Fan and Fred's Lunch Tab

A quarter-trillion dollars, and rising.

It seems a lifetime ago, but it's only been six months since the Congressional Budget Office put a $25 billion price tag on the legislation to bail out Fannie Mae and Freddie Mac. At the time, then CBO Director Peter Orszag told Congress that there was a "probably better than 50%" chance that the government would never have to spend a dime to shore up the two government-sponsored mortgage giants.

Barney Frank.

So much for that. In the past few days Fannie and Freddie have requested a combined $51 billion from the Treasury to compensate for losses in their loan portfolios. This comes on top of the $13.8 billion that Freddie needed in November.

The latest requests take the tab to $70 billion or so -- but that's not the end of the story by a long shot. Earlier this month, CBO released its biannual budget outlook. And largely ignored underneath the $1.2 trillion deficit estimate for fiscal 2009 was the little matter of a $238 billion charge for rescuing Fan and Fred. To put that in perspective, $238 billion is more than the entire federal budget deficit in fiscal 2007.

The CBO's $238 billion estimate represents its guess of the long-term cost of paying for the guarantees that Fannie and Freddie write on their mortgage-backed securities. Nor is that just a post-bubble hangover. The last $38 billion of that is for losses on new business this year. And for all anyone knows, that number, like the earlier estimates, is wildly optimistic.

For starters, that $238 billion doesn't include $18 billion that the CBO expected the Treasury to lend the wonder twins this year. But in any case we're already well beyond $18 billion on that score: As of this week they've already requested $70 billion since the fiscal year began -- and we still have eight months to go. So you can add $70 billion to the $238 billion, which gets us to $308 billion -- and even that might be conservative. Rajiv Setia, an analyst at Barclays, figures the duo will need $120 billion from Treasury this year alone, which would mean another $50 billion on top of the $70 billion already requested.

Back when the bailout was being debated last July, Senator Jon Tester (D., Mont.) worried that the Fan and Fred bailout could cost $1 trillion. Given that the two companies combined have more than $5 trillion in debt and mortgage backed securities outstanding, Mr. Tester's guess isn't looking worse than anyone else's.

At that same time, Senator Kent Conrad (D., N.D.) said that the CBO's $25 billion estimate would be "very helpful to those who want to advance this legislation." And no doubt it was. A spokeswoman for Fannie promoter Barney Frank said then, "we especially like that there is less than a 50% chance that it will be used." The CBO had figured that there was a 5% chance that losses would reach the $100 billion cap on the credit line created by the July law. Now CBO's best guess is more than double that.

The bigger picture here is that politicians like Mr. Frank have been telling us for years that Fannie and Freddie's federal subsidy was a free lunch. We are now slowly, and painfully, learning the price of Mr. Frank's famous desire to "roll the dice" with Fan and Fred. Keep that in mind the next time you hear a politician propose a taxpayer guarantee. The only sure thing is that the taxpayers will pay.