Last afternoon we got the Senior Loan Officer Opinion Survey from The Fed.

It was Tribbling, er, troubling.

Highlights included:

• 55% reported tightening of C&I terms to large and middle-market firms.
• 50% reported tightening of C&I terms to small firms.
• 80% reported tightening of Commercial R/E terms.
• 60% reported tightening of Residential residential mortgages.
• 70% reported tightening of HELOC terms.
• 50% reported tightening existing HELOC terms.

I don't see "loosening" anywhere in the report.

Debate swirled around Bank of America's acquisition of CFC, and after the market closed yesterday BOA released the following:

"'The transaction is on track to close in the third quarter as agreed to,' said Robert Stickler, a spokesman for Charlotte, North Carolina-based Bank of America, in a telephone interview today. "

Now c'mon. What we didn't get is a press release, and of course a "telephone interview" can be disclaimed as "you misunderstood me." So where's the press release? Most of the time that's the format of such a "response", because you can be held accountable.

Yahoo's Yang commenced whining immediately when his stock got hammered after Microsoft told him to go to hell. Awwwww....

"Yahoo, the most-visited Web site, turned down a $33 a share offer from Microsoft, which withdrew its bid on May 3. The company was cut to 'sell' by Citigroup Inc. and ThinkPanmure LLC analysts today, and its stock dropped 15 percent."

Yeah, and you closed under $25. From where I sit you flushed $8/share down the toilet.

Betcha another $6 comes off in the next couple of weeks.

Idiot.

In the "moral hazard" department JP/Morgan appears to have "rented" out its access to the TAF to Target!

"Target Corp., the second-largest U.S. discounter, will sell 47 percent of its $8.2 billion in credit- card loans to JPMorgan Chase & Co. for $3.6 billion to raise cash for stock buybacks and reduce its exposure to consumer defaults."

Anyone care to bet if that credit-card paper will immediately wind up in the TAF?

You don't think Dimon would have created an arbitrage opportunity for himself via his seat on the board of the NY Fed, while (further) contaminating The Fed's balance sheet with crap credit card paper, do you? You don't think Dimon has been negotiating this with Target while debating the extension of those credit facilities as a board member of the NY Fed, do you?

Oh, and Target then uses this money to buy back stock, thereby propping their stock price, and offload the risk of consumer defaults to the taxpayer!

Both Bernanke and Congress are now permitting The Fed to essentially create a stock buyback and credit support fund for a retailer?

You're kidding me, right? We're not just "backstopping" banks but are now creating the ability to factor consumer credit card debt?

Excuse me while I go barf in Bernanke's shoes.

There are plenty of folks who write options (you know, the guys that get rammed when they're wrong?) that believe this rally is a "sucker bet":

"Investors are currently paying the highest prices relative to earnings since March 2004 and 15 percent more than when the S&P 500 reached its all-time high in October."

Yeah, and PUT Implied Volatility is about twice that for CALLs on the indices.

While the options market-makers are occasionally wrong, the facts from OCC and the CBOE say that if you think you're smarter than they are as a retail investor, 80% of the time you're the one who gets the reaming, not them.

If you're buying this rally, how do 'ya like those odds?

UBS reported a stunning $11 billion loss and decided to play "hide the sausage" with BlackRock, with the latter hoping to find a bigger set of suckers for UBS' "potentially bad" subprime paper factory. Someone is going to get creamed in this one, and my guess is that it won't be Blackrock or UBS. My money is on Blackrock setting up a "bankruptcy remote" SIV to dump all the crap in and then peddling it off to retail investors, soaking them when it goes "boom" while earning their management fees. Nice eh? Don't go anywhere near this one kids, no matter how much glossy paper is used in the offering prospectus.

Fannie was expected to lose $1.48/share, but actually lost $2.57, cut the divvy and announced intentions to sell both common and preferred to raise capital. They also said they believe 2009 will be worse than 2008 in terms of credit losses, which rattled people materially. While many people think they're "well positioned" to deal with the credit issues, I'm nowhere near as sanguine, as I've noted before. My biggest problem with both of these firms is that I believe both have absolutely no idea how much credit risk is on their book - both explicit and implicit.

The whole issue here is all the 'liar loans" that were taken on by these folks without being compensated for same, and in many cases, I suspect, without their full knowledge and consent. The "Fast and Sleazy", er, "Easy" loans are just one of many examples. Since both of these firms are levered to an insane degree very small changes in credit loss can result in stunning - and perhaps fatal - financial losses.

Fannie and Freddie have also been cheating in their accounting, in some cases refusing to declare a loan "non performing" on their book until it is two years late!

That's outrageous, but heh, when you're operating with a government regulator that acts like a LAP DOG and licks your privates instead of doing its job......

Accounting? What's that? 2 + 2 = 6 (or is it 60?) so long as we have the government to prevent us from going to jail for pulling that sort of nonsense, right?

Of course now that Fannie has demonstrated that it is incapable of estimating its credit book losses and has thrown the concept of prudent declaration of non-performing paper out the window, OFHEO loosens the leash around its neck. That's right, our "regulator" that is supposed to provide security and safety for these agencies (and the taxpayer) instead allows them to lever up even more into a declining market, booming credit losses, rigging of the "non-performing" loan numbers and an admission that they can't manage their own credit risk demonstrated by a loss that's double estimates.

At least the Mainstream Media has figured out how to use a calculator:

"'We’ve taken tremendous risks by loosening these companies’ purse strings,' said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. 'They could cause an economywide meltdown if they (Fannie and Freddie) got into real trouble and leave the public on the hook for billions.'

.....

