The Washington Post reports today how the Congressional Budget Office Director, Peter Orszag, feels that Fannie and Freddie will likely cost taxpayers less than $25 billion, but further deterioration in the housing market could force an infusion beyond $100 billion. The quote of the day comes directly from Orszag: "There is significant uncertainty involved here," Orszag said. The cost "could be zero. It could be $100 billion." At least he is honest. Like the market, no one really knows. Of possible contention in the recently drafted legislation is how the protections for taxpayers were not specifically spelled out but were left to the Treasury to define.

Source: ClipSynidcate / Bloomberg

At the end of Q1, both Fannie and Freddie had liabilities of $1.6 trillion, plus mortgage guarantees and investments totaling $5.2 trillion. Unfortunately, the excess of their assets over liabilities may have fallen to $7 billion. Still, the $25 billion estimate may also end up overstating the cost since it does not reflect the value to the government of any purchased stock received for their $25 billion investment (assuming the company needs to be taken over). As quoted in the article:

"If we do this right, taxpayers will not spend any money because the markets will be confident in the vitality of Freddie Mac and Fannie Mae, and the markets will correct themselves," said Sen. Judd Gregg (R-N.H.). "But if the markets don't correct and Fannie Mae and Freddie Mac become unstable, then we've got very serious problems well beyond anything in this estimate."
Of course, if the government does step in, then the confidence has been lost, and the value of the stock at that point is most likely less than their bailout investment. As argued, it still appears the issue comes down to a matter of confidence (to some extent), which partially explains the need for Treasury to have an open checkbook, or at least give that impression. Open checkbooks are nonetheless scary, and often end up being used to buy more than you originally went to the store for, but in this instance, they may have no choice. Too little, and confidence is lost. Too much, and either the market gets scared, and/or moral hazard starts to creep in. I wonder if Treasury Secretary Paulson is missing his Manhattan corner office right now?