CFP Convenes Practitioners from World’s Largest Financial Institution

The Center for Finance and Policy (CFP) hosted a conference in Washington DC on October 29, 2015 — along with PricewaterhouseCoopers and the American Society of Public Administration — to bring together lending practitioners within the U.S. federal government to discuss best practices and challenges facing that community. The 25th anniversary of a law that overhauled the budgetary and accounting treatment of federal lending programs served as a backdrop for the event. Staff from several federal lending agencies including the Small Business Administration, Department of Agriculture, Department of Energy, Department of Housing and Urban Development, and Overseas Private Investment Corporation presented on topics ranging from risk management and loan servicing/systems improvements to budgeting and accounting for credit programs.

CFP’s Deborah Lucas kicked off the event with a presentation of how the U.S. government has become what one might consider the world’s largest financial institution. Given its sheer size, federal activities in this sector of the economy have a first-order effect on the distribution of risk and allocation of capital. A lively discussion ensued regarding the government’s cost of capital, it’s growing balance sheet of loans and contingent liabilities, and the design of its credit products. Deborah also presented original research she has recently completed on the U.S. government’s reverse mortgage program (known as Home Equity Conversion Mortgages or HECMs) and explored design features that may be undermining the effectiveness of that program.

Doug Criscitello shared reflections on 25 years of the Federal Credit Reform Act (FCRA), including successes realized and shortcomings that remain to be addressed. While FCRA enabled a dramatic improvement in budgeting for credit programs, three broad challenges persist: 1) a downward pressure on costs has resulted in a proliferation of programs estimated to have near-zero or negative costs (i.e., savings) to taxpayers; 2) an opaque subsidy reestimate process allows agencies to tap directly into Treasury’s coffers to cover shortfalls in expected performance; and 3) a failure to reflect fair value principles in estimating program costs.

Jason Delisle from the New America Foundation provided an in-depth exploration of the Department of Education’s growing direct student loan portfolio. He shared several seemingly counter-intuitive findings on default rates and expected costs to taxpayers that made for an engaging session and provided ample food for thought.

Michael Grunwald from Politico provided an insightful and entertaining lunchtime keynote address by sharing reflections gained over the past year while covering this topic. His seminal piece over the past year is The (Real) Bank of Americaand can be found here.

CFP intends to host other events of this nature going forward given our objective to serve as a catalyst for innovative, cross-disciplinary and non-partisan research and educational initiatives that address the unique challenges facing governments in their role as financial institutions and as regulators of the financial system.