Guidant Financial Group Blog

The Congressional Budget Office (CBO) released estimates today for the governmental bail-out of Fannie Mae and Freddie Mac. Their guestimation? $25 billion (see Cost of Fannie, Freddie Rescue - $25B).

Ouch.

Fannie and Freddie have repeatedly reported that they have more than adequate capital to continue operating as usual. Freddie Mac also noted that their June 30 results will show that the institution has a “much greater surplus” than the required minimum (see Government Steps In To Rescue Fannie, Freddie).

So why the bailout?

According to an NPR article, the driving force behind the rescue is investors’ peace of mind. In his article, reporter Joshua Brockman writes:

“Right now, it's more of an effort to battle the markets' lack of confidence. Opening the discount window to Fannie and Freddie ‘instills confidence in investors, so investors will continue to fund Fannie and Freddie,’ says Frederick Cannon, chief equity strategist for Keefe, Bruyette & Woods. ‘I don't see them using the [money].’”

Hmmm.

So if they’re not going to be using the money, is the actual cost of the bailout a moot point? To confuse the issue even more: The CBO says that there is a greater than 50% chance that Fannie and Freddie won’t need the money. Yet, it also says that there is a 5% chance the bill could run as high as $100 billion.

Huh?

We suppose it all comes down to analyzing the best-case and worst-case scenarios.

Best-case? Fannie and Freddie don’t need the credit. According to some U.K. publications, the panic in the U.S. financial markets is simply begetting more panic (see Fannie, Freddie and the ‘Economics of Fear’) and the government needs to step in to calm investors’ nerves in order to stimulate investments in the secondary markets.

Worst-case? According to a St. Louis-Dispatch Editorial, “If the mortgage cousins were to fail, money for new mortgages would dry up. Home prices, already falling, would collapse. More homeowners would default. The homebuilding industry would crater.” (See PRO-CON: Should the Government Rescue Fannie Mae and Freddie Mac? YES.)

Yikes.

Whatever may come to pass, $25 billion seems like a lot of money for some peace-of-mind; but, should the mortgage giants collapse, it may be a small price to pay to save the (according to some reports) $12 trillion mortgage market.

What are your thoughts?