Eric Fry in The Rude Awakening says Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) performed terrifying high-wire act in the way they did business. More terrifying was the public’s indifference to the companies’ profligate piling up of debt…

Goodbye Fannie, Farewell Freddie… We will miss you both.

We will miss the epic housing bubble you nurtured; the wealth delusion you fostered; and the arrogance you epitomized. Above all, we will miss the hope you inspired in the breasts of so many Americans – the hope that a “free lunch” did, in fact, exist and that impossible was, in fact, possible.

For the last several years, these two mortgage-lending giants performed a kind of financial high-wire act – piling up multi-trillion-dollar liabilities with the greatest of ease. The high-wire act itself, was terrifying, but not nearly as terrifying as the public’s indifference to it. Almost no one seemed to worry that the acrobatic lenders might slip from their perilously leveraged balance sheets.

“What happens if they fall,” your anxious editor would sometimes ask the onlookers. “They won’t” came the ambivalent response. “Besides, the federal government is holding the net.”

“But those two tightrope walkers are carrying much more weight than the high wire can possibly support!” we insisted.

“Well they haven’t fallen yet,” came the practiced reply, “And besides. The wire is much stronger that it looks. It is a high-strength composite of single-family mortgages, reinforced by state-of-the-art derivatives.”

“Okay,” we would shrug. “But just the same, I think I’ll watch the rest of the performance from a safe distance…just in case.”

The high-wire finally gave way yesterday, and the share prices of Fannie Mae and Freddie Mae plummeted into a grotesque heap. Fannie Mae tumbled $6.31 to a mere 77 cents per share, while Freddie dropped $4.22 to 88 cents a share. America’s largest mortgage lenders are now penny stocks.

The demise of Fannie and Freddie has destroyed hundreds of billions of dollars of investor wealth. And this saga’s destructive legacy may continue for several more years. Sadly, it’s impossible to undo the damage. But it’s not too late to learn from it.

The range of possible lessons is vast, but one very essential lesson springs to mind immediately: “Ignorance equals risk.” Or, as Warren Buffet famously remarked, “Risk comes from not knowing what you’re doing.”

Source: The “Argentinization” of America