Ray Suarez was interviewing US Rep. Barney Frank on the news hour last night. Barney was defending the Fannie & Freddie bailout. They got into the history, and Barney was very firm that the entire disaster was caused by a lack of regulation, and of course he, the democratic party and the US house had pushed for appointment of a regulator. The evil Republicans in the Senate had failed to approve Barney's pet regulation bill, and so the Fannie & Freddie disaster was all the fault of Republicans.
A regulator was going to save Fannie & Freddie? A clueless back seat driver overseeing company management is going to raise their stock value, sell their bonds and prevent a wave of foreclosures? Maybe in Barney's universe. Barney is very smart, very liberal, Jewish, and from Brookline Masschusetts, a town that makes the People's Republic of Cambridge look conservative.
As it is, looks like Fannie and Freddie's $5 TRILLION dollars of debt is going to be added to the existing $9 TRILLION dollars of the existing federal debt. Scary. That's an unbalanced budget that will never quit.
The other option would be to tell the Fannie and Freddie bond holders that they won't get paid, they are out $5 TRILLION bucks. That will make a load of unhappy investors, pension funds, banks, builders, real estate brokers and every one in the housing business. Law suits will go on for 50 years. Without Fannie and Freddie, banks will have to relearn how to do mortgages and attract depositors, and mortgage money will be very hard to get. It will damage the credit of the United States, making it harder to sell US treasury bonds to the Chinese. All in all, the "let 'em crash" option is even scarier than absorbing $5 trillion of debt.