Fannie Mae (FNM) could be under more pressure when trading opens Monday in New York. Shares fell almost 3% in Europe after an article over the weekend in Barron’s suggested the giant mortgage lender could need a government bailout if the housing market continues to swoon. “Its balance sheet is larded with soft assets and understated liabilities that would leave the company ill-equipped to weather a serious financial crisis,” Jonathan Laing writes. “And spiraling mortgage defaults and falling home prices could bring a tsunami of credit losses over the next two years that will severely test Fannie’s solvency.”

Worries about the financial strength of Fannie and other lenders consumed the market late last week, as shares in the banking sector fell sharply both Thursday and Friday. Fannie raised billions of dollars in new capital late last year through a sale of preferred stock, but a report in The Wall Street Journal hints that the company is considering going back to the trough as CEO Daniel Mudd makes his annual trip to Asia. With the market as turbulent as it has been, he tells the Journal, “You need to remain long capital.”

By James Ledbetter

You remember the old line about the role of the Federal Reserve being to take the punch bowl away as soon as the party starts getting good? Well, the European Central Bank takes a different view: if you’ve had a little trouble with liquidity lately, don’t worry, there’s an open bar.

The ECB announced Monday it would make “unlimited” funds available at below-market rates to any European bank that might require them, in order to ease the unpleasant effects of the global credit crunch. This move, it is hoped, would make money cheaper for banks to lend to each other, which they’ve been reluctant to do because, as Peter Eavis pointed out last week, private-sector banks have all too clear an idea which ones among them might have a little liquid problem.

The Associated Press labels the ECB move “unusual”; the Wall Street Journal quotes an economist from Commerzbank who calls it “extraordinary.” Which it surely is: how can any bank guarantee an “unlimited” amount of credit? Leave it to the Brits, though, to quash this outbreak of Continental glee; the BBC news site story closes with this gem of understatement:

But some analysts say that until the banks reveal the true scale of their potential losses, the central banks will be unable to do much to ease the credit crunch.

Quite. As Eliot might say: Hurry up, please, it’s time.

Stocks staggered out of the gate Thursday as central bankers failed to ease a severe credit crunch. Interest rates on some loans stayed at a seven-year high despite Wednesday’s high-profile global liquidity booster, Bloomberg reported. Fortune’s Peter Eavis had warned that the Fed’s bid to loosen up credit markets could backfire, and other market watchers were similarly skeptical, with some dubbing the worldwide effort “global coordinated panic.“

The panic led to a stampede out of financial stocks Thursday morning, as Lehman Brothers (LEH) dropped 2 percent in spite of better-than-expected earnings and bond insurer Security Capital (SCA) plunged 26 percent on worries that it won’t be able to raise enough capital to forestall a possible ratings downgrade. Even beloved Goldman Sachs (GS) saw its shares drop, in spite of a heartwarming report in the FT that CEO Lloyd Blankfein is looking at a $70 million payday this holiday season. That leads to a question that’s clearly on everyone’s mind: What will Ben Stein say?

The SIV bailout plan engineered by Treasury Secretary Henry Paulson is finally getting under way. The New York Times reports that the effort to pool funds from big financial firms to rescue troubled structured investment vehicles - bank-sponsored entities that issued short-term debt to purchase assets like collateralized debt obligations and subprime mortgages - moves into fund-raising mode today. But the paper also reports that Citi (C), the biggest sponsor of SIVs, is devising a separate rescue plan, seemingly reducing the need for the government-arranged effort.

Actions taken by other banks support the notion that the SIV bailout plan isn’t necessary. In France, Societe Generale became the latest European Bank to take troubled SIVs onto its own balance sheet, with a purchase of $4.3 billion in assets that’s intended to head off fire sales of SIV assets. HSBC (HBC) took similar action last month