308 PA R T I I I Financial Institutions Crown Finance To promote housing and community development, the government has created the Canada Mortgage and Housing Corporation (CMHC) to provide funds to the Companies mortgage market by borrowing from the federal government and also from the private sector by issuing mortgage-backed securities The CMHC is not a bank; it doesn t take deposits and is not governed by the Bank Act, but as a financial intermediary makes direct loans and investments primarily for social housing Agriculture is another area in which government financial intermediation plays an important role Farm Credit Canada (FCC), headquartered in Regina, was set up as a Crown corporation in 1959 and is the successor of the Canadian Farm Loan Board, which was established in 1927 to help Canadian farmers It makes direct loans to new and established farmers for any agricultural or farm-related operation, including the purchase of land, equipment, and livestock It sources its funds from the federal government and from selling its notes to domestic and foreign capital markets To stimulate the export of Canadian goods and services, Export Development Canada (EDC) was established in 1969 as the successor to the Export Credits Insurance Corporation, which dated from 1944 The EDC is a Crown corporation wholly owned by the Canadian government With its head office in Ottawa, the EDC provides loans to Canadian exporters to finance the working capital buildup associated with international trade It also provides intermediate-term, low-interestrate loans to foreign concerns for the purchase of Canadian goods, equipment, and services To promote and assist in the establishment and development of business enterprises in Canada, in 1995 the government created the Business Development Bank of Canada (BDC), headquartered in Montreal It is the successor to the Federal Business Development Bank (FBDB), which had been set up in 1975 to succeed the Industrial Development Bank (IDB), which dated from 1944 The BDC issues notes in domestic and foreign financial markets and then uses the proceeds to make loans to small and medium-sized businesses GovernmentSponsored Enterprises in the United States The U.S government has also created a number of government agencies that provide funds, either directly or indirectly, to the mortgage market Three agencies the Government National Mortgage Association (GNMA, or Ginnie Mae ), the Federal National Mortgage Association (FNMA or Fannie Mae ), and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac ) provide funds to the U.S mortgage market by selling bonds and using the proceeds to buy mortgages or mortgage-backed securities Except for Ginnie Mae, which is a federal agency and thus is an entity of the U.S government (like CMHC, FCC, EDC, and BDC are in Canada), the other agencies, known as government-sponsored enterprises (GSEs), are federally sponsored agencies that function as private corporations with close ties to the government Although the U.S government does not explicitly back the debt of the GSEs, as is the case for government-sponsored Treasury bonds, in practice the federal government in the United States has not allowed a default on their securities Unfortunately, the implicit government backing of GSE debt leads to moral hazard problems similar to those that led to financial crises discussed in Chapters and Because the U.S government in effect guarantees GSE debt, market discipline to limit excessive risk taking by GSEs is quite weak The GSEs therefore have incentives to take on excessive risk, and this is exactly what they have done in the United States, with the taxpayer left holding the bag The recent bailout of Fannie Mae and Freddie Mac by the U.S government involved US$200 billion of government funds (see the FYI box, The Subprime Financial Crisis and the Bailout of Fannie Mae and Freddie Mac)