Mick Weinstein The Week's Best Stock Blogs

A year or so into this subprime mortgage debacle, we've become inured to corporate financial disasters on the order of magnitude of billions of dollars. So are you ready now for the 't word' to enter the picture?

Fannie Mae (FNM) and Freddie Mac (FRE) own or back approximately half of the U.S.'s $12 trillion mortgage market. In addition, global investors hold $5.2 trillion of debt securities backed by the two giants. Shares of the two companies have been falling for months, but this week, stock of the two government sponsored enterprises ("GSEs") simply fell off a cliff as word spread on Wall Street that the previously unthinkable may occur: behemoths Fannie and Freddie could currently be - or soon become - insolvent.

By the close of Thursday's trading, Fannie stock had lost 67% of its market value year to date, and Freddie Mac had shed 76%. A quiet panic has set in regarding the stability of these two lynchpins of the all-important housing market and overall financial system. As always, finance bloggers have some of the most interesting, candid and insightful commentary on the developing situation and what the near future could hold. Click through for the full items:

Government Bailout by 'Conservatorship'

Thursday night brought a report from the New York Times that the government is considering 'conservatorship' for the two firms - a scenario that effectively eliminates the value of the companies' stock while preserving the integrity of their loan books. Responses:

• Wall Street veteran Barry Ritholtz says "I smell an ugly, taxpayer-funded bailout coming -- and I am utterly aghast at what it's going to cost." Regarding top brass at the two firms, Ritholtz adds: "How about we go back and recover some of that ill-gotten bonus money the [Fannie and Freddie] corporate execs paid themselves over the past decade?"

• Corporate finance advisor Yves Smith: "Under [the conservatorship] scenario. shareholders are wiped out and taxpayers fund any losses. What I find disturbing about the mainstream media coverage is the refusal to connect the dots between the increasing demands placed on the GSEs by Congress and the negative reaction in the market. This is pushback, pure and simple, against efforts to finesse a Federal bailout of housing by pushing as much as possible on to Fannie and Freddie, rather than set up new programs so the costs would be explicit. There are no free lunches, particularly in times like these."

• Yet David Merkel believes that conservatorship of Fannie and Freddie would not ultimately be as painful as some predict: "Let the preferred and common equity be wiped out. Let the subordinated bondholders sweat. The losses at the senior level should be small. The benefits of such a guarantee would be big, though. Who invests in Fannie and Freddie direct and guaranteed paper? Banks, insurers, stable value funds, foreign investors, and more. Do we want a 'domino effect' that might lead to further financial failures? I think not. Arresting the losses at the senior level, and eventually folding Fannie and Freddie into GNMA, preserves many other financial institutions."

• Tanta at Calculated Risk agrees that some exaggeration has entered the discussion, but is nonetheless quite concerned: "Guaranteeing the debt of Fannie and Freddie would not double the public debt because they have somewhat offsetting assets. This would lower the borrowing costs for Fannie and Freddie and is probably the most effective solution (if one is needed). [But] it's not clear to me how a conservatorship helps. Pretty scary discussion..."

'Adequately Capitalized'?

At the same time that we're hearing reports of a government contingency plan to move the firms into conservatorship, Treasury Secretary Paulson publicly stands behind the statement of James Lockhart, director of the Office of Federal Housing Enterprise, that the GSEs remain "well capitalized" - and are therefore in no immediate danger.

• Investment advisor Michael Shedlock is far from convinced of that. Recalling similar statements made about Citigroup, Merrill, Bear Stearns and others before they were revealed as untrue, Shedlock says: "Everyone knows [the 'well-capitalized' statement] is a lie. So why say it? The answer is obvious: to attempt to placate the markets. Lies, however, can never accomplish that."

• Indeed, in order to rebuild their capital bases, the two mortgage-backed security firms "will have to raise substantial amounts of equity to rebuild their capital bases, perhaps as much as $50 billion each, possibly more," says Charlie Bottle. "Now, who would be willing and able to invest such large amounts at this stage? ... The answer is no one - except the U.S. tax payer. I suggest that rather than trying to throw sand in the eyes of the public and come up with a more aesthetic solution, the government should just look at an outright nationalization."

A 'Bear Stearns Squared' - Too Big To Fail?

• Robert Reich, former Secretary of Labor and current professor at UC Berkeley, blogs: "As a practical matter, we're facing a Bear Stearns squared. Fannie and Freddie are way too big to fail -- especially now. There's no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again."

• Economist Mark Thoma concurs: "If failure of these firms endangers the broader economy, and hence threatens to impose large costs on people who had nothing to do with creating the problems, then policymakers need to step in and do what they can to prevent a downward economic spiral. In addition, they need to change the rules and regulations that allowed the problem to emerge in the first place, and add new rules and regulations as needed to lower the moral hazard worries going forward."

• Finance blogger Felix Salmon: "My gut feeling... is that the government is being prudent, war-gaming worst-case scenarios in terms of fiscal policy just like it does in terms of foreign policy. Ultimately it's conceivable that Fannie and Freddie might need to be nationalized, which in a way would only make sense since no one ever believed that they were really private companies in the first place... But the effect on the total U.S. national debt would be extremely unpleasant, and I'm sure that no one in any administration would want to go down that route except as a very last resort."

• Frugal Millionaire believes market participants have always assumed that the government would bail out the GSEs, if necessary. That said, with the mortgage portfolio at the GSEs on the same order of magnitude as the U.S. government's total debt, "such an action could easily double the level of current US debt," thereby translating into a lower U.S. dollar, and kicking "high inflation into the next gear." Whatever happens, "the loss of confidence in US financial systems is becoming the reality."

What Happens Next? The Pink Ring Expands

• Legendary investor Bill Miller of Legg Mason is a big holder of Freddie Mac - and has been confidently adding to his position all year. WSJ's Evan Newmark now wonders: "How does Miller keep the faith? Better yet, how does he get his followers to keep the faith?"

• Financial planner Roger Nusbaum: "Were [Fannie and Freddie] to fail... I would expect financials to take another big tumble, the dollar to take a big tumble, then one way or another the dollar would have to be defended (wouldn't it?) which would lead to higher rates."

• Libertarian author Joe Specht takes a good look at Fannie Mae's balance sheet and concludes: "In the end, Fannie may survive as the troubleshooting arm for those problem-solving wizards in Washington, but it will likely not survive as a well-performing portion of anyone's investment portfolio."

• Venture capitalist Paul Kedrosky allows us to end on a comical note, with an allusion to Dr. Seuss' The Cat in the Hat Comes Back: "We may have gotten the pink cat ring out of the bath, but the resulting pink snow is now everywhere - and getting deeper by the minute. Voom needed."