That word would be "TARP" of course. The night before Christmas, the Treasury announced that these two bankrupt mortgage giants would get an unlimited draw on the taxpayers' dollars. This looks a lot like TARP.

Just to remind everyone, the original TARP program was about buying up bad assets from banks. It had the appearance of the mother of all bailouts, as it seemed likely that the government would overpay for these assets, handing public money to bankrupt banks. The TARP changed course, with the government providing hundreds of billions of dollars of loan money to banks at a time when the private sector had no confidence in the banking system.

The TARP, along with the much larger lending programs from the Federal Reserve Board and the FDIC, succeeded in preventing the financial system from collapsing. The banks are now back on their feet, with near record profits and near record bonuses for the executives who are so skilled in getting public money. The largest banks have now repaid their TARP money, with many smaller banks anxious to follow suit in order to avoid troubling questions about how they have used their taxpayer dollars.

The major exception to the happy picture in the financial sector is the plight of Fannie Mae and Freddie Mac. Officially, the Treasury reports that together the two companies have drawn just over $100 billion on their $400 billion line of credit from the government. But this story is very hard to reconcile with the decision to enlarge this line of credit without limit. The Treasury claims this was done to assure the financial markets that the government would stand behind the debt of the two mortgage giants.

Since Fannie and Freddie went into conservatorship in September of 2008, it has been explicit policy that the government would back up their debt. Originally, $200 billion was committed for this purpose. That amount was subsequently doubled to $400 billion (almost half of the ten-year cost of the health care bill). If the bad debts to date have only forced Fannie and Freddie to draw just $100 billion, isn't a commitment equal to four times prior losses sufficient to maintain the confidence of financial markets?

The arithmetic on this is very hard to understand. While Fannie and Freddie did get into subprime near the peak of the bubble in 2005, the vast majority of their assets were still tied to prime mortgages. These are mortgages in which people had to put 20 percent down or buy mortgage insurance.

The combined portfolios and guarantees of the two companies were $5.5 trillion at the time of their takeover. Suppose that 10 percent of their mortgages went bad (an extremely high rate for prime mortgages). This would put $550 billion at risk. If the loss rate on these mortgages was 25 percent (a very high loss rate for prime mortgages), then Fannie's and Freddie's combined losses would be just $163 billion, not even half of the line of credit.

Furthermore, Fannie and Freddie had combined reserves of more than $50 billion going into this disaster, and make money on ongoing operations. On the face of it, it is very difficult to see how Fannie and Freddie could go more than $400 billion in the hole, based on their September 2008 assets. In fact, this possibility seems so far out, it is hard to imagine that the financial markets need any further evidence of the government's commitment to these mortgage giants.

This raises the possibility that Fannie and Freddie are incurring losses on assets purchased after September of 2008. This would mean that they were paying too much for mortgages and mortgage-backed securities bought from banks after the financial meltdown was already in full swing. This was the original purpose of the TARP program. Of course, TARP came with at least some restrictions and disclosure requirements. If Fannie and Freddie are overpaying for mortgages, then there are no conditions whatsoever put on the banks that get the money.
It is possible that there is some other more innocent explanation for the sudden need to raise Fannie's and Freddie's credit limits. If so, then the Obama administration should make its case to the public and explain how losses could conceivably run above $400 billion (credit markets don't need reassurance against inconceivable events).

While they are it, the Obama administration might also want to explain why the CEOs of these bankrupt companies now stand to pocket $6 million a year, a fact released in another Christmas Eve announcement. Surely, there are people who can run bankrupt companies at a much lower pay rate. This looks like yet another case where Santa is being very generous to the financial industry boys, while leaving the rest of us with a lump of coal.

Christmas Eve announcements were a favorite trick of the Bush administration. It is disappointing to see this practice continue under President Obama.

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