I want to recall that, at the time of the Fannie and Freddie bailouts at the beginning of the summer, Hank Paulson, backed up by a compliant Congressional Budget Office, made the claim that any bailout of Fannie and Freddie was largely symbolic and not likely to cost the taxpayers much, if anything at all.
Here’s a blast from the past from the July 22 issue of USA Today:
Fannie, Freddie could cost us $25 billion
WASHINGTON — Congress’ top budget analyst says a federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion.
But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers Tuesday that there’s a better than 50% chance the government will not have to step in to prop up the companies by lending them money or buying stock.
Paulson went on to reiterate those claims. At the time I found those claims to be ludicrous, as they would require loss ratios for Fannie and Freddie that were not just smaller, but a tiny fraction of the losses that the rest of the mortgage industry had already booked.
Just a few days ago, and barely 4 months after the "50% chance" of no losses, Fannie announced a $29 billion loss:
Fannie’s loss: $29 billion
NEW YORK (CNNMoney.com) — Troubled mortgage-finance giant Fannie Mae reported on Monday that it lost $29 billion in the most recent quarter, putting the firm closer to having to draw on the $100 billion in taxpayer dollars committed to it in September.
Fannie Mae (FNM, Fortune 500) said that as of Friday it had yet to draw on those funds. But the company warned in a filing that "if current trends in the housing and financial markets continue or worsen…we may have a negative net worth as of December 31, 2008."
And today we got this:
Freddie Asks Treasury for $13.8 Billion After Loss
Nov. 14 (Bloomberg) — Freddie Mac, seized by the government two months ago, asked the Treasury for $13.8 billion after a record quarterly loss caused its net worth to fall below zero.
The company said it expects to receive the money by Nov. 29. The third-quarter net loss widened to $25.3 billion, or $19.44 a share, after writing down tax assets and providing for bad mortgages and securities, McLean, Virginia-based Freddie said in a statement today.
I know enough about accounting that I can state that it is thoroughly impossible for more than $50 billion of losses to materialize out of thin air in only 4 months. Which means that Paulson and his buddy Peter R. Orszag, director of the Congressional Budget Office, were being less than forthright when they sold the bailout plan to Congress. Either that, or Fannie and Freddie were hiding the truth. But somebody knew that there were tens of billions in losses on the way, that much is certain.
In a fair and just world, Paulson and Orszag would now be before congressional committees being grilled about this deception. I’m not holding my breath for that, though.
"Early this week, Fannie Mae reported a record loss, including write downs of its deferred tax assets that make up a significant portion of its capital.
We monitor closely the performance of both Fannie Mae and Freddie Mac and both are performing within the range of our expectations. The magnitude of the losses at Fannie Mae were within the range of what we expected and further confirms the need for our strong actions."
Within the range of our expectations? That’s odd, because back in July the stated range of expectations was a maximum of $25 billion with only a 50% chance of happening.
And we’re just getting started on the Fannie and Freddie losses. So unless they had a "non-public" range of expectations that was 2x to 10x larger than the one they sold to Congress, I find this a difficult statement to accept.
My "range of expectations" has not shifted much. I think Fannie and Freddie are going to cost us $250 billion over this next year and close to $750 billion overall.
There are two possibilities here for how Paulson is handling this crisis: either he knows more than he is letting on, preferring to drip the information out, or he is constantly behind the situation and is making it up as he goes along.
Of the two, I am not sure which is worse.