Banks Not Alone in Fannie-Freddie Panic - TheStreet

Banks Not Alone in Fannie-Freddie Panic

Bank executives are reportedly "panicking" over the possibility that the industry may be on the hook for liquidating Fannie Mae and Freddie Mac. You should be too.
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NEW YORK (

TheStreet

) -- The banking industry has an appropriate fear that it may get hit with paying for the bailout of

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

; taxpayers and many of their representatives do not.

The bailout of the two giant mortgage-finance entities has been the most costly, the longest running and the least likely to be repaid. The Obama administration has been largely silent on the Fannie-Freddie issue, and lawmakers opted not to address it in the financial reform bill -- until now.

Politico

came out on Thursday morning with what it called a

"DOUBLE SIREN EXCLUSIVE": A legislator had scribbled a note in the margin of the financial-reform draft bill, "insist"-ing that Fannie and Freddie be included in a "too big to fail" liquidation fund. The proposed fund will be supported by a tax on such "too big to fail" banks -- those with over $50 billion in assets - which would of course include the Big Six:

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

.

So, how much would the wind-down of Fannie and Freddie cost? There's no solid estimate, because it's unclear how much longer they will rely on taxpayer support, how much the bailout will ultimately cost, whether the bailout cost will be considered part of the liquidation cost, whether the firms will even be liquidated, and if so, how.

Therein lies the problem with the administration's slothy response to a huge factor in the financial crisis.

Still, it's understandable that bank executives were "panicking," as

Politico

described it. The cost of winding down

Lehman Brothers

has already reached $750 million. The firm was a fraction of the size of Fannie and Freddie, with far fewer assets to unwind. The liquidation process is still going on, nearly two years after Lehman declared bankruptcy.

The Treasury Department's lifting of the bailout cap for Fannie and Freddie last December, combined with the Obama administration's silence, implied that the two firms could simply rely on the full faith and support of taxpayers. But the note scribbled in the margin indicates that that may not be the case.

Adding such a liability to the collective balance sheet of the banking industry poses a lot of danger -- to ratings, capital levels, stock prices and an assortment of other things. But what's even more dangerous for banks, the housing market and taxpayers is how the uncertainty over Fannie and Freddie's fate is impacting market confidence.

The Obama administration and congressional leaders have had a wide window of opportunity to come up with some kind of plan for Fannie and Freddie. The mortgage industry has come up with at least two plans on its own, and Republicans have suggested a comprehensive plan that fell on deaf ears.

The window is closing fast as the market gets more jittery about the outcome.

-- Written by Lauren Tara LaCapra in New York

.