Banks on the Hook for Fannie and Freddie?

Politico’s Morning Money reports that a proposal penciled — literally — into the financial regulatory reform bill in conference committee last night might put big Wall Street banks on the hook for the cost of winding down Fannie and Freddie — a cost that could reach into the hundreds of billions.

Apparently, executives are “panicking” over a possible change to the liquidation authority provision that would name Fannie Mae and Freddie Mac, the government-sponsored entities backing the mortgage market, as “financial companies,” meaning that other “financial companies,” like Wall Street banks, would need to cough up funds to shut them down. Republicans have already put out a bill supporting Fannie and Freddie’s liquidation; the scenario is certainly possible within the next few years. Politico writes:

That would be an enormous added liability to the banks and could expose them to ratings agency downgrades and a big stock market sell-off. “It’s not clear to us how the markets and ratings agencies will react to this,” one senior executive at a large Wall Street bank said last night. “But because this is a known quantity of potential liability there is a very real possibility that ratings agency’s will determine it is an immediate hit.”

Fannie Mae and Freddie Mac are much more likely to fail than any of the systemically important banks already a part of the liquidation authority, dramatically changing the equation for ratings agencies assessing the possible impact of financial reform. The exasperated executive added last night: “This is what happens when you have really important decisions made by the scribble of a pen.”

Here, via Politico, is the House side’s proposal. The conference committee is due to finish its work today.

Update: Pencil erased. Banks are off the hook.