Playing with numbers

That $700 billion estimate is being thrown around with such certainty that you'd almost expect Hank Paulson to take out his check ledger at the Treasury Department and begin scribbling. Reality is a lot different. Brett Arends, who writes the WSJ's R.O.I. blog (short for Return on Investment) offers some perspective on what’s actually involved here, especially the actual cost to taxpayers. So let's just suppose that the bailout package goes through and Congress appropriates all that money. What happens?

The Federal government pays just 4.34% interest on long-term, 30-year loans. So the government could borrow this money for 30 years at a cost of just $30 billion in interest per year. To put that in context, that is about one-fifth of 1% of our gross domestic product. One-fifth of 1%. We've almost certainly lost many times that just in the dithering, flapping and populist posturing over this rescue package. And if we don't get a rescue package, we will probably lose a lot more.

Obviously, the story doesn't just end with the interest cost. When you take out a loan, you've got to be able to repay the principal in due course as well. Let's take a worst case scenario. Let's imagine Uncle Sam borrows $700 billion to buy these assets and never gets a single penny of it back. Let's imagine this paper ends up completely worthless. So instead he has to tap taxpayers to pay off part of the principal every year for 30 years, until the loan is all redeemed. How much would that cost per year? Try $42 billion. That's the interest and principal repayment. That's less than one-third of 1% of our annual gross domestic product. That's the true, annual cost of this bailout. Not $700 billion.

While most of the focus has been on money, scant attention is being paid to what could be the most important matter: How will this thing be administered? When the federal government buys all this distressed paper, it means they're becoming the lender for hundreds of thousands of indebted borrowers. What exactly will Paulson & Co. do with them? Will Washington accept offers from vulture funds that already have been buying toxic assets? How will Washington manage the homes that already have been foreclosed? Who will be in charge of making sure the grass gets mowed and there's no graffiti on the walls? Who will borrowers contact if they want to modify the terms of their loans? What happens to the properties that are now going through the foreclosure process? Who will be in charge of selling off the REO properties?

During Congressional testimony last week, Paulson spoke vaguely about hiring asset managers who would sort out this stuff. Maybe they will - there are some government agencies who handle complicated financial hand-offs very well (the FDIC, in particular). Whatever happens, it seems that long-term administration rather than short-term cost should be getting the most attention. And it’s not.