Sen. Dodd: Fannie, Freddie 'Too Big To Fail'The rescue plan for giant mortgage companies Fannie Mae and Freddie Mac promises credit and possible stock purchases. It might cost the U.S. nothing — or it might cost $25 billion. Democratic Sen. Christopher Dodd says balancing investor confidence and taxpayer exposure is a fine line, but "doing nothing is not an option."
The rescue plan for giant mortgage companies Fannie Mae and Freddie Mac promises credit and possible stock purchases. It might cost the U.S. nothing — or it might cost $25 billion. The rescue package has to pass through the Senate Banking Committee, and its chairman, Christopher Dodd (D-CT), is at the center of the debate.
Supporting the companies and their stockholders is important, Dodd says, because "there's a great risk that the people holding the debt are going to dump it. And it isn't just debt being held in this country; it's being held globally ... and if they decided to dump that debt tomorrow, you could have a collapse globally."
Dodd tells Steve Inskeep that the entire architecture of the financial services sector needs to be restructured. In the meantime, though, the Bush administration's plan — which would temporarily underwrite Fannie Mae and Freddie Mac with additional loans and prop up the stock price — will provide "critical confidence" in the system to help stabilize the markets.
The plan is designed to offer some assurance that the federal government will step in if it has to, that "we're not going to allow this to fail." At this point, the expression "too big to fail" probably applies, Dodd says. "I don't think it applied to Bear Stearns; it applies here."
The problem is not going to be solved by the federal government, but by the private marketplace, Dodd says, and the government now must play a supportive role.
"I'm worried about the dual role. Investor confidence and taxpayer exposure — walking that thin line is not an easy path, but ... doing nothing is not an option at this juncture. We have to shore up that confidence."
Keeping Fannie Mae and Freddie Mac afloat could set taxpayers back as much as $25 billion, a congressional budget analyst said Tuesday.
But if history is any indicator, that estimate might turn out to be chump change. Initial projections by the General Accounting Office in 1988 of the savings and loan bailout were in the same ballpark — $26 billion to $30 billion. The final cost to taxpayers, according to the GAO: $132 billion.
And the S&L industry chipped in another $40 billion.
Analysts pointed out that the price tag was actually even higher because of the interest paid on the cleanup money.
To save the day, Congress established the Resolution Trust Corporation. It:
• Shut down or merged 747 savings & loan associations
• Provided safe harbor to 25 million depositor accounts
• Sold more than $465 billion in assets, including 120,000 pieces of real estate
• Took six years to get the job done.
Compiled from news reports.
A federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion, the Congressional Budget Office said Tuesday.
But CBO Director Peter R. Orszag said in a letter to lawmakers that there is a better than 50 percent chance that the government will not have to step in to prop up the companies by lending them money or buying stock.
Congress is expected to vote this week on a housing measure that includes Treasury Department authority to throw Fannie and Freddie a temporary lifeline.
Treasury Secretary Henry M. Paulson, who has been pressing for the power, says the backup plan will help to calm investors and stabilize financial markets.
Orszag said it's most likely that the companies will remain afloat and the government won't have to put up any money, but there's a very small possibility that Treasury will have to step in to help cover losses at Fannie and Freddie topping $100 billion. The $25 billion estimate reflects his office's best guess of how big a federal infusion would be needed.