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The Associated Press reports that the House passed a bill that will increase the amount of debt available to buy houses. In the process, it will make the U.S. a much riskier place to invest. That's because when a country's debt tops 60% of its Gross Domestic Product (GDP), lenders consider it a risky credit. The House bill will lift the U.S.'s ratio to 75%. And the dollar will continue to plummet.

Of course, the bill is not being sold that way. Instead its stated goals are to help 400,000 people with foreclosures and to save Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Here are six key provisions according to AP:

• Puts distressed real estate on the government's books - Provides $3.9 billion in grants for "devastated neighborhoods" -- a provision the White House hated since it looked like the S&L bailout's RTC, that Bush I approved.
• Gives Paulson unlimited Fannie/Freddie bailout power - Gives the Treasury Department an unlimited line of credit to bail out Fannie and Freddie and to buy an unspecified amount of their stock.
• Creates new debt for drowning borrowers - Lets 400,000 foreclosing homeowners refinance into more affordable, fixed-rate loans backed by the Federal Housing Administration (FHA).

• Raises national debt to 75% of GDP - increases the statutory limit on the national debt by $800 billion, to $10.6 trillion -- GDP is $14.2 trillion.
• Increases the budget deficit to encourage more mortgages - Provides $15 billion in housing tax breaks. As AP said, the bill includes a "credit of up to $7,500 for first-time buyers who purchase homes between April 9, 2008, and July 1, 2009."
• Creates a new regulator - The new regulator will have approval power over how much Fannie and Freddie executives get paid.

Let's be clear about what's going on here. Washington is using our money to keep the Wall Street gold mine of securitization going. This will be a big boost to investment banks and institutional investors who buy mortgage-backed securities. It will also boost inflation, since it will make the U.S. even more heavily indebted than it was before. The value of the dollar will drop even further than the 72% it's tumbled already.

And the middle class will be left holding the bag for a flawed securitization factory that has cost us $8 trillion in lost wealth. Does that sound good to you?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Bloomberg News reports that the 8,500 banks and S&Ls in the U.S. hold $8.56 billion worth of foreclosed homes on their balance sheets. And most of those $6.9 billion, are held by two companies -- Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). They hold 81% of the foreclosed properties but 50% of the mortgages -- more evidence that Fannie and Freddie financed far more bad loans than their standards should have permitted.

This inventory of foreclosed homes weighs down the entire housing market. Generally, such homes sell for a 20% discount -- and that's not good for the prices in the neighborhood. Bloomberg reports that the prices received for foreclosed properties have declined -- from 93% in 2005 to 74% of the unpaid mortgage principal. Moreover, unless the bank pays to cut the grass and otherwise maintain the foreclosed home, its poor curb appeal taints the neighborhood a bit for potential buyers.

I've suggested that given the huge costs of the collapse in the real estate market, we should put an end to securitization. This is the practice of buying up thousands of loans -- backed by real estate, credit cards, auto loans, and others -- bundling and wrapping them in insurance and ratings and then selling them to investors. Bloomberg reports that mortgage securitization has nearly wiped itself out. Banks bundled $1.15 trillion of home loans into so-called private-label securities in 2006 -- that number has fallen 96% to $46 billion in the first half of 2008.

And the huge volume of foreclosed properties is likely to keep that figure falling further.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Talk about an interesting day for E*Trade (NASDAQ: ETFC). The broker, a competitor of TD Ameritrade (NASDAQ: AMTD) and Charles Schwab (NASDAQ: SCHW), reported Q2 earnings on Tuesday after the market closed. E*Trade saw its stock close up on the day by almost 11% on better-than-average volume ahead of the press release. Then, after hours, the stock was down over 15% as investors digested the data. It was a wild ride indeed, and I'm glad I wasn't on it.

E*Trade saw its total net revenue decrease by 20% to around $532 million. The loss per share came in at 19 cents. According to this Reuters article, Wall Street was hoping the loss would only be 14 cents per share.

E*Trade isn't out of the woods yet, and I think it'll be a while before it fully turns itself around and recovers from the financial crisis it's been suffering. In fact, the release mentioned how the broker lost value on investments in preferred equities of Federal National Mortgage Association (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) in July and that the liquidation of the investments will impact the third quarter. Yeah, I'm sure shareholders of E*Trade love to hear the names Fannie Mae and Freddie Mac thrown around in the earnings report. They're sure to warm the heart.

