The government is using a belt and braces to hold up the show – and, most important, to get US mortgage rates down. It will recapitalise the government-sponsored enterprises by gradually buying preferred stock – a plan that will also massively dilute all existing shareholders. It will lend the GSEs what they need to continue, while slowly winding down their operations. And it will buy their mortgage-backed securities directly itself. All this is bullish for credit markets. As for the future structure of the US mortgage market – that is a problem for the next guy.
How much might it cost taxpayers? The Treasury can inject as much as $100bn into each GSE to help support their combined $5,400bn portfolio of bonds – although it is unlikely to need to do so. It may even make a profit from the GSE mortgage-backed debt that it buys directly and then holds to maturity.
Even so, the bailout is potentially huge, although it will probably not be the US's biggest: the cost to the taxpayer from the savings and loan crisis was $300bn in today's money. Against that – and billed as saving the global financial system from unimaginable turmoil – the expense of saving the mortgage financiers may even prove moderate. Still, drastically extending the role of the state cannot be what Paulson imagined he would be doing when he joined the Treasury from Goldman Sachs in 2006. But perhaps he is simply behaving like any good banker – he is expanding his balance sheet. The US government's, after all, is pretty much the last one left in town.
