“Freddie Mac and Fannie Mae: The muddle-through approach — America’s government tries a quick fix for the intractable problems of Fannie Mae and Freddie Mac”, Economist, July 14, 2008.

They hold or guarantee some $5.2 trillion of the nation’s $12 trillion of mortgages, backed by the thinnest wafer of capital, meaning their collapse would imperil the already paralysed American housing market. Yet as Joshua Rosner, an analyst at Graham Fisher, a research firm, points out, nationalising them, a stark choice for the government since their shares tumbled last week, would “result in a doubling of the federal deficit [actually the national debt, I think], a further collapse of the dollar and unthinkable implications for the Treasury’s cost of funding in the debt markets.”

Those two unpalatable options—failure or rescue—led the Treasury on Sunday July 13th to announce several stopgap measures aimed at restoring confidence in the two institutions, although it fell short of fundamentally reshaping them. The measures may buy a bit of time, but they are unlikely to put to rest highly sensitive questions about the future of Fannie and Freddie, leaving a large cloud looming over global financial markets.

The Treasury’s three-part plan, announced by Hank Paulson, the Treasury secretary, is to increase its line of credit to the government-sponsored entities (GSEs), which currently stands at a paltry $2.25 billion each. The Treasury also seeks authority to buy stakes in each company if necessary, and wants to give the Federal Reserve a greater role in oversight of the GSEs. Separately, the Fed’s governors said that they had granted the New York Fed licence to lend to Fannie and Freddie if necessary, against suitable collateral. [I.E. mortgages!]

“Fannie, Freddie Rise on Government Support for Equity”, by Dawn Kopecki, Bloomberg, July 14, 2008.

The Federal Reserve Board of Governors also authorized the New York Fed to lend directly to Fannie Mae and Freddie Mac through the discount window to meet their liquidity needs if necessary, the central bank said yesterday in a press release.

The discount window offers direct loans to commercial banks at an interest rate that’s now 2.25 percent, a quarter point above the Fed’s benchmark rate. Bernanke opened it to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.

Igor says, “collude,” but I think it’s more like Paulson mugging Bernanke over the weekend. Oh well … at least Sen. Dodd is off the hook now

Sorry for Igor treating you so rudely this morning. He never trusts anyone with more than one link- even John and me!

http://market-ticker.denninger.net/archives/513-Fannie,-Freddie,-Banks-and-Government-Debt.html

If you’re really don’t know the connection between the Macs, why GSEs were created, and Depression era bank failures… might do you good to check the FDIC’s own website and see their cartoon history.. not kidding about this.. it’s pretty good, and a very fast read.

http://www.fdic.gov/about/learn/learning/when/1930s.html

No matter what the market’s reaction tomorrow, I suspect this will be another Bear Sterns moment- Bernanke and Co. will tell us how we barely dodged the bullet, but everything is fine now.

FNM/FRE might be the biggest players, but there are still other guys out there who could still get hurt.

The Beltway folks might want to get some sleep Monday if they can manage it- who knows what Tuesday will bring.

This story is presently Google News’ top cluster (about 5,000 stories — keeps bouncing around). Things will likely be pretty dramatic tomorrow. And if they turn out not to be dramatic after all (like Y2K in my old computer sector) then you’ll see some serious partying Monday night among the guys who worked through this hot summer weekend in the Beltway, NY, etc.

“I support Secretary Paulson, the Administration, and the Federal Reserve in their efforts to stabilize the housing finance system.

OFHEO will continue to work with the Treasury, the Federal Reserve, the Congress, and the Enterprises in addressing the current situation and to assure that the Enterprises continue to fulfill their mission. We look forward to rapid passage of GSE regulatory reform legislation.

The Enterprises’ $95 billion in total capital, their substantial cash and liquidity portfolios, and their experienced management serve as strong supports for the Enterprises’ continued operations.”