Housing bubble-caused credit problems too big for feds to fix?

That’s the take from Bill Fleckenstein First, he takes on the hypocrisy of Wall Street:

The whole notion that Fannie (Mae) and Freddie (Mac) should bail out the mortgage sector — because of foolish behavior on the part of (a) the financial institutions that lent money to folks who could never pay it back if home prices didn't rise 6% annually and (b) the folks who bought a house they couldn't afford, because it just had to go up in value — is anathema to capitalism.

Now, here’s the latest wrinkle that could further dry up credit:

Turning to losses abroad — caused by investments here — when the German bank IKB imploded two weeks ago, it was revealed that they had about $17 billion in subprime exposure and had lost $3 billion. IKB held these structured-credit assets in a conduit, which is a version of a special-purpose entity that banks use to own structured credit. More importantly, conduits are funded in the commercial-paper market. So, in addition to credit risk, it sounds to me like they are borrowing short and lending long, which is always dangerous when your assets are illiquid.

Soon, most conduits will be updating their net asset values and rolling their commercial paper. In addition to those two potential data points, it's important to understand that in all likelihood, IKB won't be the last entity in trouble. As my "lord of the dark matter" friend notes, most of these European banks all pursued similar strategies. And I would say that if European banks were involved, U.S. banks probably were, too. …

The moral of the story? As we get further down the road, I think we'll discover that some money-market funds owned commercial paper issued by a conduit whose assets may not be up to snuff. So folks with a lot of assets in money-market funds might want to double-check that they know what's in them.

Bottom line: The upcoming weeks should be pregnant with indications of more trouble throughout the whole financial-engineering world. More than a few outfits may discover that the triple-A pieces of paper they thought were worth 100 cents on the dollar are worth only, say, something in the 70s. That will make for a lot of heartache.

In other words, we’ve probably just seen the start of problems. By the end of this month, the one piece of good news is that we should know just how bad the problem is.