CBO Comes Close to Saying It Made Up That $25 Billion Freddie, Fannie Rescue Cost Estimate

Readers may have seen that we cast aspersions on the CBO’s estimate that the Fannie and Freddie rescue program would “probably” cost taxpayers $25 billion. We had noted that the estimate was only through 2009 because that’s how far the authorization extends, but there is no way that Fannie and Freddie will ever be cut loose. Thus an estimate the looked at the liability that was really being taken on, which is open-ended, would come up with considerably higher numbers. A couple of readers stressed that that is how the game is played and the CBO can only opine on bills as written. Hence, legislation is drafted with sunset provisions that everyone knows are a fiction.

Nevertheless. our original view, that the CBO lacks the expertise and resources to estimate what the downside for Fannie and Freddie might be was confirmed by the New York Times:

The proposed government rescue of the nation’s two mortgage finance giants should appear on the federal budget as a $25 billion expense, the independent Congressional Budget Office said on Tuesday, but officials conceded that there was no way to really know what, if anything, a bailout might cost taxpayers.

The budget office said the chances were better than even that a rescue would not be needed before the end of 2009 and would not cost any money. But the office also said there was a 5 percent chance that the mortgage giants, Fannie Mae and Freddie Mac, could lose $100 billion…

The budget office, while acknowledging that the $25 billion was, at best, a rough estimate, did not explain fully how it came up with the figure. The office said it analyzed the companies’ financial statements and consulted with regulators, analysts, market participants and the companies themselves to estimate possible future losses and the amount of any cash injection that might be needed from the Treasury….

Senator Jim DeMint, Republican of South Carolina, said lawmakers were generally supportive of the overall rescue plan, but he added that he had doubts about the $25 billion estimate. “Everyone knows it’s just a wild guess,” Mr. DeMint said. “We are either going to spend zero or we’re going to spend a whole lot more than they are talking about.”

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  1. eh

    I would think the amount of any “rescue” money — of course they wouldn’t call it a bailout — will depend on how much further their (ahem) assets will deteriorate and their insurance obligation escalate. Which right now can only be estimated. But up ’til now things have pretty much been worse than expected.

  2. phil_hubb

    The good senator from South Carolina was kind enough to give us two bailout cost scenarios. The zero figure is absurd, so he obviously thinks the taxpayer is on the hook for much more than 25 billion.
    No doubt, he’ll vote for it just the same.

  3. Anonymous

    Probable loss of zero, but 5% chance of $100 billion? Sounds like the Treasury needs to do some hedging. Binary options, Hank? LOL!

    More revealing, though, is how they propose to "protect the taxpayer." From Bloomberg:

    "Lawmakers, intent on limiting potential losses to taxpayers, tied the potential aid to Fannie Mae and Freddie Mac to the federal debt limit. Still, they also raised that ceiling to $10.6 trillion from the current $9.815 trillion."


    So, they're giving Hank up to $785 billion … at least for today. As everyone knows, debt ceiling hikes look like a stairstep. When you subtract actual debt, it produces a sawtooth function. This particular tooth, in 2008-2009, will start at $785 billion and gradually decline to zero, as $500 billion deficits eat away the borrowing authority in 18 to 24 months.

    Obviously, this is a complete joke. Any serious attempt to protect to taxpayers would put a specific limit on that line item, the Fannie & Freddie bailout. The debt ceiling limit is merely a fig leaf.

    As usual, the goodies hidden in the book-length bill reveal the true intentions. Here's one of them:

    "A new, higher cap on the size of mortgages they may purchase … would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said."

    Yee-haw! Pimp my house, Hankster!

    As I've said all along, Ben's plan is to engineer Bubble III:

    1. Crank inflation north of 5% CPI and 9% PPI to raise replacement costs — CHECK!

    2. Cut Fed Funds to 2% to produce a real rate of minus 3%, and bring back teaser-rate financing — CHECK!

    3. Raise limits on GSEs so they can finance $650-750K mini-mansions nationwide — CHECK!

    All the building blocks are now in place to BRING BACK THE BUBBLE! We need it; we're entitled to it; and now we're getting back our beloved 'housing ATM.'

    O frabjous day; calloo, callay! He chortled in his joy.

  4. Stuart

    Listening to the CBO come up with estimates is eerily similar to the initial estimates and rationale I heard for the Iraq war and we all know how close those estimates turned out to be.

  5. Anonymous

    “CBO can only opine on bills as written”

    Not so. Every year, for instance, CBO does a projection assuming the tax cuts stay in force that refers to no specific legislation.

    — Miracle Max

  6. Anonymous

    What WON’T be in the housing bill, I presume, is any requirement that the new “world-class regulator” impose prudential capital standards on the GSEs in line with Basel II capital adequacy requirements — which probably would imply SEVERAL TIMES more capital than Fannie and Freddie currently have.

    So the entire bill is built on a lie (namely, that Fannie and Freddie are adequately capitalized now), and fails to address the root problem (undercapitalization in relation to risk, as just vividly illustrated last week).

    This is bipartisan Looter Capitalism at its worst. First the disgraceful Bear Stearns bailout; now the squalid GSE bailout. Truly, Congress is a marble whorehouse. What’s on sale is not flesh, but favors paid for with OPM (other peoples’ money). I’ve got half a mind to barge in there, shove aside the pimps and piano players, and make some citizens’ arrests on vice charges.

  7. s

    No way the housing bubble will reemerge. Psychology has changed. There will be no sustained bubbles. Funny how the market is taking care of that attempt: Jumbo rates are exploding up. so fed bails out GSE, raises the limit because of overpriced houses and an attemopt to keep them that way. Bail out scheme raises the CDS of the US and mortgage rates creeping up with almost every bank saying they are reigning in their balance sheets namely resi. wa la: bailout wil work to exacerbated the problem of price declines as interest rates begin to creep up more and more.

    this bailout is all about protecting the Treasury ability to issue toilet paper to the rest of the world. The US couldn’t possibly risk a debt restructure or it would jeporadize its ability to push all the new debt it is goingt o create. Why in the world the Sovs keep buying is purely a fear buy. When they finally realize that the end is foretold, is the day this bailout chaos ends and so to what use to be.

  8. Anonymous

    So Congress is going to pass the mother of all bailouts and the taxpayers of this country will be on the hook for potentially hundreds of
    billions maybe even trillion plus.
    The SEC, the FED and Treasury are
    orchestrating and stage managing the
    current stock rally. How can this
    country continue to claim that it is
    still a free market capitalist system?

  9. AnoninCA

    Yves, earlier you questioned why the OCC and Fed were sent in to look at the GSEs books. American Banker has an article exploring this issue. (Free after login.)

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