Proposals Could Still Leave Taxpayers Vulnerable to Bailout

(Washington, D.C.) Statement by Leslie Paige, Director of Special Projects for The Council for Citizens Against Government Waste (CCAGW) in response to today’s testimony before The House Financial Services Committee on regulatory reform of the nation’s government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.

            “Despite varying degrees of consensus, momentum is clearly building for a transfer of GSE regulatory authority to the Treasury Department.  Chairman Michael Oxley (R-Ohio) has stated that he believes a bill to move the regulator to Treasury can pass this year.  This is good news, but there are still weaknesses in the proposals being discussed on Capital Hill.  CCAGW applauds the efforts of Richard Baker (R-Ala.) for his dogged persistence in getting Congress to put some teeth into the new GSE regulatory regime.  However, members of Congress have so far failed to include a critical component:  any serious regulatory regime must include a legally binding requirement that the GSEs meet the disclosure rules of the Securities and Exchange Commission (SEC).  Strengthening the regulator is an essential step forward in preserving the public’s confidence in the GSEs, and the capital markets.  Every other company in the country must make financial disclosures to the SEC and the GSEs should also be required to do so.  It would provide another level of protection for the American taxpayer and is one more line of defense against a potential GSE bailout that would make the Savings and Loan bailout of the 1980’s look like a picnic.  H.R. 2022, co-sponsored by Chris Shays (R-Conn.) and Ed Markey (D-Mass.) would do just that.  Congress must include this provision if it is serious about GSE reform and protecting the American taxpayers.”

“In addition, Freddie Mac has announced that it will miss its September 30 deadline for restatement of earnings.  That delay will, in turn, delay their deadline for filing financial statement with the SEC until mid-2004.  This kind of uncertainty is what keeps markets on uneven footing.  It is beyond belief that Congress still has not required them to comply with the SEC’s disclosure rules.  The GSEs enjoy the implied guarantee of the taxpayer backing and have special privileges and exemptions worth more than $11 billion annually.  Cong. Baker’s bill (H.R. 2575) should include all the GSEs under the rubric of one independently-funded regulator with broad authority to review any new business activities, set minimum and risk-based capital requirements, and enforce charter compliance. It must also include SEC disclosure of all GSEs.”

“These hearings dramatically illustrate the fact that the lack of transparency in GSE activities resides in the very charters that Congress wrote for them.  The charters are too broad and lack clear parameters.  Getting a stronger regulator is long overdue and a good place to start, but if Congress really wanted to fully immunize taxpayers from future GSE liabilities, it would require the GSEs to get out of the mortgage-backed security business altogether, reduce conventional conforming loan limits in order to force the GSEs to focus their subsidies on first-time homebuyers, bar them from securitizing anything other than home mortgages,  eliminate their lines of credit with the U.S. Treasury, abolish their presidentially-appointed board members, dramatically downsize them, and eventually put them on a path to full privatization.”       

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.