Standing on the steps of the U.S. Treasury building across the street from the White House, Treasury Secretary Henry Paulson asked Congress for the power to prop up Fannie Mae (FNM) and Freddie Mac (FRE), the two failing mortgage giants involved with nearly half of the $12 trillion U.S. mortgage market.

“The president has asked me to work with Congress to act on this plan immediately,” Paulson said Sunday. “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.”

But half a world away – in his new home in Singapore – peripatetic investing guru Jim Rogers blasted the federal government for its new activist approach, which conflict with the very idea of a free market. A rescue of Fannie Mae and Freddie Mac – the second federally sponsored corporate bailout in four months after the Treasury Department rode to the rescue of The Bear Stearns Cos. Inc. (BSR) in March – is shifting the cost of errant financial strategies away from shareholders and onto U.S. taxpayers.

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“I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers, the best-selling author and famed investor told Bloomberg News. “These companies were going to go bankrupt if [the feds] hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they’ve made. Whats going to happen when you put some Band-Aids on it for another year or two or three? What’s going to happen three years from now when the situation’s much, much, much worse?”

Clearly, a sweeping rescue of the government sponsored entities, such as the one planned, will bring with it a broad new range of liabilities for the American taxpayer, who will be financing institutions that are widely regarded as insolvent.

The debt securities issued by Fannie and Freddie are widely owned by pension funds, mutual funds, institutional investors, and even foreign governments. So a collapse of the two government-sponsored enterprises would send shockwaves through an economy that is already struggling to overcome the worst housing recession in a quarter-century, tight global credit markets and soaring inflation thanks to rising food and energy prices.

Paulson asked Congress for the authority to buy equity in – and lend to – the companies, while also substantially increasing their lines of credit.

The Treasury Department did not specify the amount of credit that would be made available to Fannie Mae and Freddie Mac, but those briefed on the plan told the International Herald Tribune that administration officials are lobbying Congress to extend the line of credit to $300 billion.

Each company currently has a $2.25 billion credit line that was established close to 40 years ago. At the time, Fannie Mae had only $15 billion in outstanding debt according to IHT. Now, Fannie has a total debt of about $800 billion and Freddie has roughly $740 billion.

Many on Capitol Hill, particularly Senator Charles Schumer (D-NY), greeted the plan with enthusiasm.

“The Treasury’s plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers,” Schumer said.

“While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies, should it be needed.”

But Rogers – who contends that the U.S. economy is in the midst of its worst recession since World War II – referred to Paulson’s plan as an “unmitigated disaster.”

“They’re ruining what has been one of the greatest economies in the world,” Rogers said, making a collective reference to both Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke.

Said Rogers: Paulson and Bernanke “are bailing out their friends on Wall Street, but there are 300 million Americans that are going to have to pay for this.”

By Jason Simpkins
Money Morning