At one time, I thought E*Trade was worth entering, and it obviously might have been worth trading ahead of the earnings (if you were quick to get out before the after-hours, that is). Now, however, I'm reticent to put any new money to work in the financial sector. It's going to be a while before the financial malaise finally lifts. Since E*Trade is still losing a lot of money and missing estimates, I see no reason to allocate any investment funds here. The stock has become too speculative, and if you want to speculate, I'm sure you can find safer sectors to place some bets.

Disclosure: I don't own any company mentioned; positions can change at any time.

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MAJOR PAPERS:

• The Wall Street Journal's "Fund Track" reported that some banks struggling to raise capital may sell their money management units. National City Corporation (NYSE: NCC) is selling its Allegiant Funds, Fifth Third Bancorp (NASDAQ: FITB) is considering selling its Fifth Third Asset Management, and KeyCorp (NYSE: KEY) will possibly sell its Victory Capital Management unit.
• The Wall Street Journal also reported that Andrew Cuomo, the New York state Attorney General, is preparing to file civil securities-fraud charges against UBS AG (NYSE: UBS), possibly as early as this week. Sources said the lawsuit may include allegations of malfeasance by senior UBS executives.

• Bloomberg reported that money manager John Paulson, the owner of Paulson & Co., is launching a hedge fund that will provide capital to financial firms which have been damaged by the housing crisis. Paulson, who wants to open the fund by December, used bets against the U.S. housing market to help him earn $3.7B in 2007.
• After U.S. lawmakers reached a deal on legislation to alleviate the housing recession, the House of Representatives will today vote on a rescue plan for Fannie Mae -- Federal National Mortgage Association (NYSE: FNM) -- and Freddie Mac -- Federal Home Loan Mortgage Corporation (NYSE: FRE). Representative Barney Frank said that the package, which increases the likelihood Treasury Secretary Henry Paulson will get the authority to inject capital into the two, is "fully acceptable," Bloomberg reported.
• Oil trading losses forced SemGroup LP, which used to be America's 12th largest private company, to declare bankruptcy yesterday. Reuters noted that SemGroup LP's parent company is SemGroup Energy Partners LP (NASDAQ: SGLP).

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The New York Times reports that the cost to bailout Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) could hit $25 billion. But that cost dwarfs what the collapse of the real estate market might cost our country in total. I think $8 trillion is a reasonable estimate -- that's about 56% of our $14.2 trillion Gross Domestic Product (GDP).

Why are we talking about a taxpayer bailout of these two government sponsored entities (GSEs)? After all, shareholders own them but there's some vague notion that since they're GSEs, government should bailout the investors who bought their $5.2 trillion worth of mortgage-backed securities (MBSs).

So how did the government pick the $25 billion figure? It turns out that the Congressional Budget Office (CBO) doesn't know how much the bailout will cost. So it is developing different scenarios. One suggests that a bailout will cost nothing. Another suggests that there's a 5% chance that the bailout will cost $100 billion. I think this means that the bailout has an expected value of $5 billion (the chance of the scenario times its cost). Regardless, the CBO's $25 billion looks like it will be joined by an estimate that follows the Fed and OCC's look at the books of Fannie and Freddie.

I commend the CBO for doing some analysis. The Times reports that the CBO found that although Fannie and Freddie had $55 billion in capital on an accounting basis; their net worth on a liquidation basis -- if they had to sell their assets and pay off their liabilities -- would be a mere $7 billion, a thin cushion considering liabilities at the time of $1.6 trillion. The point is the agencies that were supposed to be regulating Fannie and Freddie fell down on the job.

Where will we get the money? The same place we've been getting it all decade -- more borrowing, The Times reports that the current debt limit is "$9.815 trillion and outstanding federal debt is roughly $9.5 trillion, leaving a cushion of $310 billion." No doubt the White House will argue that we need to borrow more -- roughly twice where we were at the beginning of the decade.

Unforunately the collapse of the housing market in the U.S. has far greater costs. The loss in the value of the housing stock has been estimated so far at $6 trillion -- but that figure could go higher. Then there's the $400 billion that banks have written off so far due to dodgy MBSs on their books -- and that figure is expected to hit $1.6 trillion. Add in the pain from three million foreclosures and the layoffs from people who work in construction and you're creeping up to $8 trillion.

