“Will Congress Line the Pockets of GSE Executives or Protect Taxpayers?”

(Washington, D.C.)  The Council for Citizens Against Government Waste (CCAGW) today praised Federal Reserve Board Chairman Alan Greenspan for his testimony before the Senate Banking Committee on Tuesday.  “His arguments were cogent and candid and CCAGW backs his efforts, along with those of the Treasury Department and many members of Congress, to enact legislation to protect taxpayers in the event of a financial crisis at the nation’s two largest housing government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac,” said CCAGW Director of Special Projects Leslie Paige.  Together, the housing giants hold $1.6 trillion worth of mortgages or mortgage-backed securities, a 56 percent jump from the end of 2000. 

While Chairman Greenspan reassured members of the Senate Banking Committee that he believes the GSEs are well-managed and do not now pose a significant threat to the nation’s banking and financial system, he still urged Congress to take steps as soon as possible to build legislative firewalls that fully inoculate taxpayers from having to backstop a GSE bailout in the future.  He also asked Congress to resolve longstanding ambiguities in the GSEs’ status, and repeatedly opined that both the taxpayers and the enterprises themselves would be better off if Fannie Mae and Freddie Mac were fully privatized.

“Chairman Greenspan never wavered in his assertion that Fannie Mae and Freddie Mac are lavishly subsidized by the taxpayers, while at the same time doing little to enhance homeownership in the United States or stimulate new home construction.  Since the GSEs were created in the early 1970s, national homeownership rates have risen by a meager five percentage points, from approximately 63 percent to 68.6 percent.  Among African-Americans and Hispanics, the group most often touted by the GSEs as the population most in need of their assistance, homeownership rates have never broken 50 percent.  Yet, the GSEs have grown exponentially and their profits have skyrocketed,” continued Paige.  “Chairman Greenspan is correct when he asks the $13 billion subsidy question:  What have the GSEs done for us lately?  He points out that if increasing homeownership is a national goal, particularly among low and middle-income individuals, there are more targeted and efficient ways to achieve that goal.  Instead, the GSEs have been leveraging their taxpayer subsidies to line their executives’ and stockholders’ pockets.”

Paige continued, “The Chairman’s comments on privatization were also very welcome news to taxpayers.  If Congress chooses to act responsibly this year, they could establish a strong, independently-funded regulator with the authority to require changes in both minimum and risk-based capital standards, and to review new products and services.  However, that should not be the end of the reform process.  CCAGW would also favor a full review of the GSEs’ congressional charters with a view toward limiting or eliminating the GSEs’ ability to hold mortgage-backed securities on their books.  That practice concentrates risk, and requires risky hedging and the use of derivatives, solely for the purpose of corporate profit and does nothing to put low and middle-income people into homes.  CCAGW also urges Congress to study the feasibility of establishing criteria for an orderly wind-down of the GSEs in case of a bankruptcy.  That process would send a very unambiguous signal to the capital markets that the taxpayers will not be left holding the bag if the GSEs get too far out on a financial limb and fall off.”

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.