Continued lessons this week in financial gravity: The Fannie and Freddie situation.  I still hold both stocks. I will tell you why:

Under the Bush Administration, there has been a tactical rape and pillaging of Fannie and Freddie. Big fundraisers at the brokerages and banks that compete with both of these GSEs wanted to roll out more of the business in less secure ways. They got their wish, and we now have this massive mess of loans so poorly bundled that it may take years to figure out what they are really worth.  These are not Fannie and Freddie loans, mind you. They had to clean up house over the time period that everything was going to hell in a handbasket at Lehman, Citi, and the other places scooping up flaky originations.

Now, the forces, largely hedge funds, that overheated the market, which I told you previously had no business being much over a DOW 12000, are finding points of attack in the bear.

Fannie and Freddie are good shorter targets.  Their losses in real terms have been well within the specifications of normal.  Their leverage leaves them vulnerable, as does their position as GSEs, to shorters. After all, if you're going to short a company, what better than ones so pivotal to the stability of the housing market, that Congress, in an election year, cannot let tank?

Both have tested their recent lows again. On Fannie, 4 and change seems about as much blood as the shorters can wring out of the turnip. 

While many Republican "experts" are calling for the government to privatize Freddy and Fannie, and now even a few Dems may be buckling, I would pay heed to what Barney Frank has said in the NYT... These companies are doing what they are supposed to do, and the situation we are in now would have been far worse had the private sector and its unregulated bundling of loans been there instead of Fannie and Freddie.

The government does not want to be in the housing business. Republicans don't want it, and when the mortgage system stablizes, neither do many of the same banks and brokerages who tried to cripple these institutions, because they will need both of them healthy to help take loans off of their books and make new ones.

In spite of the hysteria, the notion of standing by what a GSE means, and backing up the institutions, seems to be more in keeping with the government's pledge to stand behind them. Inviting shareholders into the party, only to say that the GSE label had no value would call into question the full faith and credit of the United States Government, something, which, as deeply as we are in debt to the Chinese, Saudis, and others abroad, would have far greater impact than on just the investors in these companies.

Politics doth make cowards of them all. They will not nationalize. They will rationalize. They will stablize.  They will find a few shorters and hang them out to dry, perhaps, to vent common rage on some nice scapegoat.

Share price, not default rates, are Fannie and Freddie's real problem at the moment, along with their leverage position.  If the companies can continue to de-leverage to a more acceptable point, and the government can calm trading fears, then they can weather the storm.

This does, however, rely on the kindness of strangers in the Bush governmental structure, one of the more corrupt and inept kingdoms in history. The stewards at the helm may still screw the pooch on this, but I doubt it. Too much at stake.

I really don't want to contemplate the alternative, if I am wrong. If the government nationalizes "private" equity in the name of its GSE guarantee, the wheels will come off of the cart on a lot of other equity classes. Treasuries are suspect, muni bonds with federal guarantees are fundamentally at risk of pillaging, and that mattress may be worth more than your FDIC guarantees.

Financial gravity orbits around fair market values, and perception. Right now perception is depressing the market, and certain issues, far more than it should. Still, though, the Dow is only off marginally from a logical 12,000 orbit point.  Matter is neither created nor destroyed. Same with capital. It just sloshes from one side of the boat to the other. 

At some point, the market allays its fears of more financials write downs.  It will probably happen after enough blood is spilled. Fannie and Freddie are misdirections. If you want to see where the blood hits the water next, look to the far less guaranteed brokerages. I hear that Lehman can't find asset buyers fast enough, and that a Deliverance-style Countrywiding of the firm may be on the horizon.

Couldn't happen to nicer folks, if you ask me.