The U.S. Treasury’s push to gain the authority to buy equity positions in one or both of Fannie Mae (FNM) and Freddie Mac (FRE) could end up costing a pretty penny, as the Congressional Budget Office on Tuesday put out the first published estimate of the cost of government intervention into the two ailing mortgage financial giants since Treasury secretary Henry Paulson proposed the plan two weekends ago. In a letter sent to Senate Budget Commitee chairman John Spratt (D-SC), as well as other Congressional leaders, CBO director Peter R. Orszag pegged the expected value of the rescue at $25 billion through 2010, saying that “there is a significant chance—probably better than 50 percent—that the proposed new Treasury authority would not be used before it expired at the end of December 2009.” Orszag’s letter, however, made it clear that the CBO was playing a game of pin the tail on the donkey with its estimate, because nobody is exactly sure if the government would intend to use any new authority were it to be granted by Congress. “If the proposal is enacted, private markets might be sufficiently reassured to provide the GSEs with adequate capital to continue operations without any infusion of funds from the Treasury,” he wrote, noting that “during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten.” Or they may not. You never can tell, not in this market. Perhaps most telling in the letter, however, was a more embedded warning about the long term costs of such a rescue strategy — a cost that would extend far beyond 2010. “Even if enacting this legislation would not result in outlays over the near term, it might effectively strengthen the linkages between the GSEs and the federal government and thereby increase the government’s underlying exposure to the risks associated with the GSEs’ activities,” Orszag wrote. Related links: Full CBO analysis Disclosure: The author was long FRE and held no positions in FNM when this story was written; further indirect holdings may exist, however, via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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