IT'S BIGGER THAN PAULSON AND BERNANKE / IT'S A BUSH DEPRESSION

Martin here with an urgent update on Fannie Mae's devastating swan dive.

Last week's plunge in the Dow ~ driven by the collapse of Fannie's and Freddie's shares ~ is just the first act of an unfolding tragedy.

Next, expect massive losses ~  and loss of confidence ~ at the world's largest financial institutions that have stuffed their portfolios with Fannie and Freddie stocks and bonds.

Is all this turmoil just malicious rumors, as Washington and Wall Street officialdom would have you believe?

I'm afraid not: Even before the latest crisis began, these two giant mortgage lenders were terribly overleveraged and effectively insolvent, according to their own murky balance sheets.

The reality: Fannie Mae's and Freddie Mac's liabilities and contingent liabilities are far, far too large for their meager capital. And this house of cards is built on the quicksand of millions of mortgages that cannot be repaid.  Fannie Mae has just 1.6 cents in core capital to cover each dollar of mortgage and debt exposure. Its younger and smaller sibling, Freddie Mac, has only 1.9 cents.

Treasury Secretary Paulson predicts 2.5 million home foreclosures in 2008; and Fed Chairman Bernanke has testified that the crisis will continue deep into 2009. So, in combination, these two high officials are warning of potentially millions more foreclosures in 2009.

That leaves Washington with just two choices:

• Let them fail ... allow the U.S. housing market to freeze up ... and invite a deep depression. Or ...
  
  
• Bail them out with taxpayer money ... double the public debt overnight ... bust the government's finances ... and gut the value of U.S. Treasury securities.

If Fannie Mae and Freddie Mac fail, international investors ~ loaded with Fannie and Freddie securities ~ will dump them in an avalanche.

But if the U.S. Treasury tries to absorb the impact of this disaster, those same investors will dump their Treasury securities in an equally large avalanche.

In EITHER scenario, foreign investors must sell their U.S. dollars. And either way, the dollar will crash, as crisis currencies ~ like the Swiss franc ~ will go through the roof.

If you're not outraged with the Bush administration ~ you're on life support.