Falling dollar warning

Judging by the news about Fannie and Freddie, the helicopter drops of money that are sure to follow from the Fed won’t be the kind in which dollars float to the ground, buoyed by air on the way down.  No, these helicopter drops will require huge, tightly-bound bundles of bills, in which folks are sure to get whacked on the noggin.

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

A “conservatorship.”  That term has a specific definition, but I suspect to most people reading the article, the word conveys a cachet of responsibility — like something blue-bloods might do for their grandchildren — that serves the purposes of Team Bush and the Fed very nicely.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

“Conservatorship” sounds so much nicer than “backdoor bailout.”  But in fact, we’re looking at Bear Stearns redux — the shareholders can hang, but the creditors recoup every penny.  (As do the executives who drove the joint into the ground, natch.)

I’m not too sure that “taxpayers” would foot the bill in the way the article implies, though.  Wouldn’t that, too, sort of work like JPMorgan’s takeover of Bear Stearns, in which the Fed assumes most of the liability for whatever might go wrong, and when it does go wrong, it’ll just print money to make up the difference?

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Hey, no sense putting it on the books if you don’t have to.  The conservatorship can be the government’s own version of a special purpose vehicle.

The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.

I take this to mean the Plunge Protection Team has met several times already this week because it is, in fact, a “crisis situation.”

As I write, gold has shot up to highs unseen since April.  The news wires attribute it to oil hitting a record and more saber-rattling between Tehran and Washington/Tel Aviv.  But the smart money knows that with Fannie and Freddie near collapse, the bales of cash dropping from the helicopters are about to land with the force of a boulder.  Gold $2000, anyone?

The Daily Reckoning