Publication: Progressive Review
Cost of Loan Bailout Could Be $25 Billion | |
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THE PROGRESSIVE REVIEW - July 24, 2008
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Cost of Loan Bailout, if Needed, Could Be $25 Billion
by: David M. Herszenhorn
The New York Times
Washington - The proposed government rescue of the nation's
two mortgage finance giants will appear on the federal
budget as a $25 billion cost to taxpayers, the independent
Congressional Budget Office said on Tuesday even though
officials conceded that there was no way of really knowing
what, if anything, a bailout would cost.
The budget office said there was a better than even chance
that the rescue package would not be needed before the end
of 2009 and would not cost taxpayers any money. But the
office also estimated a 5 percent chance that the mortgage
companies, Fannie Mae and Freddie Mac, could lose $100
billion, which would cost taxpayers far more than $25
billion.
The House is expected to act this week on housing
legislation that includes the proposed rescue plan.
Legislative language has been finalized, but the
Congressional Budget Office said its estimates were
based on the plan by the Treasury Department and that
it did not expect significant changes in the final bill.
According to the estimate, which was delivered in the
form of a letter to the House Budget Committee chairman,
Representative John M. Spratt Jr., Democrat of South
Carolina, the director of the budget office, Peter R.
Orszag, predicted that "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."
Mr. Orszag, at a briefing with reporters, acknowledged
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.
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The rescue plan, put forward last week by the Treasury
secretary, Henry M. Paulson Jr., 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.
Mr. Orszag said that the analysis by his office did not
distinguish between the different forms of aid that might
be offered - a credit line or a stock purchase - and that
the analysis showed no short-term potential financial
benefit for taxpayers even if Fannie Mae and Freddie Mac
perform well.
But he said the analysis found substantial risk for tax-
payers if the companies had steep losses and would not
say if his office had analyzed the implications of a full
government takeover of the companies.
How much the government will end up spending on a rescue,
if one is needed, would depend on many factors, he said,
including sentiment on Wall Street. "A key question
becomes how does the market view the entities?" he said.
Fannie Mae and Freddie Mac are commonly referred to as
government-sponsored entities, because of the long implicit
guarantee that the federal government would step in to
save them if they were ever in danger of collapse.
One thing that is certain as a result of the rescue
proposal is that the guarantee of government aid is
now much more explicit, and Mr. Orszag said that the
government's assurance that it would not let the
companies fail would have to be included in any analysis
of their long-term financial prospects.
Most immediately, the $25 billion cost estimate provides
a precise amount that Congress will have to offset with
spending cuts or tax increases if lawmakers intend to
comply with "pay as you go" budget rules in the House.
Lawmakers could also decide that the $25 billion should
be viewed as emergency spending and simply added to the
national debt.
There was little immediate reaction to the projections on
Capitol Hill as lawmakers and staff members reviewed the
complicated calculations and the various assumptions they
were based on.
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Mr. Spratt, the chairman of the Budget Committee, issued
a statement praising the Congressional Budget Office for
moving quickly to produce its analysis. "Estimating the
fiscal impact of this proposal is complex and involves
considerable uncertainty," Mr. Spratt said. "And not
everyone will necessarily agree with every aspect of
C.B.O.'s analysis."
But he added: "C.B.O. is performing its important
institutional role by providing in a timely manner
its best professional and independent assessment."
The analysis by the Congressional Budget Office also
offered a sobering assessment of the mortgage giants
based on several different metrics.
Under generally accepted accounting principals, Mr. Orszag
said that the net worth of the mortgage giants at the end
of the first quarter of 2008 was about $55 billion. He
also said that the companies held more than $80 billion
in capital at the end of March and for regulatory purposes
were considered to be "adequately capitalized" by the
Department of Housing and Urban Development.
But on a fair value basis, the value of the mortgage
companies' assets exceeded their liabilities at the end
of March by just $7 billion, a thin cushion considering
liabilities at the time of $1.6 trillion, and an indication
of why there have been numerous calls for the companies to
raise additional capital. Mr. Orszag also noted that on
July 11, before the Bush administration proposed its rescue
plan, the total value of shares in Fannie Mae and Freddie
Mac had fallen to a low of $11 billion. Shares in the
companies are now worth about $20 billion.
The House is expected to vote on the larger package of
housing legislation, including the rescue plan for the
mortgage companies, as early as Wednesday, and the Senate
is expected to quickly follow and send the bill to
President Bush.
Among the issues that lawmakers have been debating is
whether to exempt from the federal debt limit any
expenditure that the Treasury Department makes on behalf
of the mortgage companies. The current debt limit is
$9.815 trillion and outstanding federal debt is roughly
$9.5 trillion, leaving a cushion of $310 billion.
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Congressional Democrats have expressed opposition to
exempting the rescue plan from the debt limit, saying
administration officials should come back to Congress
for emergency authorization if additional spending is
needed. Officials said it was probable that a compromise
would be reached and the debt limit would still apply.
The housing legislation also includes the creation of a
regulator for the mortgage companies, an agency apart
from the Department of Housing and Urban Development,
which oversees the mortgage giants.
Some critics have questioned whether the new regulator
would have sufficient authority to swiftly increase
capital requirements - the amount of cash that the
mortgage companies need to maintain to protect against
losses.
In his letter to Mr. Spratt, Mr. Orszag suggested that
simply enacting the proposed rescue plan could bolster
the confidence of Wall Street in Fannie Mae and Freddie
Mac.
"Private markets might be sufficiently reassured to
provide the GSE's with adequate capital to continue
operations without any infusion of funds from the
Treasury," he wrote. "during that time, it is possible
that expectations about the duration and depth of the
housing market downturn may brighten."
But Mr. Orszag said his office had also consulted with
market investors with a different outlook. "Many analysis
and traders believe there is a significant likelihood
that conditions in the housing and financial markets
could deteriorate more than already reflected on the
GSEs' balance sheets," he wrote, "and such continuing
problems would increase the probability that this new
authority would have to be used."
Taking into account all of the different possibilities
and sentiments, and measuring them against the budget
"scorekeeping" rules, Mr. Orszag said his office had
concluded "that the expected value of the federal
budgetary cost from enacting this proposal would be
$25 billion over fiscal years 2009 and 2010."
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