Fannie And Freddie Only $25 Billion! Act Now While Supplies Last

The Washington Post reported yesterday how the Congressional Budget Office Director, Peter Orszag, feels that Fannie (FNM) and Freddie (FRE) will likely cost taxpayers less than $25 billion, but further deterioration in the housing market could force an infusion beyond $100 billion.

The quote of the day comes directly from Orszag: "There is significant uncertainty involved here," Orszag said. The cost "could be zero. It could be $100 billion."

At least he is honest. Like the market, no one really knows. Of possible contention in the recently drafted legislation is how the protections for taxpayers were not specifically spelled out but were left to the Treasury to define.

 

 

Source: ClipSynidcate / Bloomberg

 

At the end of Q1, both Fannie and Freddie had liabilities of $1.6 trillion, plus mortgage guarantees and investments totaling $5.2 trillion. Unfortunately, the excess of their assets over liabilities may have fallen to $7 billion. Still, the $25 billion estimate may also end up overstating the cost since it does not reflect the value to the government of any purchased stock received for their $25 billion investment (assuming the company needs to be taken over). As quoted in the article:

 

If we do this right, taxpayers will not spend any money because the markets will be confident in the vitality of Freddie Mac and Fannie Mae, and the markets will correct themselves," said Sen. Judd Gregg (R-N.H.). "But if the markets don't correct and Fannie Mae and Freddie Mac become unstable, then we've got very serious problems well beyond anything in this estimate.

 

Of course, if the government does step in, then the confidence has been lost, and the value of the stock at that point is most likely less than their bailout investment. As argued, it still appears the issue comes down to a matter of confidence (to some extent), which partially explains the need for Treasury to have an open checkbook, or at least give that impression. Open checkbooks are nonetheless scary, and often end up being used to buy more than you originally went to the store for, but in this instance, they may have no choice.

Too little, and confidence is lost. Too much, and either the market gets scared, and/or moral hazard starts to creep in. I wonder if Treasury Secretary Paulson is missing his Manhattan corner office right now?

Disclosure: None

Comments

[AmesTiedeman]

Bank on further deterioration led by California.

[JST]

Uncle Sam to U.S. taxpayers: "uhhm, yeah.. we're gonna need those rebate checks back...Little glitch in the system, it wasn't supposed to happen. Oh yeah, Fred and Fan say "hi" ..."

[kkin365]

I thought I read in yesterday's Washington Post (I live in DC) that Fannie and Freddie might even soak up $300 billion. Am I wrong? I read also that much depends upon local lenders cooperating (willing to writeoff on an individual-borrower basis). How realistic is this scenario?

[GeorgeJurgensen 01]

FNM and FRE as the GSE's underwrite conforming mortgages, that is the mandate, and they get discounted financing due to the government's implicit guarantee and reduced capital requirements versus banks. So why they did FRE and FNM have holdings of non GSE CDO's in their asset holdings, including Alt-A, subprime, and payment option mortgages, at total holdings that were well above equity capital. How on Earth can Paulson and the government justify bailing out shareholders and subordinated debt holders? Why were regulators not preventing the GSE's from holding non-conforming assets? Paulson and the SEC should be investigating fraud, not bailing out management. GSE's should be recapitalized with much subordinated debt converted to a new equity stake, and insolvent shareholders getting zilch, nada, nothing.

GSE shareholders, including affiliated banks like WAMU, allowed management to go out on a limb in search of yield, not keeping to the GSE mandate, all while collecting fat dividends before the house of cards crumbled. No bailout for shareholders!