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.

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?

Wall Street got thumped yesterday on renewed worries about the financial sector. The major indexes fell more than 2 percent. The Dow lost more than 230 points.

The sector is by no means out of the woods. Investors expect more major credit-related writedowns. They expect earnings to be dismal.

Jeff Clark in The Growth Stock Wire says this all adds up to a great contrarian opportunity. Financials are brutally oversold. Jeff says look out for a two-week rally. Buy banks now and you could be looking at 30% gains…

Derivative traders are treating Fannie May and Freddie Mac as if they didn’t have the quality credit ratings the big ratings agencies say they do. (Didn’t the same credit-rating agencies give worthless subprime debt the same quality ratings?)

Chuck Butler says the mortgage behemoths could be the next ‘risk events’ in the markets.

Bill Bonner takes a more historical approach. He says Fannie and Freddie are more like the East India Company was to the British Empire in the 19th century: huge, stupid and probably fatal.

Brian Hunt says the collapse of the US banking sector will one day lead so some fantastic bargains. He also says investors should avoid it like the plague for now…

The world’s largest credit-rating companies say mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) have bullet-proof Aaa credit ratings. But Bloomberg says derivatives traders are treating the discount mortgage brokers as if they are rated five levels lower.

And, ominously, the price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

What about the government’s implied guarantee of the debt held by the companies? It seems investor confidence in short supply.

Hahahahahahahaha!

Well you have to laugh. Without a trace of irony the Gray Lady reports that Ben Bernanke & Co. are to “issue new lending rules next week to restrict exotic mortgages and high-cost loans for people with weak credit.”

Now that’s timing for you. Billions of dollars wiped off the face of the planet after an orgy of irresponsible lending sanctioned by the Fed and now they want to tighten up the rules! Hahahahahaha! Priceless!

UBS AG (UBS) was at the center of a tornado of crushing news yesterday (Tuesday), as it announced major changes to its board amidst pressure from the U.S. Department of Justice to reveal the names of top clients taking advantage of the bank’s tax breaks.

Four of the No. 1 Swiss bank’s board members — Stephan Haeringer, Rolf Meyer, Peter Spuhler and Lawrence Weinbach — will step down at the bank’s Oct. 2 shareholder meeting.

In the frenzy of troubling news, UBS shares sank to a 10-year low, trading at $19.57 mid-afternoon Tuesday, before recovering slightly to close at $20.35.

Editor’s Note: Like a farmer fertilizing his crops, the financial sector is spreading its muck far and wide, says Karim Rahemtulla in The Smart Profits Report. But is it the beginning of the end of the sector’s collapse? Karim reckons he knows how to predict the rebound…

Editor’s Note: Fear of inflation is growing around the world, and it’s shaking investor confidence in global stock markets. With two-thirds of the world’s population now experiencing inflation over 10%, smart investors are getting into gold, says Sally Limantour in Taipan Daily.

The International Herald Tribune reports that “benchmark indexes in Europe and Asia are also off sharply as investors digest the possibility that central banks will squelch growth with higher interest rates in the hope of containing inflation.”