Fannie-Freddie help costly

Proposed rescue plan might cost $25 billion

From wire reports

July 23, 2008

WASHINGTON - A federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion, Congress' top budget analyst said yesterday.

But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers that there's a better than even chance the government will not have to step in to prop up the companies by lending them money or buying stock.

Congress is expected to vote this week on a housing measure that would give the Treasury Department authority to throw Fannie and Freddie a temporary lifeline.

Treasury Secretary Henry M. Paulson Jr., who has been pressing for the power, says it's intended as a backup plan to help calm investors and stabilize financial markets.

Orszag said it's most likely that the companies will remain afloat and the government won't have to put up any money, but there's a very small possibility that Treasury will have to step in to help cover losses at Fannie and Freddie topping $100 billion. The $25 billion estimate reflects his office's best guess of how big a federal infusion would be needed.

Orszag, at a briefing with reporters, acknowledged, however, that pinpointing the eventual cost of the package was impossible. "There is very significant uncertainty involved here," he said.

The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long term. Others, including some private equity managers, are pessimistic and predict heavy losses.

The rescue plan, put forward last week by Paulson, would allow the Treasury Department to spend hundreds of billions of dollars to shore up the mortgage companies should they be at risk of collapse, either by extending credit or by purchasing equity in the companies, which are publicly traded.

How much the government will end up spending on a rescue, if one is needed, would depend on many factors, Orszag said, including sentiment on Wall Street. "A key question becomes, how does the market view the entities?" he said.

With financial markets now assuming the measure will be approved, Orszag suggested the cost of inaction could be steep, too.

"It is arguable that if it were not enacted at this point, that the consequences could be quite severe," he told reporters.

Paulson said in a New York speech yesterday that Congress needs to quickly approve a support package for Fannie Mae and Freddie Mac - which guarantee or own almost half of the home mortgages in the country - to make sure they maintain their critically important role in housing finance. He said their continued operations were "central to the speed with which we emerge from this housing correction."

Treasury officials confirmed that bank examiners from the Federal Reserve and the Office of the Comptroller are inspecting the books at both Fannie Mae and Freddie Mac. Paulson said in an interview published yesterday in TheNew York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.

After a period of market turbulence in which fears grew about the fiscal soundness of both institutions, the administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and also to purchase stock in the two companies if needed.

Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months.

At the Capitol yesterday, he used a weekly closed-door party lunch to try to sell the plan to Senate Republicans.

Paulson told the group that by showing a clear willingness to back up Fannie and Freddie, Congress would help ensure that no federal rescue would be needed.

"If you go in strong, it's less likely that you're going to have to use the strength," Sen. Sam Brownback, a Kansas Republican, said after the session. Paulson, he added, is "saying, 'We've got to go in strong.'"

Critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of losses.

Sen. Jim Bunning, a Kentucky Republican, told reporters yesterday that Paulson is trying to "ram down" his proposal to shore up Fannie Mae and Freddie Mac, which Bunning said "smacks of socialism."

However, many lawmakers in both parties regard a lifeline for the companies as vital to restoring investor confidence and market stability.

"Freddie and Fannie are important mainstays in the American economy, and we need to find solid footing for these enterprises before the economy can recover, right itself, and get back on track," said Sen. Judd Gregg of New Hampshire, the top Budget Committee Republican.