Reducing government involvement in a market: Lessons from the privatization of Sallie Mae

Abstract

Government intervention shapes institutions and markets; even when government seeks to reduce its involvement, it must protect against resulting market distortions. Government provided substantial benefits to Sallie Mae as a government-sponsored enterprise (GSE). Giving up GSE status allowed Sallie Mae to expand the scope of its financial services beyond restrictions of its GSE charter. Benefits of GSE status led to scale economies and low cost structure that now propel the company's dominance and growth as a non-GSE. Lessons from Sallie Mae apply to removal of GSE status from other GSEs and to restructuring and deregulation in other economic sectors.