The CBO says the proposal to allow the federal government to purchase equity in the mortgage giants could cost up to $25 billion. Yet in the same letter, to House Budget Chairman John Spratt (D-S.C.), the CBO says there's greater than a 50 percent chance that the bailout won't cost the government a penny because Fannie and Freddie may not need the feds to swoop in and provide any liquidity.
The hope for taxpayers is that the markets will simply recover along with Fannie and Freddie and no bailout will be necessary.
"If the proposal is enacted, private markets might be sufficiently reassured to provide the GSEs [government sponsored enterprises] with adequate capital to continue operations without any infusion of funds from the Treasury," CBO director Peter Orszag said. "Under that scenario, the temporary authority would not be used and thus would involve no budgetary cost."
But the zero cost possibility is certainly no guarantee, Orszag warns. If the housing market continues to deteriorate and Freddie Mac and Fannie Mae need the government to provide some cash or equity help, it would cost $25 billion between fiscal 2009 and 2010.
A leading House conservative seized on the cost estimate as an opportunity to push for privatization of Fannie and Freddie and warned of the consequences of a government bailout.
"By bailing out Fannie and Freddie as proposed, Congress would put taxpayers on the hook for billions of dollars worth of risk," said Rep. Jeb Hensarling (R-Texas), chairman of the Republican Study Committee. "... The only true reform is to ensure that Fannie and Freddie become truly private and transition – over a reasonable time period – to the discipline of a competitive marketplace.”
Spratt seemed to reflect a Democratic concern that the high potential price tag could scare away Republican support and says the CBO estimate is not necessarily set in stone.
"Estimating the fiscal impact of this proposal is complex and involves considerable uncertainty – and not everyone will necessarily agree with every aspect of CBO’s analysis," Spratt said. "I think CBO is performing its important institutional role by providing in a timely manner its best professional and independent assessment of the fiscal impact of a very important proposal."
Treasury Secretary Henry Paulson will speak to the Senate Republican Conference during a closed policy lunch today, part of his effort to sell both parties and both chambers of Congress on the need for the Fannie and Freddie rescue. The housing bill could clear the Senate by the end of this week, but it faces a veto threat if Democrats insist on including $4 billion for Community Development Block Grants.