Taxpayers Bear Brunt of This Bailout

Estimates on the ultimate price of a publicly-financed bailout are staggering.

Nouriel Roubini, professor of economics and international business at New York University, estimates that Fannie and Freddie collectively face a capital shortfall of $200 billion to $300 billion, which is the amount by which he says their liabilities exceed the fair values of their assets.

Such a cost is similar to the amount paid by the U.S. government to save the savings and loan industry in the 1980s.

"We have subsidized through Fannie and Freddie, the most wasteful and unproductive form of capital ever," Roubini says. "We have too many homes and not enough machines."

Roubini thinks the two firms' bondholders should eat this cost, not U.S. taxpayers. That's because bondholders have been compensated by about a 100-basis points spread above Treasuries for buying Fannie and Freddie debt, he says. At the same time, if the government bails out Fannie and Freddie, then bondholders don't experience a credit loss. Instead, they've been directly subsidized by the federal government.

Based on the $5 trillion in liabilities between the two firms, that amounts to a $50 billion annual subsidy today to "Wall Street, the investors, and the well-connected," Roubini says.

If bondholders collectively took a 5% haircut on the value of their Fannie and Freddie loans, this could fund the $200 million to $300 million shortfall in capital at Fannie and Freddie, he says.

However, he admits this plan is unlikely, partly due to the large clout by Wall Street firms who are whining for a bailout. He calls the Treasury plan "socialism for the rich."