Wall St.'s Stunning FNM/FRE Revelation

On Fannie and Freddie: Both closed down 25 percent to multidecade lows; preferred shares also got hit. The Street is coming to the following realization:

1) that the equity is essentially zero;

2) that a government bailout (intervention, whatever) is now the likely scenario;

3) that the critical issue is not equity in the company -- it is to keep Fannie Mae and Freddie Mac operating; that any further disruption in their ability to provide liquidity will increase mortgage rates and may create an additional down leg in housing.

That's exactly what the head of the Minneapolis Federal Reserve, Gary Stern, said this afternoon: that the critical issue was to keep Fannie and Freddie operating.

Elsewhere, despite all the hand-wringing from equity holders in the two stocks, note that the overall market reaction has been a bit of a yawn:

1) an even number of advancing versus declining stocks;

2) two financial stocks advancing for each one declining, with only a few down 3 percent or more (regional banks rallied into the close);

3) oil remaining in the middle of the $112-$117 channel it has been in for two weeks;

4) bond rally continuing.

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