No one can tell what rescue will cost

The Baltimore Sun

WASHINGTON - If everything breaks right, the hit to taxpayers from a broadening government rescue of the nation's tottering financial markets could be minimal.

But if it doesn't, there's a big bill waiting for us all.

"These measures will require us to put a significant amount of taxpayer dollars on the line," President Bush acknowledged yesterday as his administration continued to work on a multipronged plan to restore confidence in financial markets. "But I'm convinced that this bold approach will cost American families far less than the alternative."

With the government already on the hook for more than $300 billion in commitments to Fannie Mae and Freddie Mac, insurance giant AIG and JPMorgan Chase, the administration was preparing a proposal that could dwarf those moves: a plan to buy as much as $700 billion in in toxic debt that has caused the credit market to seize up.

"Americans, get ready for an enormous tax bill!" analyst Aaron Task warned Friday on the Yahoo Finance blog Tech Ticker. "There is no free lunch. Just how significant an amount of taxpayer dollars [to be put on the line] remain unknown, but it's going to be massive."

Talk of creating a new entity to buy up bad debt has evoked memories of the Resolution Trust Corp., the government agency established in 1989 to dispose of the assets of failed thrifts during the savings and loan crisis of the late 1980s and early '90s.

The General Accounting Office estimated that the S&L; cleanup cost taxpayers $132.1 billion. Roger Staiger, who teaches real estate at Johns Hopkins, expects the current crisis to set taxpayers back far more.

He tallies the costs so far: $200 billion in commitments to Fannie Mae and Freddie Mac, an $85 billion loan to AIG and $29 billion to finance the purchase of Bear Stearns by JPMorgan Chase. And there could be more on the horizon.

Sen. Benjamin L. Cardin says the final cost to taxpayers could be far smaller than many fear. A well-crafted federal plan to buy risky debt "shouldn't be a major issue as far as taxpayer cost," said the Maryland Democrat, if it is "done the right way."

"Look at what Warren Buffett did with Constellation Energy," he said. "He's going to make a lot of money."

Cardin, still awaiting details of the administration plan, was referring to the agreement last week by Buffett's MidAmerican Energy Holdings to buy the Baltimore-based energy company for $4.7 billion - about half the company's value the week before.

Under the plan being discussed, the government would be buying mortgage-backed debt "at a discount" and, ideally, realizing a return on the investment once real estate markets rebound.

That's also the hope for the funding infusions of the two mortgage giants and AIG, which give the federal government an ownership stake that could increase in value.

Amid broad bipartisan consensus on a need to act, the White House delivered its proposal to lawmakers yesterday, and and Congress was expected to move quickly this week on a package.

One issue up for debate: whether the bailout will be paired with the tighter market regulations favored by Democrats.

"We've got to deal with some of the issues that got us here to begin with," said Rep. Chris Van Hollen. The Montgomery County Democrat said a bailout plan should "prevent [crises] from happening again."

Staiger, the Hopkins professor, sees more costs on the horizon.

"We haven't even looked at the crises for the mid-sized banks, for the small-sized banks," Staiger said. "We've only looked at one large insurance company. The mortgage crisis alone, the guarantee that they have on Freddie and Fannie for the $5.3 trillion in debt - how much of that is the taxpayer going to end up having to pay?"

Cardin points out a key difference between the savings and loan cleanup and the current plan. The Resolution Trust Corp. was created to liquidate the assets of failed savings and loans. The current plan would involve buying up bad debt so banks would be freed to continue lending.

"You're providing a mechanism to deal with the confidence to keep your money in banks and for banks to borrow and for the federal government to be there to add liquidity and credit to the market," he said.

Bush expects the government to recover much of the money it lays out.

"This action does entail risk," he said. "But we expect that this money will eventually be paid back. The vast majority of assets the government is planning to purchase have good value over time, because the vast majority of homeowners continue to pay their mortgages."

He warned that the cost of inaction would be "far higher."

Rep. Elijah E. Cummings agrees on a need for broad action. But he says it must include relief for individuals as well as corporations.

"In the barbershop and other places I've gone, people find it difficult to swallow helping out an AIG within a matter of hours with $85 billion in their tax dollars while they are losing their homes," said the Baltimore Democrat.

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