That's a pretty deep hole for the next President to crawl us out of.

Update. A Houston ABC affiliate has a clip of the current President making light of the problems. As he says in the clip: "There's no question about it. Wall Street got drunk ---that's one of the reasons I asked you to turn off the TV cameras -- it got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments."

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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The New York Times reports that as the White House pushes Congress to fund its bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), it is finally getting around to scrutinizing their financial condition. Is there any chance that the inspection will NOT reveal a critical need for the Congressional bailout? No. That investigation is guaranteed to support the White House's case.

The Times reports that the Federal Reserve and the Office of the Comptroller of the Currency (OCC) will be inspecting Fannie and Freddie's books. This comes at a time when the Office of Federal Housing Oversight (OFHEO), which should have been tracking their condition, is due to be wiped out.

Meanwhile, the Times reports that Fannie and Freddie are on the hook for some big obligations. They owe $1.5 trillion; they "own or guarantee more than $5 trillion in mortgages"; and they have derivative contracts to hedge $2 trillion worth of mortgage risks. I am curious what else the Fed and the OCC will be looking for as they inspect the books. I hope they can figure out how much cash Fannie and Freddie have available to pay off their obligations over time. But why doesn't the government know this already?

But I don't think that's the purpose of the scrutiny. I think it's confirmation bias -- the tendency of decision makers to seek out data that supports the outcome they desire and ignore the rest. So the latest inspection of their books will yield a sales pitch to support the White House's bailout.

Of course that bailout must be different than the one established by the first president Bush -- the $200 billion S&L bailout that involved buying up massive numbers of houses. That's why the White House will veto the Congressional bill if it contains a "$4 billion block grant program for states to buy foreclosed homes."

Politics really is personal. And we are paying the price for the unresolved conflict between King George I and King George II.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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The Fed and the Comptroller of the Currency want to know how Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) are doing financially. No one seems to know for sure. That means the price of a bail-out of the companies is up in the air

According to The New York Times, "The financial condition of Fannie and Freddie is of keen interest to members of Congress, some of whom have expressed concern about approving a plan without a clearer understanding of the value of the possible losses."

The questions out of Congress are fair enough. The fact that the two firms do not already have answers to the questions is disturbing.

It is hard to imagine how Fannie Mae and Freddie Mac could have gotten so off track that they cannot give an adequate assessment of their own books. Perhaps if they had know more about their balance sheets and had implemented better forecasting and risk controls, the current mess would not be nearly as dire.

When no one knows how bad things are, they usually get worse.

Douglas A. McIntyre is an editor at 247wallst.com.

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MAJOR PAPERS:

• The books of Fannie Mae -- Federal National Mortgage Association (NYSE: FNM) -- and Freddie Mac -- Federal Home Loan Mortgage Corporation (NYSE: FRE) -- are being examined by the Federal Reserve and the Office of the Comptroller of the Currency to review their financial condition, according to the Wall Street Journal.
• The Wall Street Journal also reported that the Chevy Volt, an electric car from General Motors Corporation (NYSE: GM), is slated to roll out in two years and it received a major boost from 36 utilities that operate in 40 states who agreed to work together to make the plug-in vehicle possible. Among the utilities are American Electric Power Company Inc (NYSE: AEP), Consolidated Edison Inc (NYSE: ED), Duke Energy Corporation (NYSE: DUK), and Edison International (NYSE: EIX).
• Struggling mortgage lender Paragon is reportedly in talks with The Blackstone Group LP (NYSE: BX) about a potential takeover by Blackstone, the Financial Times reported.

• The New York Times reported that TiVo Inc (NASDAQ: TIVO) will today introduce a "product purchase" feature in partnership with Amazon.com Inc (NASDAQ: AMZN). Under TiVo's plan, the television remote control will be turned into a tool for buying products that are advertised and promoted on talk shows and commercials.

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• Bush Prods Congress, as Financers Are Inspected - Treasury Secretary Henry M. Paulson Jr. said examiners are inspecting the books of Fannie Mae and Freddie Mac.
• GM, utilities team up on electric cars - Partnership aims to tackle issues that will crop up when electric vehicles are rolled out.
• H&R Block names McDonald's executive CEO
• Ford to Make Broader Bet on Small Cars - After two decades focused on trucks, the company is about to drastically shift focus to building smaller cars.

