Before it's too late, the government is trying to salvage something from the S&L crisis by improving the soundness of several lending agencies for which the good faith and credit of the U.S. Treasury has been placed on the line.
For a group of so-called government-sponsored enterprises (GSEs), the government stands behind $800 billion in their outstanding loans and guarantees with its own implied guarantee. Reform of a laxly regulated federal credit system, including changes in the way GSEs can do business, has now been made an integral part of the budget summit process.
Treasury Secretary Nicholas F. Brady and Office of Management and Budget Director Richard G. Darman propose legislation to force GSEs such as Fannie Mae and Freddie Mac to obtain a triple-A credit rating. Their goal is to assure adequate capitalization.
If the GSEs don't measure up to this high-quality standard, they would have to submit to the Treasury a plan under which they would be eligible for triple-A status within five years. That might require a GSE to limit dividends, salaries or benefits -- or trim sails elsewhere.
In addition, financial oversight would be shifted to the Treasury from agencies like the Department of Housing and Urban Development (HUD). The Treasury would be a more logical -- and more disinterested -- cop on the block.
But this sensible effort, showing that even Washington bureaucrats can learn from experience, could be derailed if Congress listens to the whining of Fannie Mae and Freddie Mac. These agencies have marshaled an all-out lobbying effort on Capitol Hill to defeat the reform proposals. "They're acting like cornered dogs," said a legislative aide.
The GSEs insist they're in good financial shape and should be left alone. Fannie Mae Vice Chairman James Johnson and Freddie Mac Chairman Leland C. Brendsel raised the specter of a credit crunch, higher mortgage rates and problems of operating under the thumb of OMB and the Treasury if the proposals go through.
"We know that some risk is necessary or all innovation is stifled," Brendsel said darkly in a San Francisco speech. To which Rep. Jake Pickle (D-Tex.) retorted: "The public will not be impressed with arguments that the GSEs cannot meet their mission without acting in a financially risky manner. ... In these times, it's not good enough for any financial institution to say, 'Trust me.' "
The problem has arisen out of the government's zeal, over the course of many administrations, to make adequate credit available for farmers, housing, education and social objectives. To accomplish these worthy goals, the government sponsored Fannie Mae and Freddie Mac, which provide housing financing; the Farm Credit Administration; and Sallie Mae, the largest holder of student loans, and others.
But as Thomas H. Stanton, a Washington lawyer and student of public administration, puts it: ''You don't do anyone a favor by extending credit they can't pay back.''
A case in point surfaced last week: the potential collapse of the Higher Education Assistance Foundation (HEAF) triggered by students defaulting on loans made by commercial banks. HEAF, a private company, has guaranteed $9.6 billion in such loans. As of this writing, the government in Washington is not sure of the extent to which it will have to cover the losses.
But HEAF is just the tip of the iceberg. According to Darman, the government's total potential exposure is much bigger, frighteningly so: about $6 trillion in loans, loan guarantees and insurance, including the $800 billion for GSEs.
No one is saying that any GSE or specific lending program is in danger of imminent bankruptcy. Fannie Mae is thought to be the weakest of the big GSEs. Although Sallie Mae has almost $1 billion in loans to HEAF, government officials say it is in excellent shape -- perhaps close to a triple-A standard -- and that Freddie Mac needs only a small boost in its capital to come close to a double-A standard.
"But that doesn't mean," Pickle argues, "that there is no reason for action." The crucial point about the GSEs is that as a sort of hybrid -- private companies, enjoying implicit government guarantees -- they haven't had to respond to normal market disciplines. That's precisely what got the S&Ls in trouble.
Moreover, supervision of the financial soundness of these lenders has been in the hands of their regulatory agencies. This has resulted either in no significant financial oversight or oversight tinged with a clear conflict of interest.
For example, HUD has only a single on-site inspector to oversee the $650 billion of lending activity by Fannie Mae and Freddie Mac.
Earlier this year, assistant comptroller general Richard L. Fogel told a House subcommittee: "Recent history with the thrift crisis and the farm-credit crisis has illustrated the disastrous effects of having regulators both promote the industry and be responsible for financial oversight."
The Brady-Darman recommendations would surely benefit taxpayers, and protect the GSEs themselves from taking on undue risk. Perhaps a triple-A standard is too high. Stanton thinks a double-A rating would be enough.
But a public duped in the S&L debacle has a right to demand protective reforms from other agencies now, beyond what they may be doing voluntarily.