Fannie Mae (FNM) and Freddie Mac (FRE) lost considerable value today in their share prices as the speculation that the US Government will need to step in and bail them out. And recent history has shown us how well the Government bail outs have ended up, we need only to look back at Bear Stearns to see how well that worked out.

There are a lot of foreign countries that own paper issued by Fannie and Freddie. Will the Government protect the bond holders (foreign investors) and sacrifice the common share holder? Many on Wall Street are thinking just that. And that is why we are witnessing a mass exodus from the common shares of Fannie and Freddie. And if it does happen then you and I will have paid for their rescue for the check that Treasury Secretary Hank Paulson has in his hand draws its funds right from our wallets.

Recent action in the equity markets, precious metals, commodities, and the US dollar all suggest that the market “does not like the prospects one bit”. The situation with Fannie and Freddie turning into a “China Syndrome” in that the fallout may very well be disastrous to the entire mortgage and housing market. And in turn that would drive up the credit spreads as risk will skyrocket. The entire banking sector could hinge on just how the Government handles the Fannie and Freddie situation. Any Government bailout would essentially put Fannie and Freddie into receivership. A situation that could demise what confidence is left in the credit markets.

But Fannie and Freddie keep saying they have plenty of capital. The problem is that the market does not believe they can sustain their capital in face of the rapidly declining housing market and the rise of foreclosures. Therein lies the problem, the companies may say they have plenty of capital but the problem is that many feel that capital won’t be enough in the future as conditions worsen.

If a Government bailout is near.. the markets are not overly excited about it.

These remain very treacherous times in the US economy and credit markets. Credit has spurred economic growth over the past two decades and that very same credit is disappearing minute by minute. A crash of the entire credit system is a real possibility. Any attempts to inflate home prices or bail out lenders only slows the progression of the China Syndrome, but it will still fester and get worse later. Only solution is to have the lenders write off ALL of the losses and start clean. No more bailouts and if a lending institution can’t make it on it’s own anymore well then too bad.. they must fail.

The system needs to be flushed… not patched with duct tape. Putting duct tape over the credit crisis leak is akin to trying to plug a hole in Hoover Dam with bubble gum.

A few requested charts:

The charts below are of the SRS (Ultrashort Real Estate ETF & Dow Jones Real Estate Index)

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LDK Daily Chart

 My take on LDK is a short term pullback from where it is right now. But should it break above the strong resistance level (black line) then don’t short, a long position can be attempted with the stop being the black resistance line. I would keep a tight stop on it if you do go long. Remember, this is a bear market