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MAJOR PAPERS:

• People with the matter said that Ken Wilson, The Goldman Sachs Group Inc's (NYSE: GS) most senior financial-institutions broker, will temporarily exit the firm, the Wall Street Journal reported, in an effort to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis.
• The American Federation of State, County, and Municipal Employees, a union with a stake in Citigroup Incorporated (NYSE: C) called for the financial services company to break itself up. The Financial Times reported that the demand will almost definitely be rejected by Citigroup.

• Treasury Secretary Henry Paulson's plan for rescuing Federal National Mortgage Association (NYSE: FNM) -- Fannie Mae -- and Federal Home Loan Mortgage Corporation (NYSE: FRE) -- Freddie Mac -- calls for the creation of a new regulatory agency that would seek to assert more stringent control over the banks and lessen the damage they could cause to the American financial system, the New York Times reported.
• The Daily Telegraph reported that BP Plc (NYSE: BP) blocked a $1.8B dividend payment to its Russian partners in the TNK-BP joint venture.

• According to paidContent.org, now that its cash on hand exceeds its market cap, speculation that Napster Inc (NASDAQ: NAPS) could be a takeover target heated up.

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What bothers me about last weekend's vague plan to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) is that it fails to solve the basic problem they face. The problem is that nobody is willing to put a hard number on what proportion of the mortgages they guarantee are likely to keep making their monthly payments ("good assets") and which are not ("bad assets").

If we analyze that split, we may be able to lower the cost of bailing them out by putting the good assets in a "good bank" and the bad assets in a "bad bank." Shareholders would probably be happy to buy stock in the good bank. And owners of the bad bank could either write off their holdings or seek to refinance them. Similarly, the holders of mortgage-backed securities (MBSs) around the world would no doubt be delighted to know what proportion of their MBSs are good and what proportion are bad.

I have heard scare tactics which suggest that Fannie and Freddie control half the mortgage market and we can't afford to let them fail. But what if 90% of their mortgages are likely to keep paying and 10% are not? We would then be faced with what to do about the $500 billion of bad MBSs that Fannie and Freddie supposedly guarantee. Could we afford to let $500 billion of MBS holders lose their investment? We had no trouble letting dot-com investors lose trillions of dollars worth of their investments back in 2000.

There was no public pressure for the government to step in and save those individual investors who lost their shirt investing in pets.com and all its peers. So why not just let those institutional investors -- who hold the dodgy MBSs that they should have analyzed more closely before buying -- take their lumps as well?

If we created a good bank/bad bank solution for Freddie and Fannie, we might find that the problem is small enough that it can be -- in the words of Grover Norquist, the conservative ideologue -- drowned in a bathtub. Then the financial system will be able to withstand the impact of the free market operating unfettered from the chains of a taxpayer-sponsored bailout of the institutional investors who bought MBSs that defaulted.

If the free market is good enough for citizens who buy dot-com stocks that crash, why not institutional investors who buy MBSs from Fannie and Freddie?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.

That's thanks to a temporary rule it created last Tuesday that blocks the short selling of the stock of 19 big banks and financial institutions unless the short sellers can borrow those shares. (As Barron's [subscription required] points out -- it's interesting that the SEC has announced it is enforcing this so-called naked short rule since the practice is already illegal).

I can only imagine the profit opportunities available to those who had early access to this list of 19 -- which according to my calculations have risen an average of 27.5% since Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- whose CEO made $20 million last year, according to AP -- are the biggest winners -- up 90% and 74.5% respectively since then. Meanwhile, all the other companies that the SEC did not protect are wondering why they were not on the list.

The SEC's actions raise many questions:

• Why did the SEC decide to enforce the prohibition on naked short selling just on these 19 companies? Why not enforce it against all companies?
• Why did the government allow our financial system to become so vulnerable that short sellers could easily profit from its fragility?
• Why not punish those who mismanaged these financial institutions rather than those who profit from exposing that mismanagement?

I don't know the answers to these questions. My hunch is that the answers are a combination of a "free market" political philosophy, the way Wall Street gets paid -- as a percentage of big deals rather than the long-term profits (or losses) from them -- and the amount of money Wall Street gives to get politicians into office.

