A take on Bernanke and Paulson’s manifest destiny, from Lolo:

Fed and Treasury agree to buy up preferred stock from Fannie Mae and Freddie Mac, buy some more mortgage backed securities, and basically toss money left and right into the crappy MBS market because awww, banks who own this crap are on the verge of meltdown:

The agencies believe that, while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.

Where’s the common going? Oh, I don’t know, probably zero. Because we’re putting the big fish first.

“While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprises,” Paulson said. “Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred stock shareholders second, after the common shareholders, in absorbing losses.”

What will it cost? Who knows. Depends on the default rate. Where is that going? Who knows. Probably higher, though. As a US taxpayer, I guess this makes me now a slumlord.

EDITED TO ADD: As I just explained Fannie and Freddie’s mechanisms to a friend, I think I will put the explanation I gave her here in case anyone else needs it –

Basically it works like this: A bank makes a mortgage loan. Then, the bank can sell it to Fannie/Freddie. Then they use the $$ they get from selling it to make more loans. Repeat many many times.

Fannie and Freddie bundle all those mortgages they are buying into a mortgage backed security (MBS). Then F&F sell those MBSes - to other banks, to mutual funds, to anyone who is buying basically. And the content of some of those MBSes really sucks because houses are devaluing and people are defaulting and nobody wants MBSes anymore bc we don’t know how bad they really are. Fed and Treasury bought a bunch of MBSes too, trying to stabilize this market.

And yep, the banks do own F&F stock, too, lots of it. JPMorgan is one of the biggest owners of that preferred stock. This announcement was really kinda two pronged. Fed/Treasury are trying again to stabilize the MBS market by buying up some MBSes and are hopefully under conservatorship trying to stop the banks’ investments in F&F from going to 0. The common stock that Joe Average can buy is probably going to 0 though, Paulson reaffirmed it is dead last in priority.

From Bloomberg: The U.S. economy shrank at the end of 2007 and grew less than forecast in this year’s second quarter, signaling that the country is in worse shape than investors had anticipated.

“We’re in a recession,” Allen Sinai, chief economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. “It’s going to widen, it’s going to deepen.”

The last time the economy contracted was in 2001. It may weaken further as the temporary boost from tax rebates, which aided a pick-up in gross domestic product last quarter from the previous three months, fades. Stocks dropped, Treasuries rallied and traders reduced bets that the Federal Reserve will raise interest rates this year.

This reminds me, Benny has been taking a lot of heat from one particular baseball player lately. From iStockAnalyst:

Former major league pitcher, hall of famer, and current US Senator Jim Bunning (KY) threw a high hard one under the chin of Fed chariman Bernanke on Capitol Hill today. I don’t expect the media to cover this verbal brush back pitch, but they should. You know the drill when it comes to the media, they only focus on things they want you to know instead of the things you should know.

Bunning blasted Bernanke’s monetary easing, and blamed him for the decline of the dollar, rising oil prices and rising inflation.

Bunning’s statement today to the Senate Banking Committee re: the FOMC report is a good read. Bunning is not a fan of expanded Fed power.

Some wags have blamed Charles Schumer’s less than reassuring comments for the trickle of funds out of IndyMac in the days prior to its demise. Of course, it takes a good Northern Rock-style FAIL to bring ‘em out in droves.

The Pasadena, Calif. thrift was one of the largest savings and loans in the country with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank and Trust Co., which failed in 1984 with $40 billion of assets.

Alt-A takedown.

Always room for one more on the failboat…

WASHINGTON—The Treasury Department is “not talking about nationalizing” struggling mortgage giants Fannie Mae and Freddie Mac, according to a person familiar with the administration’s thinking.

In an unusual move, Treasury Secretary Henry Paulson issued a written statement Friday saying that the Bush administration’s “primary focus is supporting Fannie Mae and Freddie Mac in their current form.”

The person familiar with the matter said the statement was intended to discount reports suggesting that the administration is considering a plan to place one or both companies in a “conservatorship”—in effect, taking them over—if their problems worsen.

(thx to Philippe for the pic suggestion)

Such harsh verbiage from Hammerin’ Hank has been part of what brought TEH PAIN into the market today; we’ve visited territory below 11000. The bonds are less of a visit to the craps table than the stocks if you think there will be a bailout anyway. I don’t think the gold traders believe his hype one bit.

Last night’s episode of Suze was on while I was at the gym and I peeked over just long enough to see a ‘case study’ where someone had a $20K car loan (but respectable other income and assets) and wanted to buy a $2K tag heuer watch. I would’ve said pay off the depreciating asset sitting in your driveway, but Suze gave the watch the nod, maybe because the economy needs her to encourage a little spending right about now.

Full text of Bernanke speech here. Futures are still down, but they seemed to like this speech okay. Bernanke reiterated the importance of rescuing Bear Stearns a few times, and talked about how he’d like to reduce the number of times intervention is necessitated, but that, of course, means he is still happy to intervene in future cases.