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Bailout’s impact on deficit debated

CBO: Fannie, Freddie subsidies cost $389 billion

The cost of subsidizing the operations of Fannie Mae and Freddie Mac should be accounted for in the federal budget as if they were federal agencies, the Congressional Budget Office argues in a new report — an accounting change that would add nearly $400 billion to the growing national deficit.

The Obama administration has argued that only cash the Treasury Department pumps directly into Fannie and Freddie — about $95.6 billion since the mortgage guarantors were placed into conservatorship in September 2008 — should be included as budget expenditures.

The government received preferred stock in Fannie and Freddie and warrants to purchase common stock in return for those investments, and projects it will invest another $65 billion in the companies over the next decade.

But the CBO maintains that the government will incur $389 billion in additional costs to subsidize Fannie and Freddie’s operations by standing behind their obligations — an amount CBO says should also be included in tallying up the federal budget deficit.

The government’s promise to stand behind Fannie and Freddie’s commitments amounts to a sort of insurance policy, which has a value that can be determined, CBO maintains in its report.

Before Fannie and Freddie were placed in conservatorship, the government’s promise to stand behind their obligations was merely implied, but allowed the federally chartered companies to borrow money at lower rates, the CBO report said. …CONTINUED