Fannie, Freddie Rescue May Cost $25 Billion, CBO Says

Fannie, Freddie Rescue May Cost $25 Billion, CBO Says

July 22 (Bloomberg) -- Fannie Mae and Freddie Mac would cost U.S. taxpayers an estimated $25 billion over two years under a Bush administration plan to rescue the mortgage-finance companies, the Congressional Budget Office said.

While the assessment is more pessimistic than Treasury Secretary Henry Paulson's prediction that a bailout is unlikely, the CBO report may quell concerns among some lawmakers that the price tag would be higher.

There is probably a ``better than 50 percent'' chance taxpayer funds won't be needed to save the two largest mortgage- finance providers, though ``that scenario is far from the only possible result,'' said the CBO, a nonpartisan agency in Washington that provides economic and budget analysis for lawmakers, said in a report today.

``Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected'' in the companies' finances, the CBO said. ``Such continuing problems would increase the probability that this new authority would have to be used.''

While neither the Treasury nor the White House budget office has estimated publicly the cost of a bailout, lawmakers including Senators Jon Tester of Montana and Richard Shelby of Alabama said last week they were concerned the cost could reach into the trillions of dollars. The CBO said it reached its assessment by taking into account the probability of various outcomes.

Helping the Markets

Paulson said today he anticipated legislation will be passed this week to authorize his July 13 request for authority to extend credit to the mortgage-finance companies or take an equity stake. Lawmakers have negotiated with Paulson over the details, with the goal of putting the package to a vote in the House of Representatives tomorrow. The Senate would also need to vote.

Paulson has said the plan alone would restore investor confidence in Fannie Mae and Freddie Mac, which own or guarantee almost half the $12 trillion in U.S. home loans outstanding, and thereby pose little cost to taxpayers. He said the Treasury has no plans to execute the financial backstop plan, and added that if it did so, he would consult with Congress and the companies.

``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson, 62, said today in a Bloomberg Television interview. ``This goes well beyond the two institutions -- Fannie and Freddie -- it has to do with investors in the United States and investors all over the world.''

Little Choice

Congress may have little choice but to sign off on Paulson's request because the financial markets are already pricing Fannie Mae and Freddie Mac's debt securities as if the rescue plan will become law. If Congress doesn't approve the bill, it would devastate the markets, CBO Director Peter Orszag said today.

``It is arguable that if it was not enacted at this point, the consequences would be severe,'' Orszag told reporters at a briefing in Washington today.

Fannie Mae, based in Washington, fell $1.40, or 9.9 percent, to $12.73 at 1:40 p.m. in New York Stock Exchange composite trading. McLean, Virginia-based Freddie Mac dropped 51 cents, or 5.8 percent, to $8.24.

The CBO estimate includes the likelihood that losses at Fannie Mae and Freddie Mac won't worsen and the government plan will prove unnecessary, the CBO said in a report today.

``The CBO report is sure to be utilized by politicians on both sides of the aisle, with opponents pointing to the hefty cost, and supporters pointing to the sub-50 percent odds placed on the likelihood of those costs ever being realized,'' Tony Crescenzi, the chief bond strategist at Miller Tabak & Co. in New York, said.

Pretty Small

Senate Budget Committee Chairman Kent Conrad, a Democrat from North Dakota, called the estimate ``good news.'' He said the CBO assessment will be ``very helpful to those who want to advance this legislation.''

Tester, a Democrat, said during a July 15 Senate Banking Committee hearing he was concerned the government would be ``potentially spending $1 trillion. Shelby, the panel's top Republican, told reporters that day he was ``uneasy about giving this blanket authority.''

Shelby today said the CBO's projection is ``pretty small.''

Skepticism

Senator Judd Gregg of New Hampshire, the top Republican on the Senate budget panel, said it's impossible for the CBO to come up with an accurate estimate because it's too hard to predict what will happen.

``They've been asked to do something they can't possibly do -- it's like trying to predict the weather two years from now,'' Gregg said today. ``It's as arbitrary as any number you could pick.''

Senator Jim Bunning, a Kentucky Republican who argued with Paulson at a congressional hearing last week over the bailout's potential costs, rejected the CBO estimate as too low. ``I don't believe a word of it,'' he said.

Heather Wong, a spokeswoman for House Financial Services Committee Chairman Barney Frank, called the CBO's analysis ``very encouraging.'' She said that ``we especially like that there is less than a 50 percent chance that it will be used.''

The Bush administration is depending on Fannie Mae and Freddie Mac to help pull the U.S. out of the worst housing slump since the Great Depression. The companies, which buy mortgages from banks, face mounting credit losses stemming from the collapse of the subprime-mortgage market.

CBO numbers assume Fannie Mae and Freddie Mac won't exceed the $85 billion in fair value losses on their balance sheets, agency officials told reporters in Washington today. The CBO said today it's taking into account an almost 5 percent chance credit losses may reach $100 billion.

BLOOMBERG