There was muted outrage from Freddie Mac's announcement that they would not buy any subprime paper originated in NY as a consequence of a new law that holds those who invest in the paper partially accountable for fraud:

"Freddie won't buy loans dated on or after Sept. 1 that meet the state's subprime definition, the McLean, Virginia-based company said today in a lender bulletin on its Web site. New York Governor David Paterson last week signed new foreclosure and lending laws that tighten legal protections for borrowers.

The legislation holds mortgage buyers like Freddie liable in ways that ``we have no way of monitoring and preventing,'' company spokesman Brad German said in a telephone interview."

There are two problems with this claim.

The first is that this essentially shuts down all secondary market paper into Freddie for subprime lending, since the entire point of pooling loans makes it impossible to separate out NY from other states, as was pointed out aptly by Mtgspy on his blog.

The bigger issue, however, is what is really behind all this sound and fury.

While I may be analyzing this incorrectly, I don't think so... and if I'm right, the implications, when they are recognized in the market, are going to be one hell of a "black swan" event.

See, Freddie and Fannie had their "stabilization" that Paulson allegedly got with his "housing bill."  Or did they?

Hmmmm.... look at mortgage rates.  Look at the TNX.  Now look at Fannie (NYSE: FNM) and Freddie's (NYSE: FRE) share price.  Freddie is trading at just over $5/share.

But more importantly spreads are back to where they were (wide) just before Bear Stearns blew up.

Is the market sending a signal to the GSEs, specifically:

No more leverage you fools; take it down now, or we will take you down.  60:1 is too damn high, and 200:1 on your credit book is outrageous.  Stop it.  Now.

Maybe.

And if so, there is exactly nothing that the government can do about it, because any attempt to use "The Bazooka in The Pocket(tm)" that Paulson was given simply transfers that consequence from the GSEs to government debt generally!  In fact, there's an argument to be made that the strong showing for government debt the last couple of weeks has been precisely this sort of warning communicated in "Bond MarketSpeak" - "you may think you have a Bazooka but we've got the shells and an empty launcher won't do you a damn bit of good!"

Back when Clinton won his first term, he had terribly expansionary plans for US Government spending, with HillaryCare being only a part of it. 

All those grandiose plans were torpedoed by Mr. Market, who made quite clear to him that Treasury Debt funding costs would get materially more expensive if he tried it.

The President of The United States was bullied by The Bond Market.

Is it happening again?

I think so - the evidence, in fact, says it is so.

So what we have now is "happy face" folks looking for excuses as to why they can't do this or that, trying to lay it off on government regulation and laws, just like Clinton did when HillaryCare was torpedoed. 

Remember? 

It was "The Neocons" who shot it down, remember?

Wrong. 

The bond market said "Screw you Herr Presidente!" and that was that.

Here's the problem with being less than honest about it, if this is really what's going on.  When you're The President and your piece-de-resistance program gets torpedoed and sunk by The Bond Market you are embarrassed, but that's pretty much the end of it.

But when you're The US Mortgage Market Makers, the bond market tells you to go screw, and you're less than honest about it, you better hope nobody figures it out, because if the facts of exactly why you aren't (can't) increase liquidity in the system become widely understood then we'd have to go back to honest, fair, reasonable lending under sustainable underwriting standards!

You know, 20% down, 36% debt-service-to-gross-income (total), 30 year fixed, no games, no "seller contributions", no bullcrap?

Gee, what a horror that would be (Hint: Housing immediately corrects to sustainable pricing, all at once, roughly 3x incomes, on average, in a given area.)

How 'ya like 'dem apples Mr. Paulson? 

Now we know why you were stuttering on Meet The Press.

Watch for Fannie to follow suit, and for this "we're not buying X" stuff to expand.  If it does, you've got your answer, and in the fullness of time - and likely quite soon - you will see the market come to the same realization that I had last afternoon.

PS: I can't wait for Dodd and Frank to get the memo.  The look on their faces will be priceless, and you can bet they'll do their screaming behind a closed door where we won't be able to see it.  I'm sure publically they'll blame the "Republicans" - just like Clinton did.

And just as it was with Clinton, it will be a lie.

Pull up a chair and grab some , this is going to get fun