I wanted to write a brief article concerning the U.S. government's bailout of the mortgage agencies, Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are very important to the mortgage market here in the United States. Between the two of them, these agencies either own or guarantee mortgages valued at over $5 TRILLION!

Why did the government step in? Because they had to. Over the past year, Fannie and Freddie have racked up a combined $14 billion in losses and write-downs. Both agencies, particularly Freddie Mac, were technically insolvent.

Foreign banks of all types, which own lots of Fannie Mae and Freddie Mac bonds, knew this and were getting extremely worried. They basically told the US Treasury department that they would no longer buy these bonds. This would have completely wiped out the US mortgage market. So the Treasury acted.

What are the consequences? They are plenty of them. First of all, the stocks of both of these companies is now basically worthless.

You may think - hey, I don't own these stocks, I'm okay. You may not be. Many mutual funds owned massive amounts of these two stocks whose value is now close to zero.

Bill Miller is a reknown manager of Legg Mason funds and was considered a "guru" until he began to falter in 2006. His funds alone owned 12% of Freddie's stock!

Other mutual fund companies which own large positions in either Fannie or Freddie or both include: Fidelity, Dodge & Cox, Alliance Bernstein, Lord Abbott, Citibank, and Capital Research among many others. So please check on any mutual funds you may own.

It wasn't just mutual funds either that owned Fannie and Freddie stock. So did many major insurance companies and banks too. These additional losses will put even more pressure on a troubled US banking industry.

The banking industry has already written-off about $500 billion. They may have to write-off in total $1 trillion or more before all of this bad debt is out of the US financial system.

Then there are also big picture macro consequences. The US taxpayer is now on the hook for possibly hundreds of billions of dollars of losses in these mortgage bonds. I warned about this in my newsletter about a month ago.

To use economic terms, the US government has taken all of these bad debts onto their balance sheet. The US government already has massive debt, backed only by their taxing power. This just added to a bad situation.

A medium-to-longer term consequence of this governemnt action may be rising interest rates along with a falling US dollar as the US government fiscally will look to investors (especially foreign investors) as a risky bet. These foreign investors won't sell the bonds they currently hold, but they may slow down their buying of US government bonds in the future.