The put-back demand letter from investors in mortgage bonds serviced by Countrywide has Wall Street freaking out.

AP

The issue is not so much the content of the letter. It's who the letter came from.

It's frightening enough that many of the biggest bond investors in the world signed the letter. If you are a major financial institution, you don't want to find yourself at odds with Pimco, BlackRock, Neuberger Berman, or Met Life.

But the presence of two names on the list of complaining bond buyers was truly terrifying: the New York Fed and Freddie Mac.

Top Wall Street executives had assumed that the government agencies would not be on the other end of put-back demands, according to my sources. They believed that their put-back exposure would be limited to private market buyers of mortgage-backed securities. The far larger portfolios of securities owned or insured by the Fed or government-sponsored entities were assumed to be safe from put-back demands.

"The universe just got a whole lot bigger," one executive said.

What he means is that the "universe" of potential liability is greatly expanded, if the Fed and the GSEs start demanding that banks repurchase the mortgages they included in residential home-loan securitizations.

"We thought the government wouldn't come after us on these things. It bought them to stabilize the financial sector and the housing market. Going after us would undo both those things," one executive explained.

But with Freddie and the New York Fed, through its Maiden Lane operations, on the other end of the Bank of America

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[BAC  Loading...      ()   ] put-back letter, the assumptions are changing. The losses from residential mortgage-backed securities (RMBS) repurchase obligations could grow to staggering levels.

Some on Wall Street expect that the Treasury and the US Fed will put the kibosh on put-back demands from Maiden Lane and Freddie Mac.

"This is a serious threat to financial stability. There's no way Tim and Ben let this play out," a senior banker told me, referring to Treasury Secretary Tim Geithner and Federal Reserve chair Ben Bernanke.

In short, Wall Street is betting that the bureaucrats will bail them out again.

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