Potential Cost of Bad Mortgages

The question on many minds is what if the $700 billion Treasury Secretary Paulson is asking for isn't enough to restore market order? What's the potential (if unlikely) amount that the government would have to shell out to get low-quality mortgage-linked derivatives off of bank balance sheets?

A new report from the Congressional Research Service provides an answer:

According to one industry source, the estimate of outstanding non-agency MBS was $1.3 trillion at the end of 2007, with another $25 billion issued in 2008. There was also another $1.3 trillion in outstanding collateralized mortgage obligations. Thus, the total amount of mortgage-related assets that might be acquired by the program would be nearly four times the $700 billion limit in the proposal. The above estimate does not include any direct purchases of whole mortgage loans or derivatives that reference the mortgage-related assets. However, it might be double counting to include both the mortgage-related securities and the underlying mortgages or referenced derivatives. If issues with the underlying mortgages are resolved, then any mortgage-backed security or derivative that references those mortgages would not be in default

In a separate report, the CRS lists the returns achieved on government bailouts of years past: