Well, now we get to the bottom line on Phoney and Fraudie.

Bullet points:

• Both common and preferred stock dividends eliminated (not deferred)
• GSE portfolios will run down starting in 2010, 10% annually, until at a "safe" level (unspecified)
• Modest growth in MBS portfolio in 2009
• Capital limits eliminated (since Treasury now must pony up whatever is required)
• Treasury to buy some MBS as necessary "temporarily" (only new MBS, however - no existing ones.  If the new underwriting standards are so good, how come they need to purchase them?)
• Senior and subordinated corporate debt will be guaranteed (despite the black letter wording on the face that says its not); no guarantee on existing MBS that were written prior to this date.
• Treasury will buy as much preferred stock as necessary to maintain a positive net worth of the firms
• Establishment of a new secured lending facility to Freddie, Fannie, and the Federal Home Loan Banks (the latter is an ugly situation that has not been recognized by the market - at all - so far)
• Preferred issued to Treasury will have a 10% coupon; that ought to leave a mark.
• US Government gets warrants for 79.9% ownership interest; both common and preferred are, essentially wiped out.
• Statement that "if you're a bank and got just skulled in both eye sockets, please call us."  Oh, and everyone else?  Too bad.  Niiiiice.
• Will take on 20 billion a month in debt to the US Taxpayer to fund all of the above, plus whatever else is required.
• All authorities and activities expire in December 2009 (ha!)

You can find Paulson's statement here, and FHFA's statement here.

Justified as once again "systemic risk" if either or both of these firms were to fail.  Never mind that Ginnie Mae has been writing perfectly-sound mortgages through this mess and could have easily taken over for these two frauds.

Further, nowhere is responsibility taken for allowing these two gigantic hedge funds to amass leverage of 80:1, nor the government's failure to provide prudent regulation during the previous ten years - including during Paulson's and Lockhart's term.

Now here's what, based on the released statements, I think should happen.  Of course the market often doesn't trade on reality......

Logically, a serious selloff in financials is what we should get.  Here's why:

• Preferred is basically worthless, as is common.  You get an 80% position (effectively) by the government, and no dividends on either, the premium for preferred stock disappears for all intents and purposes, and the common may as well be delisted.  Since both Presidential candidates have said that these firms will not be allowed to exist in present form, buying or owning either is idiotic.  If there's no stampede to the door on these shares at the bell Monday, I officially crown the Equity Markets "Dunce Of The Universe."
• Any institution that holds preferred just got it in both holes.  Common has been basically worthless for a while, but preferred has been holding up much better, only losing ~30-50% of its value (instead of 90%).  Forget that as of Monday.  This will force more lending standard tightening across the board in community and midsize banks.
• The existing GSE MBS is not guaranteed, and the "back door" interest coupon payments along with refusal to recognize losses will immediately end.  Treasury will probably inject however much capital they need to prevent those losses from being recognized, however.  Senior and Subordinated corporate debt is being explicitly supported.  This is, effectively, a "take over" of $7 trillion worth of this debt onto the US Balance Sheet.  Treasuries are likely to NOT like this - at all.
• The total losses from this boondoggle to be "eaten" by the Taxpayer are likely to exceed $500 billion over the next couple of years.  The spread on new MBS issuance will mitigate this, but not by much - these firms might (MIGHT!) earn $20 or $30 billion over the same time.  Hell, give 'em $50 billion.  That's still ten percent or less of the loss that will be absorbed.  You are going to eat it.
• How did this happen?  Simple - Morgan came in and "reclassified" some of their so-called 'temporary' impairments into permanent ones, wiping out their capital.  Now, the question you better ask, is how many other financial institutions have similarly not taken writedowns on similar positions?  "What is every major financial, Alex?"
• Got Level 3 assets? Guess what?  You're at risk of having the same thing done by Treasury.  All of you.  This is positive?  Uhhhhhh...
• Paulson has been proven a liar.  Two months ago he said he was going to keep these firms in their present form.  He lied.
• The bond market should react by forcing treasuries much higher in yield.  Yes, the spread will narrow to near nothing, but it should happen by the Treasury market treating this as a doubling of the debt of the United States - because it is.  This, if it occurs, will force all borrowing costs higher, which is exactly what Paulson said he was "a-feared" of if Fannie and Freddie collapsed.

The FX and Bond Markets will tell you what everyone thinks, along with commodities. Currencies open before futures, and futures before Asia.  I will watch currencies in particular.

I have no idea whether the market will interpret this as "good news" or "aw crap!"; the facts say its "aw crap", but the market has a habit of paying zero attention to facts for variable amounts of time.  Witness Bear Stearns.

I think there's a very good chance that the reaction will be extraordinarily violent, but which direction remains open to question - for a few more hours anyway.

In any event, this is what happens when Americans sit in front of the Boob Tube and watch American Idol instead of paying attention to what their government is doing.

We are now in the zone where mistakes can cause a government funding collapse. 

Congratulations America.