The Capital Markets

CHAPTER 11Government‐Sponsored Enterprises and Federal Agencies

David Isaac and Francis C. Reed, Jr.

INTRODUCTION

Government‐sponsored enterprises (GSEs) are chartered by Congress, and in some cases given lines of credit from the Department of Treasury to provide a continuous, low‐cost source of capital to specific types of borrowers, most notably, homeowners, farmers, and students. Some GSEs are publicly owned and traded in the equity market while others are corporations wholly owned by the U.S. government. GSEs are a uniquely American concept—a symbol of American idealism, resourcefulness, and optimism combined with free‐market capitalism. Commonly referred to as U.S. agencies, the debt securities issued by the GSEs are publicly traded across the globe. The security for agency debt falls into two general categories: (1) explicitly guaranteed by the full faith and credit of the U.S. government, and (2) supported by, but not guaranteed by, the U.S. government. (See Table 11.1.) Two of these agencies, the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corp. (FHLMC or Freddie Mac), were instrumental in the creation of one of the largest and most liquid markets in the world, the mortgage‐backed securities or MBS market. Collectively, the success of the GSEs has contributed greatly to the unprecedented expansion of the U.S. debt market as the dominant force in global fixed income.

Table 11.1: Government‐Sponsored Enterprises and ...