The Wall Street Journal reports:
Is Washington looking in the wrong place for financial market risk to taxpayers? According to a new study by Standard & Poor's, the answer is yes.
Congress is disturbed about the bailout risk from the Federal Reserve opening its discount window to borrowing from investment banks and broker-dealers. That's a reasonable concern, especially with the Fed guaranteeing $29 billion in dodgy Bear Stearns paper. But according to S&P, the "maximum potential cost" of bailing out Wall Street would be below 3% of GDP, assuming a deep and prolonged recession. That's painful, but not catastrophic.
Guess where the far greater danger comes from? If you said Fannie Mae and Freddie Mac, you are a faithful reader of these columns and we bow before you. According to the S&P study, the taxpayer risk from Fan and Fred, combined with that of other government-guaranteed agencies, "yields a potential fiscal cost to the government of up to 10% of GDP." With total U.S. GDP estimated at somewhere north of $14 trillion, that would put the Fan and Fred bailout cost at about $1.4 trillion. Yowza. This "fiscal burden" would be so large, in fact, that S&P figures it could even jeopardize the AAA credit rating of the U.S. government.
These are the same two companies, by the way, that have recently had their capital requirements reduced and their jumbo mortgage lending limits increased to a maximum of $729,750. New York Senator Chuck Schumer, among many others on Capitol Hill, had browbeaten the Bush Administration until it eased those limits. Capital is of course the only cushion taxpayers have against a bailout if Fan and Fred keep racking up losses. Better hope this recession isn't deep.
According to
Bloomberg:
Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac account for 45 percent of the $11.5 trillion U.S. residential mortgage market
Where are the anti-trust people yelling about these two companies being such a large percentage of the mortgage market? I guess Barney Frank(Democrat-Fannie Mae) and the rest of Congress really are on Fannie and Freddie's pad.If the United States federal government loses its' triple A credit rating:interest rates will be going much higher.
