The good news, there’s a “better than 50 percent” chance it won’t happen. The bad news, if it does it will “probably” cost taxpayers $25 billion (luckily not each). And regardless, it’s looking like at least half of the not so dynamic duo these days might be suffering from a shrinking appetite for new mortgages.
Yes, they’re talking about Fannie Mae and Freddie Mac. You know, the duo which the “Bush administration is depending on…to help pull the U.S. out of the worst housing slump since the Great Depression.”
Fannie, Freddie Rescue May Cost Taxpayers $25 Billion, CBO Says [Bloomberg]

13 thoughts on “What’s Twenty-Five Billion Between Three Hundred Million Friends?”
  1. $25 billion…. heheheh
    I’m sticking with my original forecast from about a year ago. US residential housing will undergo a ~$6 trillion haircut. Private interests (banks, investors, etc.) will lose about $500 billion, and the taxpayer will “contribute” another $500 billion. The remaining $5 trillion in loss will be “absorbed” by existing homemoaners.
    I posted some analysis behind these numbers a few months back on SS:
    (look there at this post – Posted by: Satchel at February 2, 2008 6:28 AM)

  2. …or privatizing the profits and socializing the losses. Everyone knew this was coming. And it’s probably far better that the government bails out FM/FM (ie. focus on housing) rather than to keep pumping the economy full easy money, tanking the dollar and driving up inflation. At least the FM/FM bail out is focused on the source of the economy’s primary problem and not a scatter shot approach that simply keeps bankers out of the unemployment line…

  3. Paul Krugman wrote that somebody shouted “Bush economics don’t work” to a cheering crowd lined up outside of Indymac waiting to settle with the FDIC.
    I hear Paulson soothsaying again today saying the housing market is “about to turn a corner”. He keeps the happy talk praying it will prevent the next shoe from dropping. This house of cards is not going to become a concrete structure any time soon.

  4. “rivatizing the profits and socializing the losses”
    who was the first to say this anyway? it appears in lots of finance articles

  5. Noam chomsky, etc., says/said it alot, but I’m sure it appears before that. Too lazy to search (someone else will surely provide a link).
    I don’t remember the phrase appearing in mainstream finance articles until some of these folks felt they were getting hosed. You usually hear the less-loaded phrase “disbursed cost, conentrated benefits” above, so that nobody thinks you are a filthy commie.
    You hear similar rumblings about health care costs too, since corps bear some of those costs, so stay tuned!

  6. At least the FM/FM bail out is focused on the source of the economy’s primary problem and not a scatter shot approach that simply keeps bankers out of the unemployment line…
    hmm… except that the big bankers are making sky high bonuses as they make garbage loans and then shunt them into Fannie and Freddie. A bailout of Fannie/Freddie keeps this game going. So I disagree: this F&F bailout will directly contribute to the bannkers wallet in a positive way.
    also: housing is but a part of the crisis. It started with housing, sure… but we also have sky high commercial RE debt, high credit card debt, and basically overly high debt everywhere. don’t believe the hype… just like this wasn’t “contained” to subprime, it also isn’t “contained” to housing. that’s just where the cracks hit first.
    and $25 billion? so people honestly think that we’ll be able to save Fannie AND Freddie for LESS than the $29B Bear Stearns debacle? I guess it’s a possibility that it will be that low… but I wouldn’t budget that way. I’d like to see the assumptions that were made for this calculation, and the standard deviation/confidence interval etc…
    it reminds me when Ben Bernanke said the total fallout of this was possibly up to $100billion. we surpassed multiples of that long ago.

  7. The $100 billion ceiling estimate was likely misunderstood. My understanding is that Ben Bernanke has been understated about this because he feels there is no alternative. All of his statements, when the qualifiers are correctly read, have suggested unbounded risk, with all that implies. It is unfortunate that so many people mistake cautious statements for ignorance. Show me the Ben Bernanke quote with full context and maybe I’ll believe he said what you assert, otherwise no way.

  8. Mole Man:
    I listen to Ben Bernanke’s speeches LIVE all the time. As with all economists, he of course has a lot of “qualifiers”. However, in sum, he has consistently UNDERPREDICTED the turmoil that comes.
    He had speech after speech about how things were “contained” (with qualifiers). he is only “correct” because he makes incorrect statements and then qualifieds them. such as “everything seems to be contained, and the general economy should not be affected, unless unforeseen downward pressure is exerted on housing”
    then surprise! “unforeseen” circumstances happen, again and again.
    It is not my job to prove to you Ben B said such things. simply read his speeches on the Federal Reserve website
    the 50-100B claim was not part of his prepared speech, so is not on the website. however, just google this QUOTE from him:
    “Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems”
    he made the comment on July 19,2007
    Reuters story
    Money dot com story
    Needless to say, his “estimates” were far off. And yes, I’m sure later on he said something like (paraphrased) “well, it’s possible these estimates are in error”. but that doesn’t change the fact that his estimates were WAY off.

