Score another short-term victory for the global financial system. Unfortunately, taxpayers will eventually fund the latest salvo by the United States federal government.

The United States officially entered the mortgage lending business on Monday following the nationalization of Fannie Mae (NYSE-FNM) and Freddie Mac (NYSE-FRE), which combined are responsible for more than half of all mortgage lending or about $6 trillion dollars.

Fannie and Freddie were too big to fail. Without their participation in mortgage lending combined with their massive outstanding issuance of credit (bonds), the possibility of a default or collapse would have undoubtedly had global systemic consequences – perhaps making the Bear Stearns’ bail-out look like a peanut in comparison. Yes, Fannie and Freddie are that significant.

At the root of the credit crisis – now 13 months old – are the problems still widespread in U.S. housing.

As the world’s largest real estate market, Wall Street lunged onto the bull market in U.S. housing values from 2003 until 2007 by introducing all sorts of synthetic securities tied to residential housing across the country. These instruments, including asset-backed securities and collateralized debt obligations, were subsequently sold to global investors; now that the party is over many U.S., Canadian and European banks have been saddled with these illiquid securities that have plummeted in value, causing widespread losses. To date, global write-downs tied to mortgage-backed securities and other securities linked to subprime and busted credits total $500 billion dollars.

Paulson and the White House, including members of Congress, must have been sweating over the last several weeks as fears mounted in the credit markets. China, the biggest investor in government agency debt has been reducing its position since August while the Japanese and other Asian banks have also pared Fannie and Freddie debt. A “snowball” effect whereby dozens of banks would dump mortgage agency debt was rapidly becoming a possibility.

Without an official guarantee from Washington, the odds of a full-scale mortgage-backed crash was imminent. Paulson’s pre-emptive strike on Monday was therefore successful.

Spreads or the difference between risk-free Treasury bonds and mortgage-backed debt, remained elevated all year until yesterday. That rate was 2.74% last Friday or 6.40% -- the highest spread versus T-bonds since the credit crisis began. The 30-year fixed rate mortgage plunged from over 6.40% on Friday to 6.04% on Monday, alleviating credit stress on that segment of the mortgage market hugely influenced by agency lending. That’s the good news.

The bad news is that “jumbo” mortgage rates, or mortgages considered too large to be purchased by Fannie and Freddie climbed to 7.35% from 7.14%. Just how the jumbo market will react going forward is anyone’s guess; but the primary concern for the market is that lending giants Fannie and Freddie remain solvent and recapitalized by the federal government.

Paulson, a former Goldman Sachs chief, is no stranger to structuring deals. In some ways, the United States and its foreign creditors are lucky because anyone else holding this position would unlikely know how to put together such a complex rescue package.

The Treasury will recapitalize the government-sponsored enterprises (GSEs) by gradually buying preferred stock – a plan that will massively dilute existing stockholders. Fannie and Freddie shares collapsed about 85% yesterday.

I purchased intermediate and short-term Fannie and Freddie debt yesterday. Spreads should continue to narrow over the next several weeks as investors return to this market. These bonds, along with high quality corporate are among the best values today in fixed-income markets. Treasury bonds, however, offer poor values adjusted for inflation and are overbought.

Taxpayers, naturally, will fund this enormous bail-out. The Savings & Loans crisis in the late 1980s cost taxpayers about $300 billion dollars adjusted for inflation since 1989. This bail-out should easily match those figures and ultimately might even be twice that amount if housing values don’t stop falling soon.

Bear Stearns, Fannie and Freddie. Who’s next?