DERISKING THE U.S. GOVERNMENT’S BALANCE SHEET:
Protecting Taxpayers, Reducing Risks, Promoting National Objectives

by   Gregory P. Wilson

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 ABSTRACT

The derisking of all federal credit, guarantee, and insurance programs on the U.S. Government’s balance sheet would be good for the United States.  As broader fiscal policy issues are debated this year and next, derisking should be a national priority for the Administration and Congress.  Derisking federal programs by transferring risk is a tested and widely accepted risk management tool to mitigate the real world impact of potential losses.  Precedents exist across the federal government that successfully utilize de-risking to limit or eliminate taxpayer exposure, provide enhanced price discovery to government administrators, and increase liquidity in certain government programs.

Derisking has three primary benefits for the U.S. economy.  First, it protects taxpayers from potential losses by eliminating significant portions of risk in federal credit and insurance programs.  Second, it gives the U.S. government a critical risk management tool to reduce potential losses by proactively managing and mitigating these embedded and possibly excessive risks. Third, derisking promotes national policy objectives in both the public and private sectors.  The tragic impact of Hurricanes Harvey and Irma proves these three points: based on prior Congressional authorization, the Federal Emergency Management Agency (FEMA) purchased reinsurance from a panel of private reinsurers, which could generate up to $1 billion of taxpayer protection from Harvey and Irma related losses.  Additionally, any losses arising from mortgage credit defaults related to Harvey and Irma will be covered by the housing GSEs for all related credit risk transactions they initiated with the private sector prior to these tragic events.

Groups such as Moody’s Analytics, the Urban Institute, and the Center for Responsible Lending have acknowledged the economic benefits of derisking.  Moreover, Moody’s Analytics has concluded that the federal government is not overpaying for the cost of CRT protection to derisk the housing government-sponsored enterprises.  Consequently, derisking the government’s balance sheet can and should be expanded to all pertinent federal programs on a comprehensive and consistent basis where it makes economic sense to do so.