Bailout cost estimate rises sharply

WASHINGTON – Bailing out the financial sector will cost taxpayers $167 billion more than originally anticipated, according to a Congressional Budget Office estimate.

The original figure in January was $189 billion, but it is now $356 billion – $152 billion more for 2009 and $15 billion more next year, the CBO says in its March report updating the budget and economic outlook.

The CBO raised its projection because yields have increased on securities issued by the bailed-out financial institutions under the $700 billion Troubled Asset Relief Program.

That means there will be an increase in the cost of the subsidy from the U.S. Treasury’s purchase of preferred stock, asset guarantees and loans to automakers, the CBO said.

In addition, since the CBO issued its original cost estimate for the program, the Treasury announced additional deals with Bank of America and American International Group.

Those deals will be at rates higher than the averages in the CBO’s original estimate. Also going up: the subsidy rates in the administration’s $50 billion program to deal with home foreclosures.

The TARP program isn’t the only one that will prove more costly to taxpayers than originally thought, the CBO said.

Bailing out Fannie Mae and Freddie Mac – the two mortgage finance giants taken over by the government in September – will cost another $52 billion this year alone, and an additional $28 billion for their activities from 2010 to 2019, the CBO said.

Since January, the condition of both Fannie Mac and Freddie Mac has turned out to be worse than expected.

So the CBO has increased its estimate of the current value of future losses.

Most of the increase stems from loans and guarantees inherited at the time the government took control of the two housing entities, the CBO said.

Fannie Mae and Freddie Mac plunged into the purchase of risky mortgages, becoming two of the major contributors to the housing market’s collapse and the ensuing global financial crisis.