Government sector
The government sector includes federal government, state government, and local government:
- Federal Government
- Government Owned Corporations
- Government sponsored activities
- State and local governments
Also government sector includes government owned and government sponsored enterprises.
Federal GovernmentThe federal government raises funds by issuing securities. Securities known as Treasury securities are issued by the Department of the Treasury through an auction process.
The federal government shows the amount of debt and who owns the debt. Until the most recent financial crisis the major owners were the Federal Reserve Banks and foreign investors but the latter has included governments overseas.
Government Owned Corporations
The federal government has several agencies that participate in the financial markets by buying and selling securities. Agencies are chartered by the federal government to provide funding for specific projects of the government. These organizations are called government owned corporations. The Tennessee Valley Authority (TVA) is a good example. They were established by Congress in 1933 primarily to promote flood control, water transportation, agricultural and industrial development, and the use of electric power in the Tennessee Valley region. The United States Postal Service and the National Railroad Passenger Corporation are two other examples of government-owned corporations. Among virtually all state-owned corporations, TVA is the only one that is a frequent issuer of securities directly in the financial markets. Other state-owned corporations raise funds through the Federal Financing Bank (FFB). The FFB is authorized to buy or sell obligations issued, sold, or guaranteed by other federal agencies.
Government sponsored activities
Another type of government chartered organization is chartered to provide support to two sectors considered critically important to the economy: housing and agriculture. These institutions are Government Sponsored Enterprises (GSEs) and are privately owned institutions.
There are two types of GSEs. The first is a publicly owned shareholder corporation whose corporation stock is traded publicly. Publicly owned GSEs include the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Agricultural Mortgage Corporation. The first two are the most well-known GSEs because they played an important role in the housing finance market. Both Fannie Mae and Freddie Mac have a similar purpose which is to promote home ownership through the availability of financing. They achieve this by buying mortgages, consolidating them, and selling mortgage-backed securities to investors. As both Fannie Mae and Freddie Mac faced financial difficulties, the government took over these two GSEs by protecting them.
Another type of GSE is the funding component of the federally chartered bank lending system and includes the Federal Home Loan Bank and the Federal Farm Credit Bank.
Government-sponsored corporations are often confused with government-owned corporations. An important difference is that state-owned corporations do not issue stock to the public, while GSEs issue stock. Another difference is that state-owned corporations are not run for profit, whereas GSEs are based on profits. Another difference is that the entire board of directors of state-owned corporations appoints the chairman, whereas for GSEs such as Fannie Mae and Freddie Mac, only five of the nine directors are appointed by the chairman.
State and local governments
State and local governments are issuers and investors in financial markets. In addition these institutions establish authorities and commissions that issue securities in the financial market.
The Federal Housing Finance Agency (FHFA) is the custodian of both Fannie Mae and Freddie Mac. This means the FHFA has complete control over the assets and operations of these companies. Of course that doesn't account for the current conservatorship that gives the federal government more power than usual in the GSEs.
State and local governments invest when they have excess cash because of a mismatch in tax or other revenue and when they need to spend that money. However, the funds available to invest through the pension funds they sponsor for their employees is a major reason for participating as investors. More specifically, many state and local governments provide defined benefit programs. A form of pension where they guarantee benefits to employees and their beneficiaries. The five largest state, local sponsors of defined pension funds and their size in billions of total assets as of January 26, 2009, according to Pensions and Investments:
California Public Employees $213.5
California State Teachers $147.0
New York State Common $138.4
Florida State Board $114.5
New York City Retirement $93.2
See more
- Finance
- Capital Markets and Capital Market Theory
- Financial Management
- Investment Management
- Financial System
- Role of Financial Markets
- Role of Financial Intermediaries
- Maturity Intermediation
- Risk Reduction via Diversification
- Reducing the Costs of Contracting and Information Processing
- Regulating Financial Activities
- How many types of financial markets are there?
- It is the lowest maturity money market instrument
- Functioning of capital markets
- What is Derivative in Financial Markets?
- What is primary market in finance?
- What is the secondary market in finance
- Among the important characteristics of market efficiency is…
- Characteristics of an economic system that create economic opportunity
- Domestic Non Economic Sectors
- The Government Sector
- The Federal Government
- Government-Owned Corporations
- Government-Sponsored Enterprises
- State and Local Governments
- Designated non-financial businesses and professionals
- Distribution of gross domestic product (GDP) among economic sectors
- Depository Institutions - Depository institutions are the most diverse type
- No depository Financial Institutions
- Domestic financial insurance companies
- Financial investment companies
- Regulated Investment Companies
- Exchange Traded Fund Companies
- A hedge fund is a type of investment that involves investing
- Separately Managed Accounts
- Pension Fund Investment Management
- What do investment banks do?
- Private Placement of Securities
- Trading Securities
- Advising on mergers, acquisitions and financial restructuring
- Merchant Banking
- Securities, Finance, and Prime Brokerage Services
- Asset Management
- Financial sector of foreign investment
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