Only if GSE debt holders are persuaded that the failure of a GSE will subject them to losses will they have an incentive to exert market discipline. Third, the GSE portfolios should be anchored to a clear and well-defined public purpose.
Tying the portfolios to a purpose that provides measurable benefits to the public would help to ensure that society in general – not just GSE shareholders – receives a meaningful return in exchange for accepting the risks inherent in the portfolios.