“The Cat is Out of the Bag and Taxpayers are Being Mauled,” Schatz says

(Washington, D.C.)—The Council for Citizens Against Government Waste (CCAGW) today congratulated Wayne Passmore of the Board of Governors of the Federal Reserve System for finally publicizing the real taxpayer subsidy for Fannie Mae and Freddie Mac, the nation’s two largest Government Sponsored Enterprises (GSEs).  The new study estimates that the present value of the federal government’s direct and indirect subsidies for the GSEs is between $119 billion and $162 billion.

“Fannie Mae and Freddie Mac have been denying the extent of their subsidies for years.  Their dirty little secret is out of the bag and there is nowhere for them to hide.  Passmore’s report, released just three days before Christmas, shows that taxpayers will be waking up to a stocking full of coal while Fannie Mae and Freddie Mac are the Grinches who stole Christmas,” said CCAGW President Thomas A. Schatz.

Passmore’s report concludes that the subsidies benefit shareholders, not homeowners.  The economists’ “middle-of-the-road” assumptions show that “GSE shareholders retain roughly 52 percent of the gains from their ambiguous government relationship or about $72 billion.”  The report also exposes the GSEs’ shell game of mortgage-backed securities: “If the GSEs were purely private, in the sense that their returns on equity and their return on assets were similar to those of other large financial institutions, they would hold far fewer of their own mortgage-backed securities in portfolio and, as consequence, would be much smaller organizations.”  Most critically, Passmore concludes that the subsidies “do not seem to result in either a substantial reduction in mortgage interest rates or an increase in home ownership.”

These latest revelations, coming on top of similar criticism from the Congressional Budget Office, Department of Housing and Urban Development, and the White House Council of Economic Advisors of the value received by the public in exchange for the advantages provided to the GSEs should give Congress more impetus to take immediate action to provide stronger oversight.  There are currently two bills pending in the Senate which would set up a safety and soundness regulator at the Department of the Treasury.  The new regulator must have broad authority to review new activities, adjust both minimum and risk-based capital requirements, and have an independent source of funding to underwrite their regulatory activities.

“Every day that Congress fails to pass meaningful GSE reform means one more day of potential catastrophic failure that will have to be paid by the American taxpayer,” Schatz concluded.

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.