MIT Golub Center for Finance and Policy
Public Policy
Valuing the GSEs’ Government Support
By
Summary
The best available estimate of the federal cost of the GSE bailout is about $290 billion— the fair value estimate provided by CBO at the time. By any measure, that cost greatly exceeds the amounts the GSEs have remitted to the Treasury. With regard to the ongoing value of the Treasury backstop provided by the Senior Preferred Stock Purchase Agreements with Treasury, model estimates suggest that the expected payments to Treasury through the sweep of all profits are roughly equal to the value of that protection. On the question of whether privatizing the GSEs would make money for taxpayers or cost them money, it seems unlikely that it could generate significant revenue unless some form of continuing government support were included in the deal. That conclusion rests on the observation that the main potential sources of value to private investors would come from underpriced guarantees or protection for monopoly or duopoly power. Nevertheless, a reform plan that includes privatization of the GSEs could have enormous indirect benefits, including increased fiscal transparency, decreased taxpayer cost and risk, greater product innovation, and more efficient pricing and resource allocation. For these reasons, and because of the distortions in the way budgetary costs may be measured, a well-executed privatization could be a net win for taxpayers even if its budgetary cost is positive.
