Wednesday, July 23, 2008

What's the Cost For Fannie and Freddie?

From Bloomberg:

A government rescue of Fannie Mae and Freddie Mac would require taxpayers to pay ``way'' more than the $25 billion estimated by the Congressional Budget Office, potentially as much as $1 trillion, Senator Jim Bunning said.

Treasury Secretary Henry Paulson ``hasn't told us the truth about this bill,'' Bunning, a Republican from Kentucky, said in an interview with Bloomberg Television today. ``Why would you put in a backstop of unlimited amounts of money if you weren't going to need it.''

While I think that number is a little high, its should be obvious that Paulson's estimates are way too low. Remember there points:

1.) Fannie and Freddie have over $200 billion in subprime assets on their books:

Fannie Mae and Freddie Mac may need to record more writedowns after they expanded their purchases of non-guaranteed subprime and Alt-A mortgage securities just as other investors fled to safer investments, their regulator said.

The value of $217 billion of the so-called non-agency securities is falling as other financial firms write down their holdings, the Office of Federal Housing Enterprise Oversight said in its annual mortgage market report. Privately issued securities backed by subprime mortgages made up 9.2 percent of the companies' combined portfolio, while Alt-A represented about 5.8 percent, Ofheo said.

Paulson's $25 billion is about 11.5% of the total subprime assets and a very small percentage of the total amount of loans on the GSEs books. Short version: $25 billion is a very low ball figure.

2.) Paulson has asked for an unlimited line of credit and the ability to buy stock in the open market. That tells me he thinks this thing is getting a lot worse.

3.) How many times have we thought we were in the 9th inning of the writedown problem?