The SEC's actions suggest that it values the executives of those 19 companies far more than it does the viability of the financial system. If it had been concerned about protecting investors, it would have enforced aggressively its own regulations during the inhalation stage of the currently exhaling credit bubble.

Meanwhile, its decision to enforce its naked short selling rule for only 19 companies is a unique form of market manipulation -- the very thing the SEC was established to prevent.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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MAJOR PAPERS:

• The Wall Street Journal reported that it is the Bush Administration versus Democrats versus Republicans to decide the strategy to stabilize Federal National Mortgage Association (NYSE: FNM) -- Fannie Mae -- and Federal Home Loan Mortgage Corporation (NYSE: FRE) -- Freddie Mac. The Administration's plan would let the Treasury Department advance a credit line and the opportunity for the government to buy equity in either firm. A package is expected to pass but not before the political and economic ramifications are battled out. Democrats and Treasury want it to be a part of a housing rescue plan; Republications oppose it.
• The Clinton Foundation, headed by former President Clinton, believes it has a pricing agreement in place that it expects will make malaria drugs affordable and available to millions of poor people worldwide, the Wall Street Journal reported.
• The Financial Times reported that UBS AG (NYSE: UBS) and Liechtenstein's LGT Group will today be accused by U.S. Congressional investigators of using the "cloak of bank secrecy laws" to help American clients evade billions of dollars in taxes.

• Globes reported that Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) is talks to acquire Barr Pharmaceuticals Inc (NYSE: BRL). The price tag is said to be between $7B and $7.5B.

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Despite plunging housing prices, record oil and food costs, rising unemployment and a growth-chilling credit crunch, there is some good news in the economy. MarketWatch reports that short sellers had their best month in seven years in June.

Specifically, it reports that The Strunk Short Index, which tracks short selling fund managers, rose 10.47% in June -- it was last higher than that in March 2001 when it climbed 12.45%.The Strunk's best years were in 2002, when investors sold tech stocks, and in 1990, during the last major U.S. banking crisis. It gained 30% and 43% respectively in those years.

But thanks to government intervention, the SEC is going to shut down the one bright spot in the economy. Bloomberg News reports that the SEC is changing the rules of short selling. In particular, it is banning so-called naked short selling -- in which a trader sells a stock without borrowing its shares -- for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). For the next 30 days, traders will need to borrow shares to short them.

This is less of a problem than it appears. The stocks of the two companies fell over 26% Tuesday and they'll probably hit zero in the next 30 days if current trends continue. Meanwhile, unless the SEC decides to ban short selling on the 150 banks expected to fail in the next 18 months, the shorts will not be denied.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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MAJOR PAPERS:

• People familiar with the issue said that European regulators are gearing up to file new antitrust charges against Intel Corporation (NASDAQ: INTC). The charges, the Wall Street Journal reported, would allege Intel gave major European retailers an incentive not to sell computers that use Advanced Micro Devices Inc (NYSE: AMD) chips.

• The New York Times reported that News Corporation's (NYSE: NWS) New York Post and The Daily News, owned by Mortimer Zuckerman, are exploring a print pact and have been in talks to find ways to combine some business functions of the papers, according to people briefed on the matter.
• According to sources, the San Francisco Business Times reported that Washington Mutual Incorporated (NYSE: WM) may be planning more layoffs in September. It is unclear how many employees will be affected and from which departments.

• In an effort to preserve capital, data compiled by Bloomberg showed that troubled mortgage companies Federal National Mortgage Association (NYSE: FNM), or Fannie Mae, and Federal Home Loan Mortgage Corporation (NYSE: FRE), or Freddie Mac, may cut dividends after more than $11B in combined losses since last year.
• Three people familiar with the matter said that the SEC subpoenaed Wall Street investment banks including The Goldman Sachs Group Inc (NYSE: GS), Deutsche Bank AG (NYSE: DB) and Merrill Lynch & Co Inc (NYSE: MER) in its hunt and crack down on suspected manipulation of Bear Stearns and Lehman Brothers Holdings Inc (NYSE: LEH) shares. Bloomberg reported that two of the people said the SEC, which yesterday curtailed short selling in financial stocks, is looking for e-mails and trading records and is also examining whether securities firms have "adequate controls" to deal properly with misconduct.

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