THE FANNIE MAE / FREDDIE MAC DOOMSDAY SCENARIO. Related item — including the Jim Johnson / Obama connection — from Mickey Kaus.

UPDATE: Reader Nick Foresta emails:

The failure of Fannie and Freddie would be a new paradigm. These entities would create a trickle down effect and it’s not only mortgage bonds and CDO’s that would be effected. European banks are coming to terms with their own structured credit problems in the form of SIV’s (Structured Investment Vehicles). These bonds are basically derivatives of other credit instruments but the banks that sell them retain a portion of the downside risk. If the agencies defaulted, several banks would be almost immediately insolvent. Credit would tighten further, the banks left standing would have a hard time lending money to anyone as their balance sheets deteriorated. Companies and individuals would cause a run on banks and the whole system would be in danger of collapse. Scary but true. The markets are not capable of bailing out these two behemoths. The real problem is this. These guys own a good deal of the most toxic mortgage bonds. Those bonds are booked at face value now but we all know they’re close to worthless. The agencies are hoping the market rebounds and they can get at least part of their money back but they’ve been waiting for that rebound for nearly a year and the situation hasn’t improved. They will have never be able to sell those bonds into a market that’s collapsing. What will they do? They will offload some of that bad debt to a fund that will include wall street and fed money. It’s the only real option.

So I guess I should be investing in shotgun shells and canned goods. . . . ?