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Administration Plan Would Avert Crisis In Quasi-Private Financing Agencies

May 14, 1990

WASHINGTON (AP) _ The Bush administration outlined a reform plan Monday aimed at avoiding another savings-and-loan-style crisis involving the government-sponsored agencies that finance housing, farming and education.

Without a penny showing up in the federal budget, taxpayers at the end of 1989 were standing behind $768 billion in loans and guarantees issued by such quasi-private agencies as Fannie Mae, Freddie Mac and Sallie Mae, Treasury Undersecretary Robert R. Glauber told the House Ways and Means oversight subcommittee.

Previewing a study to be issued by the department later this month, Glauber listed four recommendations designed to improve the federal regulation of the so-called ″government-sponsored enterprises″ and insulate taxpayers from the potentially huge risks. The recommendations are:

-Private stockholders in the enterprises should put more of their own capital at risk, providing an incentive to operate soundly. Glauber said some of the enterprises ″are among the most thinly capitalized of U.S. financial entities.″

-At least two independent credit-rating agencies, such as Standard & Poors Corp., should regularly evaluate the enterprises. They would be required to meet the standards applied to the healthiest corporations with a triple-A rating. Those that couldn’t would have five years to meet the standards or lose their ties to the federal government.

-The government regulator charged with making sure the enterprises operate safely should be separated from the regulator who makes sure the enterprises live up to their original purpose. For instance, the Department of Housing and Urban Development would continue to ensure that Fannie Mae and Freddie Mac provide affordable housing, but some other agency that has no interest in promoting housing should make sure they don’t go bankrupt.

-The value of government support for the enterprises should be disclosed. Because of the government’s implied backing, the enterprises can borrow at interest rates far below those paid by comparable fully private corporations. Congress and taxpayers should be told how much this backing is worth so they can decide whether it’s being put to good use.

Glauber declined to comment on the soundness of specific government- sponsored enterprises, but in response to a question from the subcommittee chairman, Rep. J.J. Pickle, D-Texas, he conceded that many would not receive a triple-A credit rating from the ratings agencies.

The General Accounting Office, Congress’ auditing agency, which is also studying the enterprises, told Pickle’s panel that none of the enterprises appears near failure.

″Nevertheless, prudence dictates that the government not wait for a crisis before protecting its interests,″ said Richard L. Fogel, the GAO’s assistant comptroller general.

An enterprise ″experiencing serious financial difficulties could pose tough and possibly expensive decision for the Congress, like those faced in the farm credit and thrift crises,″ he said. ″No one wants to see those experiences repeated.″

Government oversight is adequate for some of the enterprises, but not for three of the largest: Fannie Mae, Freddie Mac and Sallie Mae, Fogel said.

Fannie Mae President David Maxwell, responding to Glauber’s testimony, said his organization welcomes strong government supervision and standards. But, he questioned whether private credit-rating agencies were in the best position to evaluate the soundness of government-sponsored enterprises and whether requiring a triple-A rating was reasonable.

Stock in Fannie Mae was the most-active issue Monday on the New York Stock Exchange. The shares lost 87 1/2 cents to close at $37.87 .

The eight enterprises included in the studies and the areas they finance are: Farm Credit Banks, agriculture; Banks for Cooperatives, agriculture; Federal Home Loan Banks, housing; Federal National Mortgage Association (Fannie Mae), housing; Federal Home Loan Mortgage Corp., (Freddie Mac) housing; Student Loan Marketing Association (Sallie Mae), education; College Construction Loan Insurance Association (Connie Lee), education; and Federal Agriculture Mortgage Corp. (Farmer Mac), agriculture.

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