The biggest bailout in history.

It is the biggest transfer of claims on property since Stalin took on the Kulaks. Freddie and Fannie have finally been nationalized. As a result, the US government is now holding about half of all the mortgages in America. This is shaping up to be the biggest financial sector bailout in human history. No surprises there, the US has just gone through the biggest housing bubble of all taime.

There are many aspects of this mess that are troubling. However, there is one number that I can't get over. On the one hand, Freddie and Fannie are holding $5,300 billion, yet the combined losses that caused the US Treasury to take over were quite small. I read somewhere that the losses were as low as $15 billion. Furthermore, this minimal losses didn't originate from subprime loans. These institutions specialized in high quality loans.

Freddie and Fannie failed because they were massively overleveraged. In this regard, they are no different from our prudent banks sitting on the UK high street. All are horribly undercapitalized with only a minimal cushion to absorb losses.

The harsh reality is that the US financial system is about two years ahead of us. Banks here made exactly the same mistakes and their American cousins, our housing market was far more inflated, and our banks have just the same propensity to fail.

The failure yesterday of Freddie and Fannie is a stark warning of what is about to hit us here in the UK.