Everybody must calm down about the Freddie and Fannie situation. No one needs to head for the exits or cyanide tablets.
The announcement on Sunday that the Fed and U.S. Treasury will backstop these two financial intermediaries is an entirely predictable, latter-day outcome as a result of the cowboy capitalism practiced in the lower end of American mortgage markets for years.
Sunday's announcement amounts to a "shoring up", and not a "rescue", of Washington's lending "hybrids" -- Freddie Mac and Fannie Mae.
And many more banks will follow Bear Stearns and IndyMac as a natural workout due to negligence on the part of governments to properly monitor mortgage markets in the U.S. for years. This is not the beginning of the end, but the end of the beginning.
Fannie and Freddie are victims, along with taxpayers, and not perpetrators. They fulfilled their mandates which were to buy mortgages from banks. They only bought mortgages from banks who ascribed to strict guidelines about downpayments and the creditworthiness of home buyers.
The reckless mortgagors, many of whom have been indicted or should be, bundled up their junk debt then peddled through many intermediaries until it ended up on Wall Street where it was exported around the world along with good debts. Bear Stearns did this so well it has gone out of business. Thank goodness.
The "shoring up" is needed because Freddie and Fannie, along with many fiscally responsible banks and responsible homeowners, are "upside down" in terms of their mortgages. This means that the value of their mortgages' underlying real estate is less than their mortgages themselves.
That doesn't mean that every homeowner with an "upside down" mortgage must declare bankruptcy if they can meet mortgage payments. It means that these homeowners cannot sell without incurring a loss nor can they borrow more money against equity in their homes.
The same situation afflicts Freddie and Fannie.
They hold mortgages, and must buy some more from banks to keep the system going, that are worth more than the underlying real estate values.
(The two giants were created during the Great Depression in the 1930s to take mortgages off the hands of banks so that the banks could lend more money. Both were supposed to profit from these transactions.)
Unfortunately, Freddie and Fannie must still fulfill their mandate which can only happen if they can raise more capital from investors. Because rumors have hurt their stock prices, the Fed and Treasury had to step in as a comfort statement so that Freddie and Fannie can continue to buy more mortgages.
Put another way, if they did not do this they could not raise more money and the entire real estate lending and construction sectors would grind to a complete halt for awhile.
So Washington is doing what it must to keep the wheels in motion.
It's just too bad that the Fed and the U.S. Treasury Department did not properly regulate the mortgage markets in the first place. Their negligence led to fraud and shenanigans and the real estate bubble that has now burst.
Efforts to regulate sub-prime mortgage lending and remove bad players were led by former New York Attorney General and Governor Eliot Spitzer and other state officials, but were impeded vigorously in the courts for years by the Bush regime.
Now they are finally stepping in, another example of the stupidity of Republican cowboy capitalism.
Facts are markets without government regulation are like football games without referees, full of thugs and chaos and eventually ruining the game altogether.
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