2/11/2010
By David Urani, Research Analyst

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Government spending has certainly reached scary levels recently and it's been getting worse as the bailouts drag on. The Obama administration recently unveiled its whopping $3.83 trillion budget, complete with a gaping $1.56 trillion deficit. There are many bailouts to blame, like them or not, for the skyrocketing U.S. debt. The CBO recently projected the ultimate costs of the bailouts, assuming paybacks, in its budget outlook. Among those projections are the following losses: AIG ($9 billion), bank bailouts ($30 billion), and TARP ($99 billion). However, the one you don't here about from the administration, and that has been conveniently been left off the books, is the GSEs, a.k.a. Fannie Mae and Freddie Mac. The CBO's projections for those? A loss $64 billion.

Considering about half of the projected TARP losses are expected to come from the automakers, that makes Fannie and Freddie the unsung elephant in the room as far as the bailouts go. But that's not even where the horror ends. Fannie is sitting on $782 billion of debt and Freddie Mac is sitting on $809 billion. That's a combined debt of $1.59 trillion. If we were to add that to the government's balance sheet, it would increase its debt by a whopping 11%. That's roughly another $5,000 of debt for every man, woman and child in the U.S. Plus, you're likely to see many billions more of the government's money (i.e. tax payers) get funneled into the GSEs' unlimited lifeline. So far, about $111 billion has been dumped into the GSEs.

That's the great part about putting something into "conservatorship", it means you can take a financial black hole and sweep it under the rug. Don't be mistaken, neither Fannie nor Freddie is by any means a private company anymore (not that they really ever were), they are another tool the administration can use to help the housing market. Fannie and Freddie recently announced that they will now buy back loans that it guarantees that are more than four months delinquent. Fannie owns $127 billion of those, and Freddie owns $70 billion. To be fair, in the long term this move could be more profitable than paying the required interest on those guarantees, but in the near term it's going to continue to crank up the leverage on them, and us. Kind of makes AIG look like angels doesn't it?

David Urani
Wall Street Strategies