FANNIE AND FREDDIE : THE LAST SIVs / THE WALL STREET JOURNAL REVIEW & OUTLOOK ( RECOMMENDED READING )

REVIEW & OUTLOOK

FEBRUARY 23, 2010.

Fannie and Freddie: The Last SIVs

A worthy effort to put them on the budget.

The first step in treating Washington's spending addiction is for the political class to admit it has a problem. This means being honest with taxpayers about the debts politicians are racking up.

Today, Members of Congress have an opportunity to set out on the road to recovery by agreeing to co-sponsor the Accurate Accounting of Fannie Mae and Freddie Mac Act. Authored by Representative Scott Garrett (R., N.J.), the bill would require that taxpayers receive an honest accounting of their exposure to the failed housing behemoths.

The Obama Administration has refused to provide such an accounting in its official budget, which is indefensible under traditional rules for government-sponsored entities. As the Congressional Budget Office (CBO) pointed out last month, since the government placed Fan and Fred in conservatorship and Treasury took controlling ownership stakes in 2008, "those actions make Fannie Mae and Freddie Mac part of the government and imply that their operations should be reflected in the federal budget."

Taxpayers have been rightly appalled at the $111 billion they've been forced to contribute to these failed housing projects since the takeover, but that figure doesn't begin to describe the taxpayer obligations. Unlike the White House, CBO at least takes a stab at a fair accounting. Its estimates suggest that the toxic twins will consume almost $380 billion from the 2008 takeover through 2020.

But even CBO is only counting the costs of the subsidies that Fan and Fred pour into the housing market. This is the estimated cost to taxpayers resulting from the more than $5 trillion of mortgages that Fan and Fred own or guarantee. CBO is also guessing how much taxpayers will lose when Fan and Fred modify mortgages to serve Obama housing policy because this program is relatively new.

What is clear is that no one in official Washington is counting the $1.6 trillion in corporate debt issued by Fan and Fred as taxpayer debt, even though we all know who's on the hook for it. Not even Citigroup maintained an off-balance-sheet SIV as big as this one.

This means that when President Obama recently signed an increase in the federal debt limit to a record $14.3 trillion, he was running the limit on Washington's credit card up closer to $16 trillion. Mr. Garrett's bill would require the White House to acknowledge the true costs of Fan and Fred in its annual budget and in calculations of the federal debt.

Mr. Obama need not wait for Congress to send the Garrett bill to his desk. He can order the White House budget office to embrace honest accounting today and bring Fannie and Freddie on the federal budget. We can think of no better way to demonstrate his alleged enthusiasm for transparency and seriousness when it comes to deficits and debt.

Fan and Fred's longtime Congressional protector, Barney Frank, can also take a baby-step toward reform. The Massachusetts Democrat, who recently said that he now favors abolishing the two mortgage giants as they currently exist, hasn't laid out a plan to do so. While he's working on it, he can at least agree to inform taxpayers about the costs.

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