Fannie Mae and Freddie Mac

Well, the other shoe has finally dropped.  Fannie Mae and Freddie Mac, government sponsored entities, are essentially bankrupt and Paulson is trying to figure out how to keep them afloat.  They are "too big to fail" because they are too interlinked into too many other financial institutions.  The companies hold or guarantee a huge chunk of the country's residential mortgages and many, many banks hold securities issued by the companies backed by mortgages (ABSs).  Recall that both companies had severe financial accounting scandals in 2003 and 2004.  It is no secret that the had been poorly run for years, paying heartily for political protection.  Now what to do??  Bail them out and impose more regulation, that's the ticket.  Some even want to nationalize the companies.  The bail out presently proposed seems doomed -- more, cheap loans -- this is only a very temporary salve.  The companies still will have to pay the new debts back and it will still be underwater on the old debt.  The only solid solution is to take the existing equity to zero, sell new equity and give some existing subordinated debt holders equity in place of debt.  The government may even have to buy the new equity.  What the government does not want to do is give the subordinated debt holders and the equity holders a free ride on whatever new capital comes in -- Paulsen has yet to declare fully on this. 

We are in a era when any financial trough leads to calls, often successful, for more regulation. If this continues we will ratchet regulation upwards with each new financial reversal.  Regulation is very, very hard to reverse once it is in -- examples are few and they take decades.  Government officials add regulation in the false hope that they can solve the problems.  What political wants to admit she or he can do nothing to solve a crisis??