I have of late,—but wherefore I know not,—lost all my mirth, forgone all custom of exercises; and indeed, it goes so heavily with my disposition that this goodly frame, the earth, seems to me a sterile promontory
          -- Hamlet, Act II, scene ii (287-290)

A few people I talk to, myself included (and I talk to myself on a regular basis), have been feeling off lately. Blame markets. Blame a persistent feeling that the planet is running down, like an old watch. Blame too much iPhone news. Go with whatever explanation works for you. I'm fine with it.

Anyway, I felt much better tonight after watching a stranger dance badly with other strangers all around the world. See if it cures what ails you. And be sure to watch it in high quality.

Huge props, Matt. Very nicely done.

According to the NY Times late tonight, discussions among senior U.S. government officials have heated up with respect to the U.S. taking over mortgage giants Freddie Mac and Fannie Mae. The structure being contemplated is a conservatorship, which is permitted under a 1992 law, and is one that would essentially wipe out the two firms' respective equity, while allowing their loans to be managed.

Strikes me this is officially crunch time. To put it in Seuss-ian terms, if Little Cat Z is anywhere in the neighborhood he needs to know Things 1,2, and 3 haven't finished the job, and so he should take the Voom out from under his hat. 'Cause we may have gotten the pink cat ring out of the bath, but the resulting pink snow is now everywhere and getting deeper by the minute.

Somewhat more seriously, four things:

1. As the Times points out tonight, most people have no idea the capital at risk here. A 10% decline, say, in Freddie/Fannie assets would be roughly the same -- $150-billion -- as another Iraq war.
2. By taking on the companies' liabilities the U.S. government's total obligations would soar from $9-trillion to $14-trillion, almost certainly forcing U.S. rates much higher.
3. It has always been a canard to say that the companies have the regulator-required capital. Because they do, but the levels are so low as to be meaningless when looked at from a leverage perspective.
4. Most of the loans on Fannie/Freddie's books were done before 2006 and are solid. And even the super-squirrely ones in 2006 and later are worth something, especially with insurance, so try hard not to be terrified by the total numbers involved here. This is going to be a wild ride, assuming a conservatorship happens, but total losses could end up being far less than the doomsters think.

My trader friend Jeff is still hanging in at the current World Series of Poker no-limit hold'em event in Las Vegas. Matter of fact, he is almost in the money -- only a few more people need to to get knocked out before everyone remaining is guaranteed at least $21,0000.

He comments here on the behavior a nearly broken bubble induces:

If I were playing optimally, I'd go crazy here trying to rob people. Unfortunately, I suffer from a common amateur drawback--making the money has too much non-monetary utility to really risk it.

A great observation: Making it into the money has far more utility than does the money itself.

More here.

Henry Paulson is out with an over-parsable statement on Freddie/Fannie worries this morning:

Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.

We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and with the companies. OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission.

The key words, of course, come early: "today" and "current form".

According to a Reuters report floating around, China is the largest foreign holder of Freddie Mac and Fannie Mae bonds. That'll teach China to mess with the U.S. You may sell us toxic toys, but we'll sell you toxic paper.

Somewhat more seriously, concerns about Fannie and Freddie's bonds are overdone. Let's keep that in mind. The equity is another story, but the bonds are not the problem, not yet anyway.