Administration's Fannie, Freddie Bailout Could Cost $25B

By Denise L. Meyer, Contributing Correspondent

-- The Congressional Budget Office (CBO) has submitted a report to the House Budget Committee on the Bush Administration's proposal to provide temporary authority to Treasury Secretary Henry Paulson (pictured) to purchase any amount of obligations and other securities issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Under current law, the Secretary has permanent authority to purchase debt securities issued by Fannie Mae and Freddie Mac up to a total of $2.25 billion from each. Reached this morning, a CBO spokesperson could not speak to whether that option has been exercised to date.

The CBO report explains that enacting this proposal could have no direct federal budgetary cost if the Secretary does not exercise the temporary authority. Should the authority be executed however, the CBO estimates the costs could run $25 billion over fiscal years 2009 and 2010. Reached by CPN, CBO’s spokesperson reiterated that the report is an assessment of the risk and it states that "there is a greater than 50 percent chance that the government would not take any action. There is also a small risk that it could cost the government a lot of money. “

The report goes on to explain that even if enacting this legislation would not result in outlays over the near term, it might strengthen the linkages between these Government Sponsored Enterprises (GSEs) and the federal government, thereby increasing the government’s exposure to risk. Also, financial markets already appear to be assuming that this expanded authority will be granted to the Secretary. Failure to provide such authority at this point could trigger turmoil in the nation’s financial and housing markets, with potentially serious consequences for economic activity and therefore for the federal budget, according to the report.

The CBO expects that most or all of any assistance under the proposed authority would go to Fannie Mae and Freddie Mac.

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