Bailout of Fannie and Freddie Will Cost Double Earlier Estimates

by Hans Bader on October 22, 2010 · 5 comments

in Bailout Watch, Deregulate to Stimulate, Economy

The bailout of Fannie Mae and Freddie Mac will cost double earlier estimates, and could cost $363 billion over the next three years, report NBC and the Associated Press.

Fannie Mae and Freddie Mac are the corrupt government-sponsored mortgage giants that contributed to the mortgage crisis by engaging in fraud and misrepresenting subprime mortgages as prime.  Earlier, the Obama administration showered their executives with $42 million in pay, even as Obama’s pay czar was ordering productive private-sector banks to chop the pay of their executives and traders (leading one bank to dump a profitable trading operation), and imposing new taxes and burdens on private banks (but not Fannie and Freddie).

As Professor Roy C. Smith noted, because of the Obama administration’s attempt to restrict bank employee pay, “Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.” Meanwhile, Bank of America’s stock has fallen over the last six months from over $19 to less than $12,  shrinking many Americans’ 401(k)s, as it has been injured by new rules and red tape such as the Dodd-Frank Act (which also is wiping out most free checking accounts).

While the taxpayers have lost a huge amount of money on the government-sponsored mortgage giants, they have actually made money on many private banks that accepted government bailout funds and then returned the money with interest.  (Healthy banks that never wanted a bailout and repaid their “bailout“ in full with interest, like BB&T, were pressured by the Treasury Department into accepting bailout money along with their unhealthy competitors, so that the public would not know which banks really needed a bailout; the Treasury Department feared that such knowledge would result in a run on those banks.)

Hal (GT) October 22, 2010 at 4:07 pm

Does anyone really think that this will actually be the number when it's all said and done? I don't. I bet we get a lot closer to the "T" word.

Reader October 23, 2010 at 5:55 am

Particularly if the foreclosure mess expands, it really could reach a trillion just for Fannie and Freddie.

Reader October 23, 2010 at 12:36 pm

Dodd-Frank is destabilizing the very banks that taxpayers recently bailed out. But this time, they won't get their money back.

Hans October 25, 2010 at 6:22 am

Peter Wallison, who prophetically predicted the Fannie-Freddie meltown, suggests that Dodd-Frank will make future bailouts much more likely.

Me October 27, 2010 at 3:52 pm

Ick.

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