U.S House of Representatives, 105th Congress
James A. Leach, Chairman
|For Immediate Release|
|Thursday, July 24, 1997||Andrew Biggs 226-0471|
Government-sponsored enterprises were created by Congress to
correct certain gaps in our economic system. Congress judged that
filling these gaps would serve a social purpose and granted GSEs
certain advantages to help them succeed.
The so-called housing GSEs -- that is, Fannie Mae, Freddie
Mac and the Federal Home Loan Bank System - were created to facilitate
home ownership in America. They have succeeded brilliantly in
this task. But their very success raises questions whether, having
largely fulfilled their mission, they are now abusing their privileges
in pursuit of narrow, self-serving objectives.
The privatization of profit, coupled with the socialization
of cost and risk of Fannie and Freddie, underscore that what is
at issue today is not merely the safety and soundness of GSEs,
but the competitive fairness of these institutions and the public
benefit derived from their government-granted privileges.
On April 10, I wrote a letter questioning Freddie Mac long-term investments. Two weeks later, I received a rambling, virtually unintelligible response from Leland Brendsel that raised more questions than it answered.
HUD Secretary Cuomo made a similar request of Freddie Mac,
and the answer he received, and shared with me, was but largely
perfunctory. I don't know if HUD was satisfied with it. I am not.
As a result, I have come around to the view that a thorough
analysis is needed not only of Freddie Mac's long-term investment
practices but of its short-term portfolio as well.
Freddie Mac has argued that the rationale for its short-term
investments is liquidity to meet its obligations and be ready
to take advantage of favorable turns in the market. But when short-term
investments are more than 10 times capital, it strikes me that
there may be an abuse of powers on the short-term side as well.
Once institutions have transformed their role from being a secondary market serving a tertiary market to enterprises that increasingly hold investments in their own name, the case for short- or long-term arbitrage to meet liquidity needs disappears. In investing in short- or long-term bonds in this circumstance, Freddie Mac is, in effect, using resources provided through socialized governmental rights for the pursuit of maximizing shareholder returns. It is any wonder that Fannie's profit per employee, as recently calculated by FORTUNE magazine, at $826,000, is nearly four times the per employee profit of General Re, the leading purely private company in that measurement? Freddie Mac, $388,000, is a distant second but still $149,000 above General Re, the re-insurance company.
There is a case for GSEs to receive government support if they
serve a public need - that is, markets private businesses are
not properly serving, which also implies that the GSEs not compete
at the retail level. But increasingly the practices of Fannie
and Freddie are turning these institutions into what in effect
are national S&Ls, and their duopoloy of power is putting
great and unfair pressure on many private companies that serve
HUD has a responsibility to monitor the mission of the GSEs
and a responsibility to work with Treasury to assess the ramifications
of GSE intrusion into the private markets.
The goal should to enable the private sector to serve customers
and the public without crowding out the private sector in the
process. The problem is that GSEs which become retail institutions
have the effect of undercutting virtually all other private sector
Among the numerous advantages the housing GSEs have been granted
by Congress, including the right not to pay state taxes, one has
received little attention: the government-imposed capital standards
on these two GSEs are approximately one quarter the Basle standards.
In other words, Fannie and Freddie can have assets four times
those of a private sector company for each invested dollar.
In the economic news this week were the adjustments Boeing
has had to make to win the approval of European antitrust authorities
for its merger with McDonald Douglas. If present trends continue,
Fannie and Freddie will push out all private sector competition
and become the Boeing and Airbus of the S&L industry.
I would like to propose today that the Administration establish
an inter-agency committee, perhaps led by the Treasury, to review
the activities of all GSEs and determine whether they are hewing
to their mission or abusing their governmental powers, whether
they are serving the private retail sector or pre-empting it.
We need a sustained and probing analysis to bring these run-away
enterprises back to their roots.