Economics and Markets OH OH. The Freddie Mac situation that I thought was all wrapped up is now looking like a MAJOR scandal and problem for the economy. What they did in addition to cooking the books by shifting profits to another quarter is a series of fictitious trades called in the business "round tripping". The purpose of round tripping is to create profits that don't exist. Here's how this scam, and it is a total scam, works:

You and I agree that I will buy your gold piece (worth $10) for $11 and sell it back to you for $11.50. The deal looks like it happens but it doesn't . It just takes place on the "books". But Freddie Mac then executed the same sham trade with two other people. The net effect is to inflate the value of this gold piece to $12 and show it as a $2 profit. Freddie Mac executed these trades with the big boys: Merrill, Chase, and a few others. This means the other "big boys" knew exactly what they were doing too. The SEC is now ready to pounce and people are really scared. The rise in rates is shaking everyone since this should not be happening.

This is large and yesterday's stock market plunge has everything to with this now major criminal operation inside our largest mortgage players, in addition to corporate layoffs. The Washington Post is doing a good job on this and if you are an investor, you better read it.

Comments by deputy enforcement director Linda Chatman Thomsen made clear that financial institutions are a particular target for the SEC.

"We continue to hold counter-parties responsible for helping companies manipulate their reported results," she said. "Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company."

That comment must have put the fear of God -- or at least the SEC -- into firms that arranged deals that allowed Freddie Mac to manipulate its reported profits by as much as $4.5 billion.

The usual regulator reaction is, "Bad boys, go to your rooms and no TV for a week." Not this time. The SEC is after blood.

The WSJ doesn't seem to share the Freddie Mac fear, but I think they are missing something the rest of the investors are not missing, a ton of "over priced" mortgage paper that has been dumped on the market. People will have to discount this incredible increase in risk. My opinion has been published on their letters page. Add at 11:10AM PDT The treasury auction went surprisingly well today with huge demand from overseas. There are two market rules at work: 1. The news is in the market; meaining that investors already knew the bad Freddie Mac stuff and were ready to buy back in and, 2. the price in the market is ALWAYS the right price. The sell off in stocks yesterday "on news" that everybody on the inside already knew was usual. Technical analysis is not over rated. Rates fell today and that is good news. As I write this the 10 year is up a full point, which means rates have dropped about .30. Hedgers of mortgage securities are all in so the next rates will honestly reflect how people feel about our economy. end