Privatizing Fannie, Freddie Could ‘Mitigate’ Risks Caused by Government Intervention, Says GAO

(CNSNews.com) - A Government Accountability Office report says that privatizing the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac could mitigate the systemic economic risk caused by the federal government’s guarantees to the now-defunct mortgage giants, but that the benefits of privatization could be reversed by government efforts to insure private-sector mortgages.

“The extent to which privatizing or terminating the enterprises mitigates current safety and soundness and financial stability risks is difficult to determine,” said GAO.

“Under one scenario, such risks would be mitigated because large and complex enterprises, which might engage in risky business practices due to the implied federal guarantee on their financial obligations, would not exist,” the report concluded. “Instead, private lenders would be subject to market discipline and consequently would be more likely to make credit decisions largely on the basis of credit risk and other market factors.