Paulson Plan Rolls the Dice with Taxpayer Dollars

The Congressional Budget Office (CBO) released a short analysis of the new “blank check” plan by U.S. Treasury Secretary Henry Paulson to extend taxpayer resources to Fannie Mae and Freddie Mac. The CBO letter explores some of the issues with the plan and explains that “CBO’s estimate of $25 billion in [taxpayer] costs over the 2009-2010 period reflects a probability-weighted average of how large those injections might need to be, including zero as a potential outcome.” CBO also noted there is “almost a 5 percent chance that the [GSE’s] added losses would total more than $100 billion.”

FreedomWorks President Matt Kibbe commented:

“The $25 billion estimate is a ‘probability-weighted average’. If this taxpayer injection is in fact needed, the costs will likely be much larger than $25 billion.”

“There is a lot of downside here for taxpayers. CBO also noted that the GSE portfolios hold $780 billion in subprime and Alt-A exposure—among the riskiest loans in the market. In April, the ratings agency Standard & Poor’s estimated that a GSE bailout would cost taxpayers between $420 billion to $1.1 trillion.”

“The CBO analysis was clearly limited by the panicky rush to pass this misguided legislation. It would be far more helpful for the CBO to communicate more of their assumptions about future housing prices and different scenarios than to provide a simple, but misleading, probability-weighted number against a very short timeline.”