Too big to save?

The mind-boggling cost of bailing out the US housing finance giants

Now we know why US Treasury Secretary Henry Paulson was reluctant to reveal to lawmakers last week the potential cost of the Bush administration8217;s rescue plan for mortgage giants Fannie Mae and Freddie Mac. It8217;s going to be a mind-popping 25 billion over fiscal 2009 and 2010, according to the Congressional Budget Office CBO, which released its estimate of the rescue plan Tuesday morning. Let8217;s put that in perspective: 25 billion for two financial institutions compared with 125 billion for the entire S038;L industry in 1989-1991? Ouch8230;

On July 14, the administration released its plan, which would temporarily allow the Treasury department to buy Fannie Mae and Freddie Mac equities and other obligations if the government-sponsored mortgage buyers got into deep financial trouble.

It8217;s widely assumed on Wall Street and in Washington that the shareholder-owned companies are too important to the US mortgage market to fail, which the Bush administration confirmed with its plan. However, during Congressional testimony last week Paulson frustrated many lawmakers by not putting a price tag on the rescue package8230;

But, this being Washington, there8217;s a catch. CBO Director Peter Orszag told reporters Tuesday that the plan could also cost nothing 8212; or as much as 100 billion. In a letter to House Budget Committee Chairman John Spratt, Orszag said there8217;s 8220;a significant chance 8212; probably better than 50 per cent 8212; that the proposed new Treasury authority would not be used before it expired at the end of December 2009.8221; But Orszag also said there8217;s perhaps a 5 per cent chance that the rescue could cost as much as 100 million.

Zero to 100 billion. Nice range8230;

There is one bit of certainty, however: The rescue plan provides no upside for the taxpayer. Orszag calls it a 8220;one-sided risk.8221;

8220;The federal budget would not directly benefit if the companies8217; balance sheet recovered dramatically,8221; said CBO8217;s summary of the plan. But if Fannie and Freddie needed to lean on their rich Uncle Sam for assistance, 8220;the federal government would bear costs over the next 17 months as a result of the legislation.8221; In his letter to Spratt, Orszag spells it out more clearly, saying the proposal might strengthen the link between the mortgage buyers and the federal government, which would 8220;increase the government8217;s underlying exposure to the risks associated with them.8221;

Some plan.

Excerpted from a comment by Brian Wingfield in 8216;Forbes8217;