Whenever I encounter a complex transaction intersticed with others I isolate the transaction so it stands by itself where it can be viewed from all sides.

We are all familiar with what a security is, we associate it with a share of stock in a corporation.

Securities, as we all know, are traded on the open market.

The value of securities goes up and down. Some become worthless. When they do it is not jarring because the ownership is usually spread far and wide.

If, however, a large block of such shares are held by one entity then that entity is in deep trouble. Again, this is not jarring because it is just one entity.

So how did home mortgages become securities? In the old days if we borrowed money from the bank to buy a home we paid the bank each month until the note was satisfied.

At some point the bank began the practice of selling home mortgages to others. Reason: they didn’t want to hold long term receivables, preferring automobile loans, lines of credit. With the onset of this practice the bank became not a lender but a broker.

Others jumped into this marvelous new way to make money. Instead of relying on interest on loans they opted for broker fees.

So who did banks sell their mortgage to? Mostly to Fannie Mae and Freddie Mac, also a broker. Fannie and Freddie, in turn, sold shares of stock to pension funds, hedge funds, investment banks, and banks. They were purchased by these entities because they were not only backed by real estate but by the federal government, albeit indirectly.

As it turns out Fannie and Freddie became the large block referred to above. And they are in deep trouble. As are their shareholders, amazingly enough, pension funds, hedge funds, investment banks, banks, all holders of shares in Fannie and Freddie for the reasons mortgage backed securities were favored.

So what to do now? Well, we can let the shareholders of Fannie and Freddie take a bath, that’s the way it works in the investment world, right?

If we take this option, which is one most favored by the loudmouths who oppose the Administrations proposed credit reform measures, money to lend would dry up overnight. In an economy almost wholly dependent on credit to function the consequences would not be hard to predict.

For example, big companies routinely borrow enormous amounts of money for daily operating activities. Sears might have $1 billion on hand at the close of business on any given day. They routinely loan that money to others who are not closed for the night. Sears, however, expects to get that money back the next morning. If this treadmill stops then companies stop.

But suppose Fannie and Freddie don’t fail, rather they do a workout, just like any company with accounts receivable that are non-performing. Well, they probably could do this but while the workout is underway credit dries up. Money that normally comes from collecting on receivables is not being loaned in the open market.

So the Administration has proposed to, in essence, buy the receivables. Its done all the time for troubled companies, by what are called factors.

Congress is balking. Blowhards are screaming that taxpayers shouldn’t be involved. Politicians are scoring their political points.

Okay, here is another solution. Abolish, either permanently or temporarily, the capital gains tax. This would send pension funds, hedge funds, investment banks, individuals rushing to buy the receivables, in essence, the properties securing Fannie and Freddie mortgages.

Congress is balking at that solution as well, not wanting to give up tax revenues. Forget that most economists have long decried taxing capital gains as a tax on phantom income.

Well, then how about this? Create a new quasi-governmental corporation called the Unlimited Credit Corporation.

Oh wait, that’s what Fannie and Freddie are.

So that all brings us back to square one, the simplest, quickest, best solution, the Administration plan.

Which is what will happen but first the blowhards and politicians have to score their political points.

They have to.

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

I don’t know if Section 8 is still in the bill, as there has been strong opposition from congressmen like Ron Paul. Everything is so rush-rush with Bush telling us last night on TV that we must act now or suffer dire consequences. I think that is political-speak for, “Don’t look now but the government is making another huge grab for power and we’re going to screw the American taxpayer big time.”

America has some dark days ahead of it.