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Journalism of Courage
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.
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;
