Outrageous!

Hank Paulson has recently been making sense. That confused me. Thanks, Hank, for returning to form and ending my head-scratching.

Hank has now bailed out Fannie Mae and Freddie Mac. The bailout plan includes opening the Fed's discount window to the two mortgage insurers (more on that later). In addition, Hank will ask Congress to approve increasing the Treasury's lines of credit to them, and buying Freddie and Fannie stock.

Wait - didn't Hank say over the weekend that a rescue plan shouldn't benefit Fannie and Freddie's shareholders? How does providing bid support for the stock not benefit them? The shareholders should be at risk, Hank. That's the nature of an equity investment. Taxpayers shouldn't be shareholders unless they want to be - I have no desire to be a shotgun bride to those two outfits. Hank is a pinko.

As for Bernanke opening the discount window, just how deep is the window, anyway? We's better find out soon, because the banks are going to start hitting it hard, now that IndyMac's gone down (more on that later, too). And he's already opened the window to investment banks. And he said not too long ago that they might keep it open to investment banks next year, even though the original plan was just to give them access this year.

Detour: Of course, that was predicated on the foolish belief that the credit crisis would be over by then. Let me stand on my desk and shout:

THE CREDIT CRISIS WILL NOT END BEFORE THE END OF 2009.

Perhaps not even then, because every move the Fed and the Treasury make just makes it worse. They respond to panic with things that will just extend and exacerbate the problems people are panicking over. And they reward the wrong behavior. So the crisis may not end until it reaches catastrophic proportions.

Back on course: So now, we're opening the discount window to Freddie and Fannie. Who's next? MBIA, FGIC and Ambac? S&P? Moody's? How long before the window runs dry, and we have to start printing money, sending inflation even higher? How long before the dollar becomes the new peso? (To quote Marty Feldman, "Oops - too late!") How long before we have to seek capital infusions from foreign nations, like Wall Street has? (Repeat the Feldman quote.)

Now, on IndyMac. Why was Bear too big to fail, and IndyMac's not? Ostensibly because if Bear fell, Lehman would follow, then Merrill, then ... Ben (who's a pansy, by the way) and Hank didn't want to start a domino effect.

And the IndyMac failure won't trigger the same in the banking sector? Do you know how many headlines I've read today alluding to that very outcome, or predicting the next name to go belly-up? Me neither; I've lost count. But WaMu's down 35% today, National City's down 15%, Zions Bank (my personal bet for the next shoe to drop) is off 23%, SunTrust is down 9%, and Wachovia fell 15%.

Jim Rogers - who's right a lot more than he's wrong - called the Fannie/Freddie bailout "an unmitigated disaster," and he accused Ben and Hank of bailing out their Wall Street cronies. He may be right.

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Two more outrageous items. First, I read this morning that Citi has about $1.1 trillion off-balance sheet - about half its total balance sheet size. The money is in various shadowy financing vehicles, some 7,000 different ones. As it takes more and more of them back onto its books, its losses are mounting.

Now, the Financial Accounting Standards Board (FASB) wants the big financials to value off-balance sheet assets and liabilities every quarter.

Citi's deputy controller sent FASB a letter objecting to that requirement, saying "We would not be able to perform this analysis given the resources we currently have."

There are two things wrong with this picture. First, when an authority requires you to do something, not being able to do it is not a tenable defense, last time I checked. (But in case it now is, hey, IRS, I can't figure out how much tax I owe you.)

Second, and far more ominous, is the notion that the largest financial institution in the world can't value what it owns - more than a trillion dollars worth (well, we think) of what it owns. The translation of the quote above is, "We have no earthly clue what this crap is worth."

The last bit of outrageousness today is a quote from a mortgage broker commenting on the impact of the Freddie/Fannie fallout on mortgage lending. "Some lenders are really pulling in their horns," he says. "They're demanding really clean loan applications with every i dotted and every t crossed."

I'm going to shout again: IF THEY'D DEMANDED REALLY CLEAN LOAN APPLICATIONS WITH EVERY I DOTTED AND EVERY T CROSSED IN THE FIRST PLACE, AS THEY SHOULD HAVE, WE WOULDN'T BE IN THIS FREAKING MESS TODAY!!

There, I feel better.