Hill Budget Chief Weighs Odds, Cost Of Rescue Plan

Peter Orszag, Congressional Budget Office director, cites "significant uncertainty" in how much aid, if any, Fannie and Freddie might need. (By Stephanie Kuykendal -- Bloomberg News)

"I do have a problem with stepping in and bailing out shareholders of Fannie and Freddie that have made billions on the way up. They never shared that with taxpayers," said Rep. Spencer Bachus (Ala.), the senior Republican on the House Financial Services Committee. He suggested capping any assistance to the companies at $100 billion to reflect the worst-case scenario laid out by the Congressional Budget Office.

The office arrived at that scenario by analyzing the financial statements of the firms and consulting with federal regulators, financial analysts and administration officials. It concluded that the most likely outcome is that the firms will not see losses in excess of the $85 billion they have already acknowledged and will not require government assistance. But there is a 5 percent chance that the firms could have additional losses of more than $100 billion, Orszag said, and would require assistance to continue to operate.

How much assistance is open to debate, Orszag said. It could be "much more" than $100 billion. But given the remote possibility that the firms' losses would run so high, Orszag settled on a "probability-weighted average" cost of $25 billion by the time the legislation expires in December 2009.

The budget office estimate does not include the potential effect on the government's credit rating, which could affect the cost of funding the national debt. Months ago, the Standard & Poor's debt rating agency reported that a bailout of Fannie Mae and Freddie Mac could make it more expensive for the government to borrow money to cover budget deficits. When Standard & Poor's offered that assessment, the government's backing of Fannie Mae and Freddie Mac was merely implied. The Treasury's proposal makes it all but explicit.

Those risks are considerable. The companies had liabilities of $1.6 trillion at the end of March, plus mortgage guarantees and investments totaling $5.2 trillion. By one measure, the excess of their assets over liabilities had dwindled to $7 billion, the budget office said.

The $25 billion estimate also could overstate the cost of a bailout. For example, it does not reflect the value of any stock the government might buy from the companies in return for a hypothetical $25 billion investment.

"If we do this right, taxpayers will not spend any money because the markets will be confident in the vitality of Freddie Mac and Fannie Mae, and the markets will correct themselves," said Sen. Judd Gregg (R-N.H.). "But if the markets don't correct and Fannie Mae and Freddie Mac become unstable, then we've got very serious problems well beyond anything in this estimate."

Staff writer Jeffrey H. Birnbaum contributed to this report.