And subprime was contained……
I am curious: what expertise does the CBO have in developing an independent view of the two GSE’s exposures? The CBO was no doubt dependent on the GSEs and/or the Treasury for key elements of the analysis.
Moreover, if you connect the dots suggested in the Bloomberg story, the analysis was likely done on a probabilistic basis, with a key assumption that there were 50% odds the facility would not be used before it expired at the end of 2009. Thus, if the cost is estimated at $25 billion, presumably the odds that it will be used are 50% with the damage in that scenario $50 billion (or more refined scenarios, say 10% odds of a cost of $10 billion, 20% odds of a cost of $30 billion, 20% odds of a cost of $90 billion).
Do you really think this facility will not be renewed? 2010 is the big year for Alt-A and Option ARM resets. The housing market is unlikely to be out of the woods. Looking at this plan only through the end or 2009 is a garbage-in, garbage-out analysis (or more accurately, the plan is fraud in pretending to provide support only a year and a few months). Once the Federal government commits to standing behind the GSEs (which appears inescapable), there is no wrigglig off that hook.
From Bloomberg:
Treasury Secretary Henry Paulson’s rescue package for Fannie Mae and Freddie Mac would probably cost taxpayers $25 billion, the Congressional Budget Office said.“There is a significant chance — probably better than 50 percent — that the proposed new Treasury authority would not be used before it expired at the end of December 2009,” the nonpartisan agency, which provides economic and budget analysis for lawmakers, said in a report today….
The cost of the plan will depend upon terms of the credit, whether the companies have to put up collateral, pay fees or commit a portion of profit to the Treasury, said Marvin Phaup, a CBO economist for almost 20 years who retired in 2007 and is now a research scholar at George Washington University in Washington.
“This is a very very difficult thing to do and of course the political pressure will be great to make the cost estimate zero,” Phaup said in a telephone interview last week. “You can make a reasoned argument that it will be zero with some probability, but of course, it’s also with some probability it could be very costly to taxpayers.”…
At the end of March Freddie Mac had $6 billion more than the minimum capital required by its regulator, and Fannie Mae had surplus capital of $5.1 billion. The companies already raised $20 billion in the past year to cover losses and meet Ofheo rules.
Freddie Mac will probably report a surplus exceeding the minimum 20 percent required for the second quarter, according to a company filing with the SEC last week. The SEC registration and equity raising will allow the company to reduce its capital surplus level to 10 percent.
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Other than the probabilistic basis, there’s no indication at all of what the calculation is. Would be interesting to know.