The Fed takeover of Fannie and Freddie came as no surprise with speculation running rampant for weeks on how not when it would happen. Many analysts felt that some sort of capitalization from the Feds would be the best approach as it would best serve the faithful investors (and speculators) who have so much at stake.

However, the bailout effectively nationalized the mortgage industry with the government taking over and becoming the top dog moving ahead of all other investment positions. Investors had paid billions to ensure their positions as preferred stockholders. How this will affect those investors remains to be seen but clearly there’s a new sheriff in town.

Among the faithful investors unfortunately are our smaller local and regional banks. This group has invested billions of dollars into both Fannie and Freddie under encouragement from Federal regulators but earning high dependable dividends raising profits. The investment holdings were allowed to be used as capital reserves requirements.

A government statement indicated the banks would be left holding some sort of bag. That bag includes a huge hole where bank capital just got sucked out effectively creating another critical issue for both the Feds and the banking system.

Banks were encouraged to contact their primary federal regulators if they believed the bag they were left holding left them undercapitalized. Smaller local and regional banks may be borrowing money from Uncle Sam.

Get your popcorn ready and keep the phone lines open on Monday.

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