There weren't many details available when the Treasury yesterday announced that it would ask Congress for the authority to buy Fannie Mae and Freddie Mac stock should it be necessary.  Published reports like the ones in the New York Times and Washington Post didn't indicate the estimated cost but talked about it being in the billions.

There's little doubt that Congress will provide what Treasury is requesting.  My question as a budget person is how it's going to be treated.

I assume it's going to be on-budget, that is, that the costs of buying the stock will count as an outlay and, therefore, that the deficit and national debt will increase as a result.

But I'm not sure. 

When David Stockman was OMB Director, he recommended and Congress agreed that the purchase of oil for the Strategic Petreleum Reserve be off-budget because, in his words, it really was just exchanging one asset (dollars) for another (oil).  The actual reason was that, at least by the standards of the early 1980s, oil had become much more expensive and Stockman didn't want to add that cost to the budget at the same time the Reagan administration wanted to show a smaller deficit.

Stockman's argument was ridiculous.  Unless it's a service, everything the government buys (an aircraft carrier, for example) is an exchange of one asset for another and there was no substantive reason to treat oil differently.  But Stockman insisted and Congress went along.

When Richard Darman was OMB director, he insisted that at least part of the spending on the savings and loan bailout be off-budget as well. Darman's was trying to avoid triggering the automatic spending cut provisions in the budget process rules in place at the time.  Once again Congress went along.

With a deficit already in excess of $400 billion and no real budget process restrictions in place, it may not be necessary this time around to go through the fiscal gyrations Stockman and Darman requested. 

But there are still substantial questions even if the transaction is on-budget.

1.  How long will the government hold the stock?

2.  How will the stock be valued?  Will it simply be held at the purchasing price or will it have to be marked to market?

3.  If the government sells the stock, how will the loss or gain be treated in the budget when that transaction happens?

4.. Will Fannie and Freddie have the right to buy back the stock at any time?  If so, at what price?

5.  If Fannie and Freddie are allowed to buy back the stock, will they have to reimburse the government for the interest it incurred from the borrowing it had to do to buy the stock in the first place?