Jim Grant writes in the WSJ - Why No Outrage? Good question.

Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.

In an interesting side note, the SEC has issued an exemption to the naked shorting prohibition it recently promulgated. Who, you might ask, is exempted? Well, just the boyz whose stock everybody else is prohibited from shorting. The SEC once more fulfills its role of protecting the industry’s compensation at the expense of the investing public.

Jim Grant asks, why no outrage? Well, there is a plentiful supply right here. And elsewhere. But so long as the “two-party” oligarchy runs the country, outrage is futile. Vote Libertarian. Vote for real change, not just rearranging the office allocation on Capitol Hill amongst a mostly hereditary clique of permanent professional politicians.

Speaking of outrage, how about the spending on the President’s personal helicopter fleet, “Marine One” ? Mostly just 10-minute shuttle flights to and from Andrews AFB. The price tag, for 28 helicopters, get this - $11.2 billion. Talk about the imperial presidency, even Caligula or Commodus would blush at this kind of expenditure. That’s roughly $100 per U.S. household, to say nothing of personnel and operating costs. Just for occasional personal transportation.

Markets are euphoric today because the price of crude oil has fallen a few dollars. Ignored in the general rejoicing, apparently, is the record low (16) reported in the NAHB homebuilder confidence index. Basically this says that no-one is showing up to look at new houses, let alone buy them. Shouldn’t be surprising, but don’t lose sight of the fact that this is the big asset class - real estate. I looked at the CMBX indices last night, and , sure enough, spreads are rising in all the commercial mortgage indices as well. Many are at record highs, especially the low quality ones. This reflects the massive overbuilding in commercial real estate, especially retail. We haven’t heard much from this sector, but we will soon.

Wells Fargo reported a decent quarter this morning. Bulls pumped the shares 25%, claiming that WFC was home safe, while ignoring the one-time effect of changing the charge-off date for equity lines from 4 months to 6 months delinquency as of April 1st.

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.

Well, all you taxpayers out there,  thanks to Mr Bernanke, you’re in the mortgage business now. You’ve just inherited the Fannie Mae and Freddie Mac debts, totalling about $5 trillion, roughly equivalent to the current net Treasury debt. Now you did get some assets, the mortgages that went along with the debt. Unfortunately, the Fannie and Freddie automated underwriting systems were full of holes to start with, and of course the collateral is declining in value on a daily basis. So good luck with that. Oh, and by the way, Fannie and Freddie don’t have any capital worth speaking of in relation to their debts (about 1%) so there’s nothing there.

At one level, these bailouts are OK. After all, I want to get paid. The problem I have is that the burdens are being shifted onto the taxpayer without any consequences for those who caused the problems. There will only be learning if there are consequences. What Mr Bernanke is doing is creating so-called moral hazard. If there is no punishment for crime, people will commit crimes because the risk-reward motivates them to do so. Here the taxpayers are paying the bills while the Wall Street folks who did this, including, but not limited to, Mr Potato Head, are off living it up in the Hamptons without a care in the world.

Edit: After the close the Fed issues a denial of the news that the GSEs are being permitted access to the discount window. Solid bet that no-one will be pursued by the SEC for that little piece of market manipulation.

Edit: Good backgrounder in the NYT on how Fannie and Freddie exploited Washington corruption.

From Bloomberg:

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,” Poole, 71, who left the Fed in March, said in the interview yesterday.

Well at least Mr Potato Head has left the bastion, with the gold. No doubt the taxpayer is going to be bailing out these over-leveraged lenders.