I say you should have to demonstrate a reasonable underlying set of beliefs, otherwise firms are free to lie outright, and it sure looks like there's been a lot of that going on in the financial sector in the last year.

The cute part of the Bear Hedgie deal is that this is not limited to them.

The FBI has been rounding up mortgage brokers - about 300 of them so far.  Hope springs eternal that this continues and that thousands of these scum-suckers find themselves in Federal Prison, and even better, that they "roll over" on their buddies in the business above them.

Oh, you may remember that I have made comments about all the GSEs being potential zeros, right?  A big part of that was predicated on the mortgage insurers starting to blow up, which I fully expected to start happening.

It is:

"June 19 (Bloomberg) -- Triad Guaranty Inc. became the first mortgage insurer to stop selling new policies after the collapse of talks with Lightyear Capital LLC to form a new company with Triad employees. The insurer plunged 40 percent in Nasdaq Stock Market trading.

The decision to halt sales was prompted in part by Freddie Mac's suspension of the company as an approved insurer, Winston- Salem, North Carolina-based Triad said today in a statement. Freddie Mac, the second-largest buyer of U.S. home loans, refused an appeal of that decision, the company said."

This sounds like Freddie "covered their own ass." 

Nothing could be further from the truth.  In fact they're refusing to take more risk, but the existing risk they took from these people is still there.

The good news is that Triad is a relatively small fry in the game. 

The bad news is the bigger fish, Radian, MGIC, and PMI are likely not far behind these guys. I believe they are all in significant capital trouble, and there is no assurance that they will be able to pull their fat out of the fire any better than Triad did.

The reason this threatens the GSEs is that a good part of their credit book is "safe" as a consequence of these guarantees - that is, for any loan that was originated over 80% LTV there is theoretically supposed to be mortgage insurance to guarantee that the principal will get paid if there is a default.

The problem with this theory is that if the insurer goes bankrupt you're screwed, as now the underlying credit quality becomes exposed. 

Sound familiar?

It should, because its the same problem that is hitting the monolines and CDOs.

The entire GSE house of cards is swaying in a freshening breeze; one good puff and......

Psst - you know that fraud putback stuff I was talking about last spring?  Look for it coming from a pissed-off bond investor near you......