Accountants for Congress this week put a $25 billion price tag on the federal rescue of two companies that anchor US mortgage markets, but that's just the tip of a potential iceberg of taxpayer costs for America's banking mess.
The reality is that taxpayers could end up paying nothing at all for rescuing the financial system – or the cost could end up as much as 10 times that $25 billion guesstimate.
Even if the official public costs are small – the White House dropped its objections to a House bill that includes $15 billion in housing tax breaks – the financial crisis is already taking a bite out of the pocketbooks of ordinary Americans in a number of ways. Just one prominent example: The economy is growing more slowly than it otherwise would, affecting jobs, incomes, and government tax revenue.
On a more encouraging note, some of the very large numbers that have surfaced in the news do not represent taxpayer obligations. The national debt won't jump by $5 trillion due to a rescue of Fannie Mae and Freddie Mac. Some $300 billion in loan guarantees designed to prevent foreclosures, also in the House bill, won't put taxpayers on the hook for that amount.
"I don't know that it's necessarily going to cost us anything" officially, says Peter Morici, a University of Maryland economist. "The real problem is the slowdown or recession that it's caused.... It's really the lost growth and the taxes that we don't collect."
That's no small cost, however. The price tag of a banking crisis for ordinary Americans is large. It would rise if economic conditions worsen. And, for all the justifiable public outrage about bailouts for pinstriped bankers, the cost of not intervening to rescue the financial system would simply push the public costs even higher, finance experts say.
"To say we could just walk away from Fannie Mae or Freddie Mac without having some severe consequences is really questionable," says Tim Duy, an economist at the University of Oregon in Eugene. "The government does have to make that balancing act."
That balancing act, however, is becoming a fiscal tightrope.
And to the degree that a credit-crunched economy weakens the federal ledger – either through lost tax revenue or direct bank bailouts – one result could be a higher cost of borrowing for the government – a burden that would fall on all taxpayers.
"The credibility of the sovereign is now at risk," Mr. Morici says. "It is no accident that we're starting to see articles about the credit rating of the United States."
In April, analysts at the credit-rating firm Standard & Poor's said that if a recession became severe, the cost of propping up Fannie Mae and Freddie Mac could put downward pressure on the US Treasury's sterling credit score.
Yet a failure to mount a rescue, given that Fannie and Freddie's debts are held by banks and investors around the world, could shake market confidence in the United States even more. These twin "government sponsored enterprises" (GSEs), while operating under private ownership, have long been viewed by investors as having implicit backstopping by the government.
That's why, after a plunge in Fannie and Freddie's share prices, a GSE rescue became a last-minute centerpiece of the housing legislation, which could reach Mr. Bush's desk this week. The White House had previously objected to a $3.9 billion provision to help neighborhoods hurt by foreclosed properties.
The bill authorizes the Treasury secretary to increase an already existing line of credit to the firms for the next 18 months. And if needed, the Treasury can buy stock in those companies – a way of bolstering depleted capital reserves.
The goal would be to keep the US mortgage market operating in the face of a sharp downturn in home prices and a rise in loan losses that spans from small banks to the GSEs.
The nonpartisan Congressional Budget Office estimated the two-year cost of the rescue at $25 billion. But the CBO accountants emphasized that this is merely a midpoint along a wide spectrum.
They agreed with Treasury Secretary Henry Paulson that it's quite possible no federal investment or loan will be needed. Any investment stake, moreover, could potentially be sold later to private sector investors, perhaps at a profit.
But the CBO outlined a 5 percent chance that, amid tough economic conditions, rescue costs for the GSEs could surpass $100 billion.
While making government backstopping more explicit, the bill stops short of nationalizing the two corporations. Some worry that such a move, if it occurred, would push the national debt up by about 50 percent from its current level just below $10 trillion. It's true the GSE balance sheets include $5 trillion in liabilities, but that would never represent a tab for taxpayers, economists say.
Still, the CBO notes in its report that "the riskiest loans, known as alt-A and subprime mortgages," account for 15 percent of Fannie and Freddie's portfolio.
That, and the wider weakness in home prices, make Fannie and Freddie the biggest potential worry for taxpayers.
But other costs could also arise.
So far, the Treasury's Federal Deposit Insurance Corp. is sitting on $52 billion – insurance premiums paid, in effect, by bank depositors – that's ready to resolve bank failures. The recent collapse of the bank IndyMac may drain about $6 billion from that fund, the FDIC estimates.
The agency has a list of other banks on its watch list, some of which will probably require similar intervention. Its insurance fund may or may not cover the final tab.
"The question is, how many big banks are going to fail," Morici says.
About two decades ago, a wave of savings-and-loan failures ended up costing taxpayers about $125 billion.