More on the Bailout

Well, stocks took off like a rocket yesterday because the Feds have come to the rescue and will save us all from Fannie and Freddie. But before you join the latest round of irrational exuberance, you may want to consider a few things.

First, Andrew Napolitano, Fox's con law talking head, thinks the whole bailout is an unconstitutional taking of the shareholders' property and will be tossed in the courts. Given that Judge Wapner's..er..Napolitano's whole schtick is that the federal government can't flush without committing a taking, I'm inclined to take his analysis with a grain of salt. I suspect he's missing a crucial point, such as the terms of the GSEs' charters, which any shareholder's rights would be subject to. Nevertheless, some clever lawyers might latch onto this and throw sand in the gears, and the proposal doesn't need any more grinding mechanisms.

For example, major credit default swap players have concluded the bailout is a credit event triggering the swaps. So far there has been no unwinding because the government guaranteeing payments, so there are no losses. Yet. The guarantees are funded only through 2009, and the protection buyers may see this as the last stop to get off of this train. If that happens, watch out.

Don't forget as well that the bailout won't help vast areas of the market one bit. GMAC is probably spinning in and may file Chapter 11 tomorrow. Its stakeholders are in trouble and can't afford the drain.

We shall live in interesting times.