Uncle Sam Should Stay Away From Freddie, Fannie

EVEN IN THE DARKEST days of the dot-com bust, I can't recall any large-cap technology companies ever losing 50% of their value in one day only to come roaring back to break-even by the closing bell. I don't remember widely owned names experiencing the 25% daily ranges as so many banks and financials have in recent weeks. Even in the depths of the 2000 tech collapse, I don't think you saw legitimately profitable companies dropping 60% or more in half a month.

When Cisco Systems (CSCO) or CMGI (CMGI) fell hard back in the early 2000s, it was prompted by changing perceptions about valuations and business fundamentals. But when Freddie Mac (FRE) loses 30% in 15 minutes or Lehman Brothers (LEH) drops from $24 to $14 in four days' time, the explanation can be summed up in one word: government.

Between the Federal Reserve, SEC, FHA, OTS, FDIC and CFTC, the financial industry is among the most regulated of all. And as I noted in March, the Bear Stearns bailout further reinforced the dangerous belief that economic problems need political solutions.

What's been building over the past few weeks is the quiet realization among investors that, when it comes to commerce, trade and their money, the government can basically do whatever it wants.

Regulators can increase the margin on futures trading or ban speculators from participating in energy markets altogether. They can impose windfall profits taxes or, as we saw in the so-called stimulus plan, redistribute income to whomever they please. And if we can trust the latest headlines they could even end up buying stock in Fannie Mae (FNM) and Freddie Mac (FRE), two companies the actual market — the free market — wants nothing to do with whatsoever.

And they're terrible traders. The Federal Reserve Bank of New York has reported that the value of the Bear Stearns portfolio it's holding has already declined by $1 billion to $28.9 billion.

Other recent policies continue to exacerbate the problem. Just last week, a $300 billion housing package passed the Senate that will, among other things, refinance up to $300 billion in troubled mortgages into insured loans backed by the government and provide $4 billion for states to purchase foreclosed loans. The net effect will be to prolong the correction and waste hundreds of billions of honest taxpayer dollars in the process.

They can even bring down banks. The Office of Thrift Supervision cited Sen. Chuck Schumer (D-N.Y.) as the cause of the failure of IndyMac (IMB) bank, the second biggest bank failure in U.S. history. After his June 26 letter questioned the bank's viability, depositors withdrew more than $1.3 billion from their accounts, collapsing the bank.