Accountability of Government Sponsored Enterprises

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ABSTRACT. Government sponsored enterprises (GSEs) are federally chartered, privately owned institutions that benefit from the perception that the government stands behind their financial obligations. GSEs provide large amounts of credit to selected constituencies such as farmers, home buyers and students. On the other hand, GSEs lack sufficient accountability to the government and taxpayers that create and subsidize them. Three elements of accountability deserve attention: (1) assure that GSEs are well capitalized and properly supervised to protect against unnecessary financial risk; (2) authorize continuing independent analysis of their public benefits and costs; and, (3) provide for an exit strategy so that the government can withdraw its sponsorship once a GSE outlives its public purposes.


The government sponsored enterprise (GSE) is a tool of government that has helped to provide credit and other financial services to selected constituencies for much of the Twentieth Century. With the dramatic growth in size of some GSEs, issues of accountability are important so that the public benefits of GSEs can be enhanced and the public costs, including the financial risks that may be inherent in their activities, can be kept within reasonable limits. The issue of public accountability is compounded by the private ownership of GSEs. Many GSEs are investorowned, with stock that trades on the New York Stock Exchange. Other GSEs are structured as cooperatives, controlled by their users. Members of a GSE board of directors, including those who may be publicly appointed, have a fiduciary responsibility to serve the interests of the GSE and its owners. Edward Fox (1982: 135) then President and Chief Executive Officer of Sallie Mae, once explained the accountability of his

GSE as follows:

We are a private corporation and as such, with stockholders and bond holders, we have a fiduciary responsibility to those individuals....We are not charged with subsidizing the guaranteed student loan program or subsidizing the students.

Because the governance structure of the GSE responds largely to the interests of the private shareholders the interests of the public need to be reflected in legislation that applies to each government-sponsored enterprise In this regard GSEs raise virtually the same policy issues as are raised by commercial banks, thrift institutions and other private firms that receive special public benefits. The savings and loan debacle in particular has taught important lessons about the need for effective public accountability to assure that private owners do not misuse a government guarantee.

GSEs are instruments of government policy, and public accountability should be designed to assure that the public benefits of each GSE outweigh its public costs. From this perspective, public accountability of GSEs needs to be strengthened in three areas: (1) to assure that GSEs are well capitalized and properly supervised to protect against unnecessary financial risk to the American taxpayer; (2) to provide for continuing independent analysis of the public costs, financial risks and public benefits of the activities of each GSE; and, (3) to provide for an exit strategy so that the government can withdraw its sponsorship from such an enterprise once its public purposes have been accomplished or superseded.

The Office of Management and Budget (1995: 14) makes similar recommendations in its 1995 memorandum on government corporations:

A fundamental policy judgment about a GSE is whether the achievement of its public purpose is worth the amount of risk that the government must accept....GSEs should have a Federal overseer created in law, with a regulatory regime that establishes and monitors performance of their mission and ensures that the entity is operating in a sound manner that minimizes risk to the government while enabling it to accomplish its mission.

The Government Corporation and Government Sponsored Enterprise Standards Act (Government Enterprise Standards Act, S. …