Bear Stearns was lunch money

(Via CJR's Ryan Chittum)

According to the WSJ, the government has drawn up contingencies for bailing out Freddie Mac and Fannie Mae. These would be the lynch pins of our secondary mortgage market.

The fact that the plans exist is not evidence that they are going in the tank (the US has plans to invade Mexico, not that we're ever going to do it), but there have been rumblings for over a year now that all is not well.

Chittum refers to a Bloomberg article that isn't exactly comforting:

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,''

And if the worst happens?

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

It may never happen, but if it does - I'm sure we will be treated to some official saying that "no one could have conceived" that these two institutions could be at risk of failing. Right before the Fed cuts Freddie and Fannie a big, fat check.