- The Washington Times - Sunday, December 15, 2002

Imagine you go to Las Vegas to play blackjack. You have the money you've saved all year, and you hope to make it home with at least some of your savings. Then Uncle Sam shows up and says he'll bankroll your losses.
Needless to say, with the risk of losing your savings eliminated, you'd be more bold, more likely to take chances. Even foolish ones.
That's what's happening now with the three principal government-sponsored enterprises (GSEs) designed to create a secondary market in mortgages Freddie Mac, Fannie Mae and, for farmers, Farmer Mac.
In a free-enterprise system, private companies are expected to pay for their mistakes. This market-driven diligence helps shift capital to more productive uses. But government programs, because they play with an endless supply of other people's money, need not share this discipline.
Consider Social Security, which faces a $20 trillion long-run deficit.
Politicians, who know the government backs the system, can afford to engage in demagoguery rather than fix it. The same goes for Amtrak, which has frittered away billions of tax dollars over the last 20 years and continues to hemorrhage red ink.
The GSEs, which get huge implicit subsidies in the form of guarantees on the loans they make, offer a similar example. The government created these privately owned companies on the theory it would be cheaper if GSEs could buy mortgages, bundle them together and sell them to investors. This works fine unless the housing market falters. Then, mortgage delinquencies climb, and the government is required to bail them out.
Defenders of the GSEs say this isn't likely forgetting, evidently, that's exactly what happened to the savings-and-loan industry in 1990. Thanks to government-mandated deposit insurance, investors didn't care whether the loans S&Ls; made were sound. When the house of cards tumbled, investors kept their money, but taxpayers got stuck with a bill for several hundred billion dollars.
Which brings us to Farmer Mac. The smallest of the GSEs, Farmer Mac was created in 1988 when the government's farm credit system collapsed. It buys farm loans and packages them into Agricultural Mortgage-Backed Securities, which Farmer Mac a k a the government guarantees.
Even these guarantees couldn't prevent a rocky start for the agency.
When lawmakers set up the GSE, they required lenders who sell farm mortgages to Farmer Mac to retain the first 10 percent of credit risk if the loans go bad. As a result, Farmer Mac failed to attract enough business to justify its existence and accumulated more than $10 million in losses. Politicians responded in the mid-1990s by loosening those restrictions. And with Uncle Sam standing by the blackjack table with an open checkbook, Farmer Mac has guaranteed more than $5 billion of agricultural mortgages since then.
Yet, despite the subsidies, Farmer Mac still has sold only 15 percent of its outstanding loans. To mask this failure, it created the Long-Term Standby Purchase Commitment, which allows farm lenders to retain their loans but pass credit and liquidity risks on to Farmer Mac. This heads-I-win, tails-you-lose arrangement is a disaster waiting to happen, and probably violates the law since the product is not authorized under Farmer Mac's charter.
Investors don't seem to care whether Farmer Mac engages in risky behavior. When Moody's recently announced that Farmer Mac is not rated and that it's the nation's largest issuer of unrated debt, debt markets shrugged. Lenders could afford this nonchalance only because taxpayers implicitly guarantee Farmer Mac's debt.
This poor performance hasn't stopped Farmer Mac executives from reaping windfall benefits. According to Farmer Mac's latest proxy statement, management and directors have been granted 13 percent of the company in the form of stock options and restricted stock. Worse, management statements indicate an additional 8 percent may have been granted since the proxy statement was issued. And even that grant won't exhaust the mammoth option program that equals 35 percent of total shares outstanding.
There is nothing wrong with executives making a lot of money, but their compensation should result from good business skills, not the ability to milk Uncle Sam.
The time has come for lawmakers to put a stop to all this and yank the company's charter. If that common-sense step is too radical, the U.S. Treasury should make clear GSE does not stand for Government-Sponsored Enron and tell investors the government doesn't guarantee Farmer Mac's debts. If the executives of Farmer Mac want to hit on 20, it should be on them, not the taxpayers.

Daniel Mitchell is the McKenna fellow in political economy at the Heritage Foundation.

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