Summary
Fannie and Freddie are broke. What's happening is that they are now conduits for Federal Reserve Funds. In other words, financial engineering and off-balance sheet entities still live.
Analysis
Fannie and Freddie are broke. They were effectively taken over by the government last year. For anybody who was paying attention, the disputes about Fannie's accounting in 2004 were leading indicators of the housing bubble. By 2006 it was clear that something was seriously rotten. (http://www.google.com/search?q=fannie+mae+accounting+scandal&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a) And after last year's meltdown they drew on the always implied but never previously explicit government guarantee. Today they are HUD, but not officially on the federal organizational chart.
What's happening is that they are now conduits for Federal Reserve Funds. The Fed has been lending against all sorts of collateral in their efforts to keep the banking system working. It was unclear to one of their economists how the collateral underlying their rapidly expanding portfolio is being evaluated. Fannie and Freddie's credit lines are being expanded from $200 billion to $400 billion. Presumably they can peddle some of their dubious mortgage backed securities to the fed as collateral for some of that.
In other words, financial engineering and off-balance sheet entities are dead. Long live financial engineering and off-balance sheet entities. But don't think Enron. That was Texas. This is now Washington, and as legend has it Washington cannot tell a lie.
