In the late ’80s and early ’90s 1,000 U.S. banks went under in the savings-and-loans crisis. The debacle cost taxpayers $125 billion.

On Sunday, the Fed said it would lend to the ailing government-charted banks Fannie Mae (FNM) and Freddie Mac (FRE) “should such lending prove necessary.” Treasury Secretary Henry Paulson said his department will ask Congress for quick approval of a plan.

The government wants to reassure the market that it won’t let Fannie and Freddie go down — at the expense of the taxpayer, of course.

Mr. Market appears to be soothed. In the early going Dow futures rose 115, or 1.04 percent, to 11,211. Standard & Poor’s 500 index futures rose 16.70, or 1.35 percent, to 1,256.40, and Nasdaq 100 index futures advanced 24.75, or 1.36 percent, to 1,845.25.

But echoes of the savings-and-loans crisis remain.

The New York Times reports that today 150 of America’s 7,500 banks could go belly up in the next 12 to 18 months as house prices continue to fall and loan defaults continue to mount.

“Everybody is drawing up lists, trying to figure out who the next bank is, No. 1, and No. 2, how many of them are there,” said Richard X. Bove, the banking analyst with Ladenburg Thalmann, who released a list of troubled banks over the weekend. “And No. 3, from the standpoint of Washington, how badly is it going to affect the economy?”

Many investors are on edge after federal regulators seized the California lender, IndyMac Bank, one of the nation’s largest savings and loans, last week. With $32 billion in assets, IndyMac, a spinoff of the Countrywide Financial Corporation, was the biggest American lender to fail in more than two decades.

Only 150 banks? That may not sound so bad. But we have a hunch it may be just the tip of the iceberg. Afterall, IndyMac, which only last week became on of the biggest bank failures in US history, wasn’t on the government’s watch list of troubled banks this spring. If IndyMac (IMB) went under the radar, others could too.

Bill Bonner weighs in on Fannie and Freddie – the Julius Caesars of Wall Street…

He that did ride so high doth lie so low, as Marc Antony said of Caesar, after the latter was stabbed to death. Freddie and Fannie were the darlings of Wall Street…the leaders of the house price bubble…with nearly half the nation’s $12 trillion worth of mortgages. A couple of years ago, they could do no wrong.

Now, they can do no right.

The government-chartered mortgage lenders are “in turmoil,” says the Financial Times.

They should be in Chapter 11, says former St. Louis Fed chief, William Poole. Fannie has $5.2 billion more in liabilities than in assets, he says. Both lenders are insolvent, he maintains. Like a racehorse in the Kentucky Derby, they should be given the coup de grace as quickly as possible, he believes.

That is not likely to happen. The feds are counting on Fannie and Freddie to end the nation’s housing misery, not make it worse. They’re not going to let the twins go under. Instead, they’re going to give them more rope…and show them the steps to the scaffold.

Yes, dear reader…this is what it has come to. It’s not just a war between inflation and deflation. It’s also a fight between the forces of delusion…and the forces of reality. The delusion is that you can make the problems caused by too much credit go away – by giving more credit! A related delusion: that you can make people richer by printing up more money for them. Yet another: that you can spend your way out of a slump caused by too much spending. And here’s another: the federal bureaucrats can manage the economy better than it can manage itself. And how’s this: that hedge fund hustlers such as Mr. Devaney can make you rich by making huge gambles with your money. Or this: that if you just allow capitalism to work, we’ll all get rich.

The reality is that you can’t get something for nothing. Asians are gaining wealth because they work for peanuts and save their money. Americans are losing wealth because they spend too much and don’t save at all. And when a bubble is ready to pop, it will pop…no matter what you do. Sometimes you can delay it…or push the damage onto to someone who doesn’t deserve it – such as the taxpayer. But all interventions just make the situation worse…causing more, and bigger problems elsewhere.

Source: The Biggest Transfer of Wealth in History