What are Government Sponsored Enterprises?

Government sponsored enterprises (GSEs) are companies which are sponsored or supported by the government. People often use the term “government sponsored enterprise” to refer specifically to financial services companies in the United States, although several other nations have similar models. The goal of government sponsored enterprises is to support the nation in some way; in the case of the United States, the organizations promote the free flow of credit, which is designed to benefit the American economy and individual Americans who need credit.

In the United States, government sponsored enterprises started in 1916, with an act of Congress which established the Farm Credit System to support American agriculture. Subsequent acts of Congress have established corporations to provide home and student loans, with these government sponsored enterprises making education, farming, and housing more affordable for Americans, and ensuring that credit will be available at low cost to people who need it.

In some cases, a government sponsored enterprise is wholly publicly owned and controlled by the United States government. Others have varying degrees of privatization, such as being owned by private shareholders, but governed by a public board. These organizations can afford to offer large amounts of financing at very low rates because they are backed by the United States government. They may also be able to assist marginal borrowers who would not be eligible for credit from private companies.

Both federal and state governments can be involved with government sponsored enterprises. Wholly government and state owned corporations are usually designed to be run in the most efficient way possible, and using methods which will benefit the taxpayers, while partially privatized companies are also responsible for generating returns for shareholders. When run well and in a state of balance, such enterprises can confer a number of benefits by freeing up credit and reducing the cost of credit so that people feel comfortable with borrowing to finance major endeavors.

Private companies in the financial sector sometimes protest that government sponsored enterprises have an unfair advantage because they can afford to offer low rates on loans, and to loan to marginal candidates, thanks to their government backing. Concerns have also historically been voiced that such organizations could potentially be a huge liability to the government if they are not properly regulated, and these concerns were validated in 2008 by the collapse of the American mortgage market, in which Fannie Mae and Freddie Mac, two government sponsored enterprises providing home loans, were heavily implicated.