Government-sponsored enterprises (GSE), is a term used in the United States to designate a group of financial services corporations created by Congress. As a way of increasing the flow of credit to certain sectors of the U.S. economy and improve the efficiency and transparency of those sectors of the capital market.
The GSE is also aimed at increasing availability and to reduce the cost of credit as regards specific sectors to which they are addressed such as agriculture, housing and education funding.
The United States Congress created the first GSE in 1916, when it gave way to the birth of the farm credit system. In 1932, with the creation of the Federal Home Loan Banks (federal home loan), the GSE began its operations in the housing finance segment. In 1972, Sallie Mae building marked its entry into the field of education funding.
Shares of the GSEs finance various debt operations, and have the implicit backing of the government of the United States, but are not direct government debt.
Bonds issued by government-backed organizations are called the GSE bonds, the market is effectively considered to have the backing of the government guarantee. This is meant to render government bonds and assets secure.
The U.S. Congress established the GSEs in order to improve the efficiency of capital markets and overcome market imperfections that prevent the ability to mobilize funds from the sources of credit to areas with high demand for credit.
In its current form, the GSEs basically act as financial intermediaries that assist both creditors and debtors in the housing, agriculture and education sectors.
In addition, the GSEs created a secondary market for loans through the extension of guarantees, the issuance of bonds and the securitization of debt. This has allowed issuers of debt in the primary market to increase the volume of loans and diminish the risk associated with individual loans.
Some of the GSEs (like Fannie Mae and Freddie Mac) are companies established privately but owned publicly. Others, such as Federal Home Loan Banks, are owned by corporations that use their services.
Although they issue securities GSEs, they still enjoy no explicit credit guarantee by the U.S. Government. Credit institutions offer favorable interest rates, and investors are willing to pay high prices for them.
This is partly due to an implied warranty based on the perception that the government will not allow these institutions, given their importance to the country’s economy, to go bankrupt or declare a moratorium on their debt. This perception has allowed Fannie Mae and Freddie Mac to save an estimated $ 2 billion per year in debt costs.
This guarantee was tested during the subprime mortgage crisis, when in September 2008, the U.S. government, rather than allow bankruptcy, rescued these companies and placed them under direct supervision.