(Washington, D.C.) – Council for Citizens Against Government Waste (CCAGW) President Tom Schatz sent the following letter to the Senate Committee on Banking, Housing, and Urban Affairs in support of legislation to establish a new, stronger regulator for the nation’s housing government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.

This afternoon, the Senate Committee on Banking, Housing, and Urban Affairs will be marking up legislation to establish a new, stronger regulator for the nation’s housing government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.  On behalf of our more than one million members and supporters across the country, the Council for Citizens Against Government Waste (CCAGW) applauds you for your commitment to this task and urges you to support the strongest possible regulatory reform bill. 

Each news cycle brings more worrisome news about the GSEs.  This week alone there have been reports that Fannie Mae may have to restate its earnings and that the Department of Housing and Urban Development is investigating the propriety of a $6 billion deal that Freddie Mac entered into in order to meet its federal affordable housings goals.  In addition, credible questions have been raised about corporate governance and conflicts of interest at Freddie Mac.  A March 28^th article in the New York Times pointed out that “four of [Freddie Mac’s] directors standing for re-election have served recently on Freddie Mac's audit committee, which can certainly be said to have failed in its duties…That directors of Freddie Mac, who failed spectacularly in their responsibility to shareholders, would not take themselves out of the running for re-election simply shows that shame is not a dominant gene in corporate America's DNA.”

One of the troubling themes that surfaced during the recent Banking Committee hearings was that the GSEs are unique entities whose activities escape true accountability as a result of the ambiguities inherent in their founding charters and the absence of true market discipline.  They have grown too big, too fast, and their risk profiles have increased dramatically.  Each new revelation, and there will undoubtedly be more, highlights the GSEs’ lack of financial transparency, increasingly problematic accounting procedures, and apathetic corporate governance.  Yet, while Fannie Mae and Freddie Mac stockholders and executives continue to reap huge profits, the risks associated with their activities have effectively been shifted onto taxpayers.

Fannie Mae and Freddie Mac are hybrids; stockholder-owned, publicly-traded corporations that retain valuable congressionally-conferred benefits not available to other private corporations.  These implicit subsidies, now worth more than $20 billion annually according to the most recent estimates by the Congressional Budget Office, encourage the capital markets to view the GSEs’ securities as having special status, on par with “agency” securities.  The GSEs’ continued reliance on their special benefits and the ambiguities contained in their founding charters inevitably lead to the perception that the GSEs are “too big to fail.”  In short, even though GSE debt instruments carry an explicit disclaimer stating that they are not backed by the U.S. Treasury or the taxpayers, as Federal Reserve Chairman Alan Greenspan said succinctly, the markets simply “don’t believe it.”

The Congress now has an opportunity to impose some much-needed rigor to the oversight of the GSEs.  The new regulatory body you are considering should be endowed with broad authority and full panoply of regulatory tools.  It should be independent and funded by the GSEs themselves.  It should have the authority to require changes in both the minimum and risk-based capital requirements and to review and approve new activities in order to ensure that the GSEs do not leverage their government-sponsored advantages to compete unfairly in the marketplace.  The new legislation should repeal the GSEs’ exemption to the nation’s financial disclosure rules.  Oversight for both the GSEs’ affordable housing mission and their safety and soundness should be housed under the same regulatory entity and that regulator should make the GSEs affordable housing goals more explicit and easier to measure.  And the legislation should contain explicit language creating a receivership mechanism for these entities in the unlikely event of a financial failure. 

Congress must begin to disabuse investors of the false notion that taxpayers would be forced to backstop the GSEs in case of a financial failure.  It is vital that the regulatory reforms Congress is crafting be viewed as significant and credible.  The establishment of a new, world-class regulator with robust enforcement tools at its disposal would send that message loud and clear.  This kind of protective firewall for taxpayers is long overdue and should be enacted as soon as possible.

The Council for Citizens Against Government Waste is the lobbying arm of Citizens Against Government Waste, the nation's largest nonpartisan, nonprofit organization dedicated to eliminating waste, fraud, abuse, and mismanagement in government.