Legal Commentary

Regulating Fannie, Freddie, and other GSEs

By Professor University of Miami School of Law

Fannie Mae and Freddie Mac are much in the news today, as the federal government finds itself obliged to make the ‘implicit’ government guarantee quite explicit.

I wrote a lot about these strange entities some time ago, and you can read what I had to say about what should have been done at Reinventing the Government Corporation, 1995 Ill. L. Rev. 543.

Among other things, I advocated breaking up Fannie and Freddie into smaller bodies that would not be too big to fail, and that would compete more with each other. I also proposed various accountability measures, and even looked into the issuance of risky subordinated debt to act like a canary in a coal mine.

I’ve put the full table of contents in the extended part below.

Table of Contents

• I. CREATION OF FEDERAL GOVERNMENT CORPORATIONS
  • A. Federal Power to Create Corporations
    
  • B. Types of Federal Government Corporations
    
  • C. Federal Government Corporations as a Policy Choice
    
    • 1. Efficiency
    • 2. Political Insulation
    • 3. Subsidy
    • 4. Subterfuge
• II. THE ACCOUNTABILITY GAP
  
  • A. Limited Constitutional Constraints
    
    • 1. State, State Actor, or Private Actor?
      
    • 2. Mixed-Ownership FGCs
    • 3. Private FGCs with Presidentially Appointed Directors
      
    • 4. Nondelegation of Public Powers to Private Groups
  • B. Limited Market Discipline
    
    • 1. Efficiency Claims Made for FGCs
      
      • a. Commercial Purpose/Market Failure
        
      • b. Noncommercial Purpose
      • c. Nationalization
      • d. Preparation for Eventual Privatization
    • 2. Negligible Bond Market Discipline
      
    • 3. Weak Competitive Market Discipline
      
  • C. Internal Governance
    
    • 1. Limited Shareholder Discipline
    • 2. Unclear Directors’ Duties
    • 3. Voting the Government’s Stock
    • 4. Private Shareholders’ Rights
  • D. Sovereign Immunity and the Merrill Doctrine
    
    • 1. Sovereign Immunity
    • 2. The Merrill Doctrine
  • E. Lessened Accountability to Congress
    
    • 1. Keeping It Out of Politics
    • 2. Serving the Clients
    • 3. The Contingent Risk: The Next S&L Crisis?
      
    • 4. Inadequacy of the Government Corporation Control Act
      
  • F. Lessened Accountability to the President and Regulators
    
    • 1. Attenuated Accountability of Publicly Appointed Directors
      
    • 2. Private Directors Not Accountable to President
      
    • 3. Weak Programmatic Control of Private and Mixed-Ownership FGCs
      
  • G. Deficit Politics
    • 1. Financial Costs
    • 2. Moral Costs
• III. REFORM
  
  • A. Limited Aims of Recent Reforms
    
  • B. Proposals Rejected by Congress
    
    • 1. Warning Mechanisms
      • a. Ratings
      • b. Risky Subordinated Debt
    • 2. Privatization
    • 3. Converting FGCs to Agencies
  • C. Some Moderate Proposals
    
    • 1. Accountability
      • a. Internal Governance
      • b. Accounting for Federal Powers and Benefits
        
      • c. Enforcing Public Goals
        • i. Regulation
        • ii. Incentives
    • 2. Financial Issues
      • a. Creating Market Discipline
      • b. Division of the Spoils
    • 3. Legal Status
      • a. Actual Control
      • b. Profit or Nonprofit
      • c. Sovereign Immunity and Private Interests
        
• IV. SUMMARY AND CONCLUSION
  

Full post as published by Discourse.net on July 14, 2008 (boomark / email).