Will Financial Reform Protect Taxpayers?

If financial reform accomplishes anything, it should minimize the cost to taxpayers of future financial crises. But looking at the bailouts that Americans will be on the hook for, it fails that very basic test. And this isn't really a controversial point, since it does nothing to reform the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac.

Bloomberg has a nice roundup of estimates for the GSE bailout. Here's the government's best-case:

The White House's Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.

And here's a worst-case estimate from private firm Egan-Jones Ratings Co.'s president Sean Egan:

"One trillion dollars is a reasonable worst-case scenario for the companies," said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.

So you can figure it will be somewhere in between. Given that we're already up to $148 billion, $160 seems a tad optimistic. After all, foreclosures continue to mount and unemployment is expected to remain near 10% throughout 2010.

Yet, instead of focus on housing policy reform, Congress' bill takes on the banking industry and Wall Street. The price tag on the bank bailout, however, comes in at a much lower number. The Treasury said in May:

Today, the U.S. Department of the Treasury notified Congress that the projected cost of the Troubled Asset Relief Program (TARP) has decreased by $11.4 billion to $105.4 billion since the FY 2011 President's Budget.

That's already less than the GSEs, but just wait. Of that total, $24.6 billion is for GM and Chrysler, and $48.8 billion is for the mortgage modification program. Another $3 billion went to the Consumer and Business Lending Initiatives program. Then AIG, which isn't a bank, accounts for $45.2 billion. That adds up to $121.6. How is that possible? Because the aspects of the bailout specific to the banks will result in a profit of $16.2 billion. If you lump AIG in with the banks, then that's still only a $29 billion loss.

So Congress is effectively trying to protect taxpayers from what caused a $29 billion loss, while ignoring another that will eclipse $160 billion and could reach $1 trillion? It may want to rethink those priorities. Come midterms, Washington needs the answer the question of why it ignored housing policy reform.