There was an article on Bloomberg today about the cost of bailing out Fannie Mae and Freddie Mac per Secretary Paulson’s plan that is before congress. The Congressional Budget Office came up with a figure of $25 billion. If a rescue is necessary, which I am not sure that it will be, the $25 billion figure seems pretty low. But this begs the question, is $25 billion or 4 times that amount, really that much, when it comes to government spending. Lets compare this with the S&L crisis:

Cost of Savings and Loan Crisis – $125 Billion

• As a percentage of GDP in 1989 – 2.85%
• As percentage of Total Tax Receipts 1989- 7.32%

 

Cost of Fannie & Freddie – $25 Billion x 4 = $100 Billion*

• As a percentage of GDP for 2007 – 0.86%
• As a percentage of Total Tax Receipts 2007 – 2.39%

 
So even just comparing the cost of this with the S&L crisis, this bailout is relatively small. You would have to triple our numbers to get close to the percentages of the S&L costs.

Now I think that Fannie and Freddie need some serious reform. The structure of these GSE’s has not necessarily been as great for homeowners as Fannie and Freddie’s management and supporters would like us to believe. And ultimately it has caused an undue systemic risk to the financial system by allowing these entities to operate with less capital requirements than other firms because they had the implied (and now explicit) backing of the federal government. But to pull the rug out now would be stupid, and as Paul Muolo, co-author of Chain of Blame, said it would be game over for the US economy if these GSE’s were allowed to fail. So I think right now this is money well spent.

*Now this is a total guess, but certainly if the federal government gets involved it would be more than $25 billion. So 4x the based number is going to be our reasonable guess.

GDP and Tax Receipt numbers are from the US Dept of Commerce – www.bea.gov

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atix1Kea2wh8