Though the companies' main regulator, James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, has voiced strong confidence in the companies, a high-ranking member of his staff said some officials had begun considering the worst.

'It's not irrational to be thinking about a bailout,' said that person, who requested anonymity, fearing dismissal."

No kidding? So now if you talk about what you actually believe in government you get fired?

Gee, that's nice. Lie lie lie lie and then lie some more.

Senator Martinez, you need to start hollering a lot louder. You're one of my two Senators, and you've been getting my Tickers now on a near-daily basis for the last few months.

Are you going to put a stop to "The Corruption Of Wall Street and Washington DC, Part MMVII" or be a part of it? Those are, in fact, your only two choices, and the impact on the taxpayer's balance sheet if and when they do blow up will be in the hundreds of billions of dollars.

Let's do the math as a "back of the envelope" exercise; all rounded off here, all combined:

• Fannie and Freddie's credit book exposure (guaranteed paper) is about $3.5 trillion
• Their outstanding debt is $1.5 trillion
• Their held mortgages (as investments) are another $1.5 trillion
• Their core capital (that which they have to operate on and cover losses on any of the above) is $80 billion

Now let's apply some estimates. If 2% of the credit book exposure (mortgages + guaranteed paper) explodes and has a recovery of 50%, it will generate $50 billion in direct losses. This is approximately what Countrywide Financial is reporting on its conforming paper at present.

But remember, Fannie and Freddie have an unknown exposure to liar loans - subprime and ALT-A paper that was not fully documented, had appraisal, income or asset fraud involved in the "underwriting."

If that "performs" similar to some of the WaMu securitizations that we've been able to to dig into via a Bloomberg terminal, then these loss estimates are insanely optimistic. Some of these securitizations are showing 20%+ of the loans in the pool REO'd, foreclosed and disposed or in bankruptcy within six months of origination! It is entirely reasonable to expect that losses on those pools will exceed 15% of the principal value, assuming that 30% ultimately foreclose and the recovery averages 50%. Any HELOCs or second lines on these loans are zeros - guaranteed.

The question then becomes one of their mix - that is, how much of that crap is on their balance sheets and has been guaranteed?

The contamination potential here is serious, it is real, and it is under appreciated. If, for example, 10% of their credit book is contaminated in this fashion, it will roughly double the losses ultimately taken, completely wiping out these firms' core capital.

In other words, it will bankrupt them both.

$6 billion in new capital being raised? Ha! Fannie and Freddie need to double their core capital in order to be reasonably certain they can weather this storm, and they also need to cease accepting anything other than fully-documented paper with no more than an 80% LTV and 36% DTI - no piggybacks, no PMI, no games, no nothing.

Let me repeat: It remains my contention and belief that Fannie, and likely Freddie as well, are both "short to zero" candidates as I do not expect either of these firms to take these actions, nor do I expect our lawmakers to force them to both recognize losses as they occur and act prudently in what they buy.

When your cash flow runs out you're dead (games or no games), and when your credit book is over $2 trillion.....

Therefore, my position on their stock is that they're a potential short to zero (but fraught with risk due to the tremendous "sticksave" games that are likely to be played) and if you own any of their bonds you better get rid of them now while they're both liquid and likely to fetch par, because once the truth of their "non-performing-but-we-call-it-performing" paper turns on them and devours their free cash flow you'll take an enormous haircut, and you sure as hell didn't buy this paper with the intention of taking risk!

Oh, and for those who say that gambling and especially foreign gamblers will "save the US", you better not talk to Tropicana:

"Struggling casino operator Tropicana Entertainment LLC is expected to file for bankruptcy protection as early as today, said two people familiar with the matter. It would be the largest corporate bankruptcy of the year, and the latest blow to Las Vegas, which has seen gambling revenues decline and major building projects canceled or delayed in the last few months."

I thought the house always won?

The worst news out of the market Monday was not the fact that The Dow fell nearly 90 points - it is that the bond market is starting to price in the massive issuance of Treasuries to cover the burgeoning debt that the government is taking on for all the handouts - a cacophony that is almost certain to continue. As it does, if Treasury's projections are right, we will be well north of $500 billion in the hole this year - more than three times last year's deficit.

A stronger economy? Ha! As the curve flattens the "vig" or spread available to banks goes away, and if the entire curve shifts upward (and it might from all the supply) then we're in big trouble economically because this will immediately and directly translate into higher long money (e.g. mortgage) borrowing costs.

And while you're at it, don't talk about valuations. At more than 25x earnings the SPX is now at all-time highs in terms of valuation. Gee, how's your breathing doing up here when the supplemental oxygen gets shut off?

We've also got big trouble on the election front - we certainly will have a Democrat Congress, but it is looking increasingly like a Democrat in the White House is a lock, as all of the "hide the sausage" games are not only failing (and must, mathematically) but worse, have sucked retail investors back into the pool only to be devoured by the Sharks of Wall Street, and the blame for that, along with the mess in the first place, is, will and should fall on The Republican Party.

In short, The Republican Party is and has squandered its opportunity to force all the fraudsters out into the open and lock more than a few of them up, with Hanky Paulson being one of the worst offenders in the "look the other way on purpose" department.

A three-house Democrat sweep would mean a serious and immediate increase in taxes, especially capital gains and dividend tax. The bond and stock markets will both tank immediately if that becomes apparent, with the stock market being far worse because a revocation of the "better" treatment for capital gains and dividends will be front-run by people selling ahead of the end of year to take advantage of the breaks while they still exist. This also changes the "fair value" computations for the stock indices, and if people are consistent (who knows if they will be) would result in a roughly 15% immediate "discount" being applied to all of the American indices across the board.

And you though the bear market was over......