310 PA R T I I I Financial Institutions needed This largesse did not come for free The federal government in effect took over these companies by putting them into conservatorship, requiring that their CEOs step down, and by having their regulator, the Federal Housing Finance Agency, oversee the companies day-to-day operations In addition the U.S government received around US$1 billion of senior preferred stock and the right to purchase 80% of the common stock if the companies recovered After the bailout, the prices of both companies common stocks was less than 2% of what they had been worth only a year earlier It is not yet clear how much the government bailout of Fannie and Freddie will cost the American taxpayer The ultimate fate of these two companies is also unclear The sad saga of Fannie Mae and Freddie Mac illustrates how dangerous it was for the U.S government to set up GSEs that were exposed to a classic conflict-of-interest problem: They were supposed to serve two masters As publicly traded corporations, they were expected to maximize profits for their shareholders, but as government agencies, they were obliged to work in the interests of the public In the end, neither the public nor the shareholders were well served *Quoted in Nile Stephen Campbell, Fannie Mae Officials Try to Assuage Worried Investors, Real Estate Finance Today, May 10, 1999 S U M M A RY Insurance providers, which are regulated by the OSFI and the provinces, acquire funds by selling policies that pay out benefits if catastrophic events occur Property and casualty insurance companies hold more liquid assets than life insurance companies because of greater uncertainty regarding the benefits they will have to pay out All insurers face moral hazard and adverse selection problems that explain the use of insurance management tools, such as information collection and screening of potential policyholders, risk-based premiums, restrictive provisions, prevention of fraud, cancellation of insurance, deductibles, coinsurance, and limits on the amount of insurance Pension plans provide income payments to people when they retire after contributing to the plans for many years Pension funds have experienced very rapid growth as a result of encouragement by federal tax policy and now play an important role in the stock market Many pension plans are underfunded, which means that in future years they will have to pay out higher benefits than the value of their contributions and earnings The problem of underfunding is especially acute for public pension plans such as the CPP Finance companies raise funds by issuing commercial paper and stocks and bonds and use the proceeds to make loans that are particularly suited to consumer and business needs Virtually unregulated in comparison to chartered banks and near banks, finance companies have been able to tailor their loans to customer needs very quickly and have grown rapidly Investment bankers assist in the initial sale of securities in primary markets, whereas securities brokers and dealers assist in the trading of securities in the secondary markets, some of which are organized into exchanges The provinces and the federal government regulate the financial institutions in the securities markets and ensure that adequate information reaches prospective investors Mutual funds sell shares and use the proceeds to buy securities Open-end funds issue shares that can be redeemed at any time at a price tied to the asset value of the firm Closed-end funds issue nonredeemable shares, which are traded like common stock They are less popular than open-end funds because their shares are not as liquid Money market mutual funds hold only short-term, high-quality securities, allowing shares to be redeemed at a fixed value