So Uncle Sam is going to move to save Fannie Mae and Freddie Mac.  Super, sounds like another instance of an “avoided failure” among financial institutions.  But everyone seems to be wondering, isn’t failure supposed to happen in market economies?  Something of a moral hazard issue.

At least that’s what we hear.  In general, despite being a real estate investor, I believe speculative investors and risky real estate investments must be punished with outright failure.  Now some of that is definitely happening and what I hope is that more real estate investors now enter the game well capitalized with contingency for the same exact thing to happen again.

But alas, back to F&F. here we have an issue of something more than just moral hazard.  Here we have a true crisis of confidence spurred last week when F&F bonds couldn’t attract a bid in their regularly scheduled auction for capital.  The two institutions are about as sound as them come, under normal business circumstances.  Odds are that the government will step in a make a bundle on their transaction.  Paulson seems to want to use F&F to turn the Treasury into a government backed hedge fund and will likely profit handsomely off any purchase of F&F stock at depressed levels.  The end game will help save the entire mortgage and real estate market from a cataclysmic depression.