Politics and the GSE Bailouts

Asking for unlimited authority seems like one way to assure people you will be given no authority. That is what the Secretary of the Treasury asked for last week in reference to help out Freddie Mac and Fannie Mae. Today we find that Fannie, Freddie Rescue May Cost $25 Billion, CBO Says, as reported from Bloomberg.

Fannie Mae and Freddie Mac would cost U.S. taxpayers an estimated $25 billion over two years under a Bush administration plan to rescue the mortgage-finance companies, the Congressional Budget Office said.

While the assessment is more pessimistic than Treasury Secretary Henry Paulson's prediction that a bailout is unlikely, the CBO report may quell concerns among some lawmakers that the price tag would be higher.

There is probably a ``better than 50 percent'' chance taxpayer funds won't be needed to save the two largest mortgage- finance providers, though ``that scenario is far from the only possible result,'' said the CBO, a nonpartisan agency in Washington that provides economic and budget analysis for lawmakers, said in a report today.

``Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected'' in the companies' finances, the CBO said. ``Such continuing problems would increase the probability that this new authority would have to be used.''

While neither the Treasury nor the White House budget office has estimated publicly the cost of a bailout, lawmakers including Senators Jon Tester of Montana and Richard Shelby of Alabama said last week they were concerned the cost could reach $1 trillion. The CBO said it reached its assessment by taking into account the probability of various outcomes.

It sounds as if the CBO study is giving the congress the cover it needs to give Paulson the authority he asked for. We are going to hear alot of complaining about the bill - but it sounds like everyone thinks it will be inevitable. The markets are trading as if the deal is already done. Between the markets and the CBO report there is little from preventing this from becoming a reality. Hopefully Paulson original declaration that no funds will be needed is reality - rather than the Tester/Shelby prediction of $1 trillion of taxpayer funds.