Privatization Issues

Will Other GSEs Follow Sallie Mae?

The Student Loan Marketing Association (Sallie Mae), at its own request, is moving from the status of a government-sponsored enterprise to that of a state-chartered, investor-owned holding company. It will have up to 18 months to develop a privatization plan and obtain shareholder approval.

For more than two years, Sallie Mae officials have been pushing for privatization, believing it would give it greater flexibility than continuing under the wing of the federal government. It would also benefit shareholders.

Sallie Mae is similar to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which -- as government-sponsored enterprises -- buy and sell home mortgages. So the question arises: why not privatize these also?

  • A July Treasury Department report noted that while privatizing Fannie Mae and Freddie Mac would impose substantial costs on them, it could also bring substantial consumer benefits.

  • The Congressional Budget Office has estimated that subsidies to the two were worth a combined $6.5 billion a year -- which the Treasury estimates as more like $6 billion.

  • The Housing and Urban Development Department, which regulates them, does not want that to happen -- it issued a report which says "no compelling reason exits" to privatize either company.

Yet HUD and the CBO both noted that going fully private would invite competition and force the two companies to streamline.

Source: Carl F. Horowitz, "Sallie Mae Ready to Go Private; Will Other Government Entities Follow?" Investor's Business Daily, October 21, 1996.

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