Treasury drops bailout cost estimate to $87b

Geithner made the new estimate in a letter yesterday to congressional leaders that was obtained by the Associated Press.

A year ago, officials were estimating the bailout could cost as much as $500 billion.

The new estimate said the biggest losses will occur from the government’s support of mortgage companies Fannie Mae and Freddie Mac. That loss was put at $85 billion followed by a loss of $49 billion from providing help to homeowners facing the threat of losing their homes through foreclosures.

Geithner’s letter estimated that the government would lose $48 billion through the support provided to insurance giant American International Group and another $28 billion would be lost through the billions of dollars in assistance provided to General Motors, Chrysler, and their auto financing arms.

The biggest offset to those losses will be earnings of $115 billion that the administration expects the Federal Reserve to realize from the extraordinary assistance it has given to provide liquidity to the financial system.

The new estimates, which President Obama is expected to cite in his weekly radio address today, are part of the administration’s lobbying campaign to get Congress to pass sweeping financial overhaul legislation.

Democrats have set an initial showdown vote for next Monday on legislation pending in the Senate. The House has already passed its version of what would be the most sweeping overhaul of the financial system since the 1930s.

“The cost of stabilizing the financial system is likely to be significantly lower than previously expected,’’ Geithner wrote in the letter to Democratic and Republican congressional leaders.

He said because of the lower costs, the federal deficit and the total national debt will be lower than earlier projections. Administration officials said the costs could fall even further as it prepares updates to the bailout costs included in Obama’s budget.