5 Dumbest Things on Wall Street: July 18

2. More Foolishness With Freddie and Fannie

Fannie Mae and Freddie Mac watchers must be suffering from a serious case of whiplash after Treasury Secretary Henry Paulson's sudden reversal of his anti-bailout rhetoric at the end of last week.

Going into the weekend, Paulson led everyone to believe there'd be no government bailout of the two giant mortgage securitization companies. Then on Sunday, he basically did the opposite.

Paulson shouldn't have been so quick to try to snub Fannie and Freddie, considering that his boss inflicted some of the pain on the two so-called government-sponsored enterprises.

As part of George W. Bush's economic stimulus package (remember the pathetically small stimulus checks?) the government ordered Fannie and Freddie to effectively double the size of loans they could purchase from banks. So the two companies started taking on loans over $700,000 compared with the previous limit of $417,000.

The move was designed to help prop up the increasingly shaky housing market. What a surprise that the problems at Fannie and Freddie got worse.

How could they not, when the changes to the loan limits effectively stuffed them full of exposure to one of the most beleaguered sectors of the housing market?

It's hard to believe anyone would think the government could walk away from the mess. Yet Paulson's comments last Friday caused an intra-day swing of almost 400 points in the Dow Jones Industrial Average.

After dropping the bombshell on Friday, the net damage to the Dow was 128 points, followed by another 46 on Monday following Paulson's Sunday reversal, when he said: "The plan includes a temporary increase in the line of credit the GSEs have with Treasury."

Or more simply, a "non-bailout" helping-hand of a problem partly caused by the government.

Maybe Paulson should have followed the advice of Denis Thatcher, the late and well-respected husband of former British Prime Minister Margaret Thatcher.

"Better keep your mouth shut and be thought a fool than open it and remove all doubt," he once said.

Dumb-o-meter score: 91. It's time to tape someone's mouth closed.