This book sounds a note of alarm about the generally weak financial supervision and low capital standards of the major government-sponsored enterprises. Author Thomas H. Stanton's earlier book on GSEs, A State of Risk (HarperCollins, 1991), helped persuade policymakers to create a new government financial regulator for Fannie Mae and Freddie Mac. Yet, the government remains largely unable to address the financial risks inherent in these highly leveraged institutions. Stanton is an attorney, the chairman of the Standing Panel on Executive Organization and Management of the National Academy of Public Administration, and a fellow of the Center for the Study of American Government at Johns Hopkins University A summary of the book follows. The book is organized into seven chapters, including a general overview of GSEs and one chapter devoted to each of the six sets of design issues listed above. The first chapter provides an overview of the size and activities of the GSEs today, their institutional behavior, and their origins.
The second chapter begins the analysis of legal attributes and organizational form of the GSE and the important differences between GSEs and other private companies. This chapter introduces the legal concept of the instrumentality of government, a nongovernmental organization that serves public purposes. GSEs are a special type of instrumentality, and the third chapter examines the most distinctive feature of GSE status, which is the implicit backing that government provides for GSE obligations. This is a unique form of subsidy, and it is difficult for government to administer, compared to other more direct types of subsidy. Thanks to the perception of implicit government backing, GSEs operate with higher financial leverage and less capital than other firms in similar lines of business and thus have a significant competitive advantage in the marketplace. A private company such as a commercial bank or an insurance company may not be able to compete against the special subsidies and preferences that government provides for a GSE. The perception of government backing of GSE obligations removes market discipline and requires that government supervise safety and soundness of the GSEs.
The fourth chapter looks at the public purposes of the individual GSEs as reflected in their enabling legislation. The chapter reviews charter powers of major GSEs and the process by which those powers have expanded over the years. The chapter assesses the quality of government oversight of the public purposes that GSEs serve and discusses the impact of new technologies upon the authorized activities of GSEs under their charters. The fifth chapter traces the peculiar legal framework of GSEs back to its origins in the first and second Banks of the United States and, before that, the Bank of England. The legal structure of the GSE is a vestige of mercantilist Europe, when the sovereign would grant a special charter to a company to undertake special activities. The behavior of GSEs today, and especially their incentives to try to protect their favorable legal status by dominating the political process, resembles similar behavior by earlier mercantilist institutions. The sixth chapter provides a case study of the consequences of institutional design for the life cycles of GSEs.
It begins with an analysis of the tension between private profits and public purposes that GSEs were designed to serve. Then the chapter contrasts two investor-owned GSEs, Fannie Mae and Freddie Mac, with the third housing GSE, the cooperatively owned Federal Home Loan Bank System. While an investor-owned GSE attempts to increase profitability by expanding into new markets, a cooperative such as the Federal Home Loan Bank System can be limited by the power of its members and the need to serve their interests. Finally, the seventh chapter discusses issues relating to the design of an exit strategy for GSEs, including lessons that can be derived from 1996 legislation to restructure Sallie Mae, remove its federal sponsorship, and end its status as a GSE.
- ISBN10 0844741604
- ISBN13 9780844741604
- Publish Date 1 January 2002
- Publish Status Active
- Publish Country US
- Imprint AEI Press
- Format Hardcover
- Pages 155
- Language English