Is the US 'too big to fail'?

Government Sponsored Enterprises (GSEs) are costing us hundreds of billions of dollars every year.  That’s the bad news.  But, the really bad news is the average citizen has no way of knowing the exact costs of operating these entities and the government obligations incurred to cover their perennial deficits. 

The problem is twofold.  First, the contractual commitments of GSEs are not currently recognized as liabilities in the annual financial statements of the U.S. government. It should be no surprise then that the cash-basis federal budget fails to estimate the total costs of GSEs to the taxpayer, as would be required under an “accrual” accounting based budget.  The long-term obligations of GSEs cannot possibly be measured under the current cash basis system of accounting used in the budget process.  Only “accrual” based accounting, which records liabilities as well as cash flow, can measure the full cost of these obligations at the time they are incurred—which our elected officials fail to understand and do.

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What is most troubling about GSEs is that they have effectively become industries that are insured by government.  Because they are backed by the “full faith and credit” of the U.S. Treasury, they are artificially created entities in industries that have counterparts in the private sector and, therefore, may be viewed as in unfair competition with them.  GSEs have become unaccountable for the deficits and debts they run up since they can issue debt securities backed by the United States Treasury, without having to go through the congressional budget process.  They were originally intended to be self-sufficient, independent entities, but this has not been the case.             

No greater examples of GSEs exist than Fannie Mae and Freddie Mac.  According to the 2013 Financial Statements of the U.S. Government, Treasury has invested$117 billion in gross investments for Fannie Mae and $72.1 billion in gross investments for Freddie Mac over there lifespans.  As of September 30, 2013, the cumulative estimated losses for senior preferred stock in Fannie Mae were $40.4 billion, and the cumulative estimated losses for senior preferred stock of Freddie Mac were $16.3 billion.  Only now, after years of running up debts and threatening the very stability of the U.S. housing market, is Fannie Mae paying back its loans.  There are commonsense bills in the U.S. Senate which aim to scale back the financial role of the U.S. government in Fannie Mae and Freddie Mac.  These bills remove the potential for future crises spurred by the risky lending practices that result when a mortgage lender is ensured by the lure of taxpayer money.  The examples of these two GSEs are in line with the Resolution Funding Corporation (RefCorp), whose debt stands now at $30 billion following the pay back of bills from the Resolution Trust Corporation during the S&L bailout of the 1980s, totaling $500 billion.

If we want to see another example of government adding on billions of dollars in more debt without going through the budget process, we need not look further than the first cousin of the GSE—the government corporation. The Pension Benefit Guarantee Corporation (PBGC) has become one of the more risky government corporations to date.  The 2013 Financial Statements of the U.S. Government list liabilities for the PBGC at $105 billion and the corporation’s contingencies at $328.9 billion. 

A University of Illinois study says that the financial risk facing this corporation is understated because the PBGC’s models have underestimated how bad things can get when the economy is weak. Well-respected professor Jeffrey Brown says that “Taxpayers are probably going to have to foot the bill in the same way we bailed out savings and loans in the 1980s and the mortgage agencies during the 2008 financial crisis.” He follows this melancholy outlook with words we hear too often about GSEs and government corporations: “Nearly everyone believes that Congress is ultimately going to have to backstop the PBGC because it’s insuring the pensions of tens of millions of people. No one believes they’re going to just let it fail.”

The PBGC is one of thirty-one such government corporations that are wholly-owned by the federal government; by contrast, only four entities are officially considered Government Sponsored Enterprises.  While both GSEs and government corporations are expected to be self-sufficient, only the latter was previously thought to be qualified for a bailout if need be.  However, the 2008 financial rescue of Fannie Mae and Freddie Mac has blurred any difference between GSEs and government corporations when it comes to the expectation of self-sufficiency.    

The experiences of GSEs and government corporations are part of an ongoing cycle of market failure and additional debt.  What also must be entered into this cycle is the big unknown in the matter: the contingencies and contractual commitments that the Treasury Department fails to recognize.  It’s like a time bomb that no one cares to admit exists (one that could explode at any moment and bring Uncle Sam the bill—damaging an already weakened economy in the process).  It is possible, however, to begin to deal with this problem, but our government officials have to admit that there is a problem to begin with.

A patient who shows signs of illness cannot begin the process of healing without a qualified physician making a professional diagnosis—many times prescribing a secondary expert opinion in different cases.  When it comes to basic accountability and common sense transparency, the financial condition of the U.S. government is showing signs of sickness—obvious to all but our elected Representatives.  It is time to bring in the independent, third-party, non-conflicted auditors as currently required by the SEC for publicly traded companies before it is too late.  Everybody knows that the United States of America is too big to fail.  That is everybody except those who have found ways to both financially and politically gain from exploiting America’s fiscal instability.

DioGuardi represented New York's 20th Congressional District from 1985 to 1989. He is a CPA, a former partner at Arthur Anderson & Co., and the president of Truth in Government.