Banks Fear They Could Cover Freddie and Fannie Bailout


One of the core proposals of the financial reform bill is a "bank tax" that would create a fund to cover the costs of a potential collapse of any big U.S. financial firm. Since Bear Stearns and Lehman Brothers were shuttered and several banks like Washington Mutual folded, the possibility of another catastrophe is not that remote.

The plan makes sense, at least on paper, because it takes the taxpayer out of harm's way and prevents the need for another Troubled Assets Relief Program (TARP).

But banks are nervous today because there's new language in the financial reform bill that might extend the use of the "bank tax" to meet the bailout costs of Fannie Mae (FNM-R) and Freddie Mac (FRE). Those costs could go as high as $400 billion by some estimates.

Why Fannie and Freddie Are Struggling

At this point, the federal government plans to cover those costs because it effectively nationalized the two institutions. An addition to the financial reform bill that would move the burden to the country's large banks would give them a crushing obligation.

Still, it would be delicious irony, considering how the mortgage giants got into their shaky positions currently. Banks have unloaded on Fannie Mae and Freddie Mac a mountain of their problem mortgages -- a big source of the two institutions' troubles. The banks are also dragging their feet on buying the shoddy mortgages back, as they're contractually required to do for loans that don't meet lending standards. The amount of problem loans that Freddie Mac has asked banks to buy back stood at $4.8 billion at the end of March. According to The New York Times, Freddie said as of the end of March, 34% of its buyback requests had been outstanding for 90 days or more.

According to Politico, the financial reform bill would label the two housing mortgage giants "financial companies." Under the current Congressional proposal, any failed "financial company" would sell all of its assets, and the bank fund would be left to cover the balance. That's a lot of money even if it's spread among America's largest banks.