Administration Seeks Protections Against Agency Default
WASHINGTON (AP) _ The Bush administration is calling for increased effort to protect taxpayers from a nearly $800 billion potential risk posed by quasi-private agencies that back loans to housing, agriculture and education.
Previewing a study to be issued later this month, Treasury Undersecretary Robert R. Glauber outlined the administration’s recommendations for avoiding a savings-and-loan-style crisis among the so-called ″government-sponsored enterprises.″
At the end of 1989, taxpayers were standing behind $768 billion in loans and guarantees issued by such entities as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corp. (Freddie Mac) and Student Loan Marketing Association (Sallie Mae), he said.
The recommendations, presented to the House Ways and Means oversight subcommittee on Monday:
-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. or Dun & Bradstreet, 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 break 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 the mortgage and home loan associations 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 rating.
The General Accounting Office, Congress’ auditing agency, which is also studying the enterprises, testified 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, assistant comptroller general at the GAO.
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.
David Maxwell, Fannie Mae president, said in response that 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.
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.