It has all the hallmarks of a political thriller: Washington lobbyists, political pressure and money… lots of money

Were, as The New York Times reports today, Fannie Mae (FNM) and Freddie Mac (FRE), which guarantee about $6 trillion dollars in US home loans, unduly “insulated” by Capitol Hill?

Did Congress make it implicit to the companies that any losses would be guarenteed with taxpayers’ hard-won cash?

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

Lots of perks, indeed. One of them being a bailout if anything should go wrong. Reuters reports that “a possible intervention by the Bush administration to help the government-sponsored mortgage enterprises could happen as early as Monday morning. That is around the time Freddie Mac is due to sell $3 billion of short-term debt, in a barometer of market appetite for its securities.”

Last week, Dan Denning in The Daily Reckoning Australia saw the writing on the wall. He said “the whole credit crisis would look like mere child’s play should a genuine crisis unfold in the quality of the debt owned and guaranteed by Fannie Mae and Freddie Mac…”

Fannie and Freddie are surely doomed now. First, U.S. Fed Chairman Ben Bernanke told Congress both are well capitalized. Haven’t we heard this one before?

Isn’t this what Bear Stearns said before it collapsed? Didn’t Citigroup (C) say it was well capitalised, and then ask for more money? Why would anyone believe these investment bankers anymore when they tell the public they are well capitalised? It’s almost like the moment a CEO of a company says it’s “well capitalised” you should be prepared for a nasty shock.

We don’t mean to alarmist about the GSEs. But as we explained to a colleague over the weekend, our job here at the Old Hat Factory is not to tell you what you may already know, or can read in the papers. Our job is to tell you about the low-probability but high magnitude investment events that could affect your money. And just to be clear, the collapse of Bear Stearns and the whole credit crisis would look like mere child’s play should a genuine crisis unfold in the quality of the debt owned and guaranteed by Fannie Mae and Freddie Mac.

It would be the equivalent of that absurd scenario in that global warming movie a few years ago, where the Gulf Stream stops flowing and the entire Northern hemisphere enters a new ice age…in a matter of days. The insolvency of the GSEs is as close as you’re ever going to want to get to Financial Doomsday and live to tell about it.

And Dan, like Bill Bonner, says a government bailout of Fannie and Freddie could ruin the U.S. Treasury market…

The U.S. government can move to stabilise that market by guaranteeing the debt. But we believe that if it does so, it will lead directly to the popping of the other big remaining bubble in the credit markets: the U.S. Treasury market (bonds and notes).

In the sixty three years since the end of World War Two, there hasn’t been a much safer investment on the planet than U.S. Treasury bonds, at least according to conventional wisdom. But the credit rating agencies, for what they’re worth, would have to take a serious look at downgrading the credit quality of sovereign American debt if the U.S. government changed its implied backing of GSE debt to an explicit backing.

The consequences of a (much deserved) lower credit rating for the U.S. government are too long to go into here. Suffice it to say the bond market won’t wait. The trouble is, what do you do with your money if government bonds aren’t safe? Cash is one answer. Owning some form of your wealth in precious metals is another. Gold should regain ground against oil in the second half if the GSE story continues to unfold in nightmare fashion.

In any event, it hasn’t quite come to that. Congress, Obama, and McCain must all be hoping that the GSE problem just goes away, at least until after the election. But the market will not wait. It could be a brutal summer.