GOV/MIL CBO: Fannie Mae, Freddie Mac Rescue May Cost $25 Billion

Dennis Olson

Dennis Olson

Chief Curmudgeon
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http://www.foxnews.com/story/0,2933,388341,00.html

CBO: Fannie Mae, Freddie Mac Rescue May Cost $25 Billion
Tuesday, July 22, 2008


WASHINGTON — Congress' top budget analyst says a federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion.

But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers Tuesday that there's a better than 50 percent 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 includes Treasury Department authority to throw Fannie and Freddie a temporary lifeline.

Treasury Secretary Henry M. Paulson, who has been pressing for the power, says the backup plan will help calm investors and stabilize financial markets.
 
Hiding Bear

Hiding Bear

Inactive
Dennis, I took a closer look at this.

Not surprisingly to us 'bears', the news is actually much worse than it seems.

The CBO used a probability method to compute the $25 billion loss. Actually it said there was a greater than 50% of no loss (don't laugh yet) but a small chance of a greater than $100 billion loss. Of course this news is buried in the attachments that most in the media will probably ever read.

Don't be fooled - these companies, Fannie & Freddie, are walking zombies with literally trillons of $s of derivatives on their balance sheets that no one in Congress has even looked at yet.

This is going to end badly for F & F.



CBO’s Estimate of the Losses on Mortgages Held and Guaranteed by the GSEs.

To assess possible market perceptions of the GSEs’ financial condition, CBO consulted with financial experts and constructed independent models of the possible future evolution of the net assets of the GSEs. In particular, CBO estimated the likelihood that the GSEs’ credit losses would exceed those already recognized on their fair-value balance sheets. This approach suggested a significant probability that the firms’ net financial position (assets minus liabilities) would not deteriorate further by the end of the 17-month period. It also, however, highlighted scenarios in which the GSEs would be much more financially impaired at that point. For those scenarios, CBO assumed that the financial markets might stop financing the GSEs’ operations unless the federal government provided sufficient funds to assure markets that the firms could continue to function.

There is a considerable amount of uncertainty about the credit losses that may be experienced on existing mortgages held and guaranteed by the GSEs in the next few years. Some financial analysts estimate that losses will be smaller than those already recognized by the GSEs in their fair-value balance sheets, and others forecast far greater losses ahead. However, those estimates do not reflect the one-sided nature of the federal government’s potential exposure to losses suffered by the GSEs.

CBO’s own modeling estimated a broad range of potential credit losses by projecting the discounted cash flows from the GSEs’ mortgage loans and guarantees at the end of March 2008, a book of business with a value of about $5.2 trillion. The riskiest loans, known as alt-A and subprime mortgages, accounted for about 15 percent of that portfolio.

The key factor for the GSEs’ future credit losses is the path of housing prices in the next several months. If the deterioration in the nation’s housing prices continues or accelerates, the GSEs’ credit losses will grow. CBO applied a probability distribution of the possible future direction of home prices, including the potential for stabilization, modest growth, and much deeper declines. Using historical and industry estimates of the expected losses on the different types of credit risk that the GSEs face in their current portfolios, CBO estimated the firms’ possible credit losses under thousands of possible future market conditions for housing prices. That analysis suggested that there was more than a 50 percent chance that the GSEs’ future losses would not exceed those already recognized, but there was almost a 5 percent chance that the added losses would total more than $100 billion. Given that distribution of possible future losses, CBO then evaluated how much assistance might need to be provided to the GSEs to allow them to continue operating in the capital markets. CBO’s estimate of $25 billion in federal costs over the 2009–2010 period reflects the agency’s assessment of the probability-weighted average of how large those injections might need to be, including zero as a potential outcome, along with the views of other analysts.
Click to expand...

http://www.cbo.gov/ftpdocs/95xx/doc9574/07-22-GSEs.htm
 
Hiding Bear

Hiding Bear

Inactive
Cost of Loan Bailout, if Needed, Could Be $25 Billion

By DAVID M. HERSZENHORN
Published: July 23, 2008

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.
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http://www.nytimes.com/2008/07/23/business/economy/23treasury.html
 
D

Dozdoats

Deceased
This is going to end badly for F & F.

No.

This is going to end badly for John Q. Taxpayer, just like all the other big.gov bailouts of big.com before it. Problem is, this could bring down the whole house of cards that is the current financial system.

That too will go badly for John Q. Taxpayer.

dd
 
Hiding Bear

Hiding Bear

Inactive
Dozdoats said:
This is going to end badly for F & F.

No.

This is going to end badly for John Q. Taxpayer, just like all the other big.gov bailouts of big.com before it. Problem is, this could bring down the whole house of cards that is the current financial system.

That too will go badly for John Q. Taxpayer.

dd
Click to expand...


I agree, but more specifically, it will end badly for the shareholders of F & F, although bondholders like China will be bailed out.

With $5 trillion in mortgages in their control, and trillions more in off the books derivative contracts, yes this could seriously destroy our financial system. So there will be a bail out - paid by the taxpayers. However it's going to cost more like $1 trillon than $100 billion, and by saving the financial system they will destroy the dollar and savings of most everyone.

The whole idea of an unregulated F & F was a very bad idea, just like unregulated s & ls in the 1980s. When will we we ever learn?
 
Hiding Bear

Hiding Bear

Inactive
blueridge said:
Noticed an article tonite that claimed it would take more than a TRILLION bux to fix the housing debacle.

http://finance.yahoo.com/tech-ticke...sing-Crisis?tickers=FNM,FRE,XLF,WM,WB,WFC,BAC

A trillion is a really, really, really big number.
Click to expand...
Roubini (in the video) is the greatest.

Yes we, US taxpayers will be paying most of that $1 trillion figure - mostly as various banks and Fannie & Freddie get taken over by the FDIC and US government, and real money losses are no longer hidden off the balance sheet.
 
Tweakette

Tweakette

Irrelevant
They're going to vote on the Fannie/Freddie/homeowner bailout package tommorrow!!! If you are against it please call your Senator and Rep and ask that they vote NO!

At the very least more time is needed to analyze what effects this will have on our financial system and on the taxpayer. Right now it's being crammed down our throats!!!

Tweak

See: www.financialpetition.org, www.FedupUSA.org
 
Hiding Bear

Hiding Bear

Inactive
Tweakette said:
They're going to vote on the Fannie/Freddie/homeowner bailout package tommorrow!!! If you are against it please call your Senator and Rep and ask that they vote NO!

At the very least more time is needed to analyze what effects this will have on our financial system and on the taxpayer. Right now it's being crammed down our throats!!!

Tweak

See: www.financialpetition.org, www.FedupUSA.org
Click to expand...


I explained this in another post, but basically this bill gives the Treasury a blank check to pay off all present and future losses of F & F. Even the CBO (above) says that loss figure may be $100 billion. In addition, the US may pay off the debts of F & F - which may be $100 billions more!
 
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