Well it turned out that the Friday denial by the Fed was a lie, as the announcement this evening is that the Fed board approved discount window lending to Fannie and Freddie. How anyone has an confidence in any statement of the government, especially the Fed, when they are willing to just flatly lie is beyond me. Paulson is also asking for a bigger line of credit with the Treasury for the GSEs, and authority to buy equity in them. As Gretchen Morgenson says in the NYT, “Bill Coming Due“.

Because the federal government established the companies, investors view them as backed, at least implicitly, by taxpayers. And that implied guarantee is what drove Fannie and Freddie’s business models.

The advantages the companies gained from this unique arrangement were huge. They had to keep less cash on hand than traditional lenders, for example. They also made more money on their mortgages than lenders because they paid less to borrow money in the bond market. These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies’ executives.

Now it looks as if the bill for that largess is coming due. Of course, it will be borne by the usual bagholders: United States taxpayers. You and me.

Anyhow, futures are being bought on speculation that this is all good, and will make things “better”. Nonsense. It is panic. It is just another in the endless series of “bailouts.” If I held shares in the GSEs, which I don’t,  I would be looking at any rally as an opportunity to become an ex-shareholder. These bailouts would not be happening if there were any capital left in the GSEs after a proper and honest accounting. And by the way, if I had any bank deposits not covered by FDIC insurance, I would be remedying that exposure forthwith. Real estate in its various forms accounts for something like 60% of bank lending, and the losses are going to be staggering. Not just residential mortgages, but the developer loans with their capitalized interest and the wild and wooly “covenant-lite” corporate lending that has been going on. The nasty thing about these loans is that they can drag on without technical default for a long time, but when they do fail eventually they will provide little or no recovery.

The great deleveraging is well underway. Jim the Realtor has posted a good piece by Brad Inman of Inman News. He outlines the consequences of the credit crunch that is now unfolding. His conclusion is that the housing market will be starved for capital. And he is right.

Remember, the economy has been dragged into modest growth with the weakest increase in employment since forever by an enormous injection of new credit. Total credit market debt has grown from $38 trillion in 2004 to $50 trillion in Q1 2008, a one-third increase. That growth is in the process of reversing itself. Figure out the likely consequences. Bailouts will keep the institutions operating. They won’t stop the deleveraging.