Discourse.net

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