  9. Mole man:
    if you are interested go here:
    it has all of BenB’s prepared speeches and testimony.
    You can read them for yourself. you will see that the Federal Reserve CONSISTENTLY minimized the fallout from the poor lending choices. they CONSISTENLY under-predict what future core and headline CPI will be. they CONSISTENTLY have under-predicted what future unemployment would be. And they consistently UNDER-reported what teh fallout from the credit crisis would be, and how much would be lost by the big banks, and how much taxpayer money may be at risk.
    this did not start with BenB. It started decades ago with Alan Greenspan. BenB is one of the smartest men I have ever met. However, we must realize who he works for. He works for the Federal Reserve, and their chief concern is the BANKS and the FINANCIAL SYSTEM.
    once you realize that, you will understand why all the projections of “taxpayer risk” and “Taxpayer cost” are minimized. it then makes sense why our Treasury Secretary says things like “well there isn’t a problem. but if there were a problem, then we should backstop Fannie and Freddie. But we don’t have to worry about this anyway because once they have the backstop they won’t even need the backstop”… all the while asking for an essential “blank check” from Congress.

  10. Great points here by ex SF-er, Satchel and others. This is a huge taxpayer bailout that rewards the undeserving. There was a great article in the weekend Wall Street Journal by James Grant titled “Why No Outrage?” .
    His main point is that we are all just sitting back while Wall Street and the federal govt are screwing us. He states that “The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees — specifically, to maximize employee compensation in the short run.” We should all be outraged (and Ron Paul is probably the only person in Washington who is).

  11. This point is getting a lot of labor, maybe more than it deserves, but as the quote shows the $100 billion number was an estimate at that time for subprime losses. Because of the way this unfolded there is no reason to think that estimate was ever anything but a rough starter figure. Some remarks about containment to subprime did get made, but what Bernanke said along those lines had big qualifiers also. Certainly few people posting here believed “contained to subprime” applied to the Alt-A Bay Area or San Francisco proper.
    Mostly I agree with what you say about the downside of Fed oversight, but there are key differences between Greenspan and Bernanke. Alan Greenspan actually told Americans to go out and get ARM loans at the worst possible time. That was way, way out of line. Bernanke raised rates until the character of trading on the markets was thoroughly changed. Bernanke has also warned Congress about the risks of tax deferrals and the unsustainable nature of large trade deficits. Those unsustainability remarks also apply to the transformations going on now. I have spent too much time watching Bernanke giving speeches. Though I stopped watching him closely back in early 2007 it is interesting that I saw a different person than you did, and a very different creature from Alan Greenspan.

  12. Mole:
    don’t get me wrong, I don’t think that Bernanke and Greenspan are very similar at all. and also, in general I think that BenB’s actions have been nothing short of masterful. I don’t know if it will succeed, but he has certainly been innovative.
    I’m only really comparing Greenspan and Bernanke in that they both would make predictions but then add in a ton of qualifiers. That way they were always correct because of the qualifiers… but their predictions on their own were wrong.
    such as “there is no bubble” and “it’s contained” and “this won’t spread to the general economy” and “inflation next year will moderate” and so on.
    I don’t think that BenB is dumb, on the contrary. I think his projections are purposefully misleading in an attempt to calm the markets, which is what the govt feels is needed. Can’t have the Fed chairman get up there and say “well, looks like we’re gonna have a doozy of a recession and a bunch of banks are gonna fail and this will cost taxpayers $500B to a Trillion bucks!”
    so instead, he talks about how current economy is slow but stable and that there should be reduced inflation in the future but that we have to be vigilant because yes there are risks to the economy etc… in essence he says “everything will be fine, unless it’s not”.
    Likewise: the govt is telling us not to worry, Fannie and Freddie are fine and don’t need any help, and if they do need help then it’ll probably cost nothing, but if it does cost something then maybe it’ll cost $25 billion or so. and thus congress willl feel less threatened and will give Paulson the ‘blank check’ that he wants.
    but remember: these are the same people that 3-6 months ago said that Fannie and Freddie were secure and we should shove a bunch of bad loans into them.
    and lastly: NOBODY knows what is in F&F’s books, and how much exposure they have and how toxic their portfolio is. Right now the govt has a horde of accountants/regulators looking at F&F’s books. It has taken YEARS to just understand what was on F&F’s books from the boom times (they still aren’t reporting accurate financials). So how on Earth will the CBO be able to tell us how much the taxpayer is at risk???? when nobody knows Fannie/Freddies books??? the answer: they can’t.
    so yeah: I don’t trust a word of this analysis. perhaps we’ll get away with only $25 billion… but those two firms are levered up over 60:1 and they have $5 Trillion of exposure… so the possible losses seem like they’d be a lot higher to me. But I also have NO IDEA… it’s all conjecture on my part.

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