Stanton Explains GSE Risk

Thomsas Stanton, A State or Risk Thomas H. Stanton.[1] 1991. A State of Risk: Will Government-Sponsored Enterprises Be the Next Financial Crisis? New York: HarperBusiness.

Review by Stephen W. Hiemstra

Historical Context

Shortly after this book was published in 1991, Congress authorized the Office of Federal Housing Enterprise Oversight (OFHEO) to supervise Freddie Mac and Fannie Mae (The Enterprises). Later during the Great Recession in 2008, Congress merged OFHEO with the 12 Federal Housing Finance Banks to form the Federal Housing Finance Agency (FHFA). I joined OFHEO in 2004 and worked on safety and soundness issues pertaining to Freddie Mac and Fannie Mae until retiring from federal service at yearend 2010.
Many of the issues that Stanton raised in 1991 continue to be unresolved concerns even as the Enterprises retain technically in conservatorship. The reason is fairly simple. The Enterprises and the Federal Reserve acquired many of the non-performing loans held on the books of private banks during the Great Recession so that the banking system could again be solvent and continue to lend. This action on part of the federal government averted the Great Recession becoming a more protracted depression, but it left the Enterprises defacto agencies of the federal government. The funds necessary to reconstitute the Enterprises as CGE were never allocated because the numbers involved were simply too big.

Organization of Book

The book is organized into these chapters:

1. Introduction: GSEs and Thrift Institutions.
2. The Hidden Costs and Public Benefits of GSEs.
3. How GSEs work.
4. Enterprises in the Marketplace.
5. The Politics of Enterprise Lending.
6. Enterprises as Private Financial Institutions.
7. The Implicit Federal Guarantee as a Source of Risk Exposure.
8. Supervising Enterprise Safety and Soundness.
9. Enterprise Accountability.

Appendices: Law, Cases, and Other Legal Sources on GSEs.


“A GSE is a privately owned, federally chartered financial institution with nationwide scope and specialized lending powers that benefits from an implicit federal guarantee to enhance its ability to borrow money” (17). Stanton clarifies this definition with two insights: (1) “An enterprise raises money the way the federal government does but it lends that money as a private institution…” and (2) “An enterprise is a privately owned and controlled institution with a public purpose” (39). These insights sound simple, but in practice many analysts have trouble understanding the business function of the GSEs.


Stanton Explains GSE Risk

Also see:

Stanton: Creating Constructive Dialogue

Benchmarks in Public Sector ERM 

Books, Films, and Ministry

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