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Letter to the Honorable Richard H. Baker 1 (July 2001)

handle is hein.congrec/cbo9063 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Dan L. Crippen U.S. CONGRESS Director WASHINGTON, DC 20515 July 11, 2001 Honorable Richard H. Baker Chairman Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises U.S. House of Representatives Washington, DC 20515 Dear Mr. Chairman: I appreciate the opportunity to respond to the criticism leveled at our report on GSEs. As I stated in a recent letter to Franklin Raines, while there are legitimate points of contention, I believe that the CBO report provides a credible and unbiased answer to the questions that you posed, and that much of the criticism is misleading. In general, there can be little dispute that the relationship with the federal government enjoyed by the GSEs is valuable. This notion that because there are no direct federal expenditures and therefore there can be no subsidy is simply incorrect. The federal government engages in all sorts of programs and arrangements that subsidize favored activities without any direct expenditures. If the federal imprimatur were not valuable, why all the effort to maintain it? It is widely recognized that one of the biggest risks to the GSEs' ongoing operations is political risk-the threat that the government might change the nature of the relationship. Indeed, whenever such a risk surfaces, the GSEs' stocks decline and the interest they must pay increases. Clearly, the market perceives a value to the status quo. Therefore, the question is the value, the worth, of the implied federal guarantees. Despite the fact the GSEs claim our analytical framework is fundamentally flawed it is only the GSEs and their paid consultants who make that assertion. This methodology has been widely reviewed in and out of government, including by participants in the market, which the GSEs claim CBO does not understand. It is only by comparing their financial activities with institutions and mortgages that do not enjoy their special status that we can begin to discern what it means to be a housing GSE. 1

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