Price to bail out Fannie, Freddie is a bit hazy

WASHINGTON — 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 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.

Lawmakers said the $25 billion cost would not have to be offset with spending cuts or tax increases as would normally be required by "pay as you go" budget rules, and instead would be regarded as emergency spending and added to the national debt.

The budget office 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 to estimate possible future losses and the amount of any cash injection that might be needed from the Treasury.

The full $25 billion cost would appear on the government's books in both fiscal years 2009 and 2010; the Treasury's authority to aid Fannie and Freddie would expire at the end of 2009, or one-fourth of the way into fiscal 2010.

Sen. Jim DeMint, R-S.C., said lawmakers were generally supportive of the rescue plan, but he added that he had doubts about the estimate. "Everyone knows it's just a wild guess," DeMint said. "We are either going to spend zero or we're going to spend a whole lot more than they are talking about."

House vote

The House is expected to vote as soon as today on housing legislation that includes the proposed rescue plan. The housing bill would also raise the national debt limit to $10.6 trillion, an $800 billion increase.

The higher debt ceiling gives the Treasury more room to aid the mortgage companies, but it could also stir opposition among fiscal conservatives. In a letter to the House Budget Committee chairman, John M. Spratt Jr., D-S.C., the director of the budget office, Peter Orszag, predicted "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."

But 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 — a point that was emphasized again Tuesday by the White House and by the Treasury secretary, Henry Paulson.

Others, including some private-equity managers, are pessimistic and predict heavy losses.

Paulson plan

The rescue plan, put forward last week by Paulson, would give the Treasury temporary authority to shore up the mortgage companies, either by extending credit or by purchasing equity in the companies, which are publicly traded.

The price of Fannie Mae shares closed at $13.41 Tuesday, down 72 cents, while shares in Freddie Mac closed up 95 cents at $9.70.

"This bill requires an emergency designation before one dollar of federal funding can be used," Rep. Mike Ross, D-Ark., a leader of the fiscally conservative Blue Dog coalition, said in a statement. "We are clearly facing an emergency situation, and we must act now in order to secure the financial future of millions of homeowners."

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 it had no way to know under what circumstances help would be extended.

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. They were established by Congress, and their debt and other obligations have always carried an implicit guarantee that the federal government would step in to save them if they were ever in danger of collapse.