What is a GSE?

A government-sponsored enterprise (GSE), also referred to as a state-owned enterprise, or a government-owned corporation, is a legal entity created by a national or state government to undertake business activities on the government's behalf. A GSE may be fully or partially owned by the government, depending on the circumstances and the guidelines set forth by the governing body. The GSEs in the United States are a group of companies in the financial services industry that were created by the Congress.

The U.S. Congress created the first GSE, the Farm Credit System, in 1916. Every GSE in the U.S. is created with the goal of overcoming inefficiencies and imperfections in the capital markets. Some of the best-known GSEs in the U.S. are those that deal in mortgage finance: Freddie Mac, Fannie Mae, and the 12 Federal Home Loan Banks. These companies have trillions of U.S. Dollars (USD) on their balance sheets, and the federal government possesses warrants, which would give it a nearly 80% share of these companies, should the government choose to exercise the warrants. The Corporation for Public Broadcasting and the United States Postal Service are also GSEs.

A GSE carries the implicit backing of the U.S. government, although they do not constitute direct government obligations. For budgeting purposes, the U.S. Congress has defined several parameters which an organization must comply with in order to be considered a GSE. It must first have a federally authorized charter. It must also be privately owned, in the sense that private individuals or entities must hold the controlling stock. A board of directors, mostly elected by private owners, must be at the head of it. Also, it must be a financial institution with the power to borrow and lend.

There are a few things that a GSE must not do, if it is to be considered just a GSE and not a government entity. It cannot exercise powers that are reserved to the government in the U.S. Constitution, such as the power to regulate interstate commerce or the power to levy taxes. Its employees are not federal employees, and their salaries are paid by the business activities of the enterprise. A GSE also does not have the power to commit government money to loans unless such a guarantee is made beforehand by the government. In practical terms, all these things also imply that a GSE benefits from an implicit guarantee from the government to facilitate borrowing, although this is not part of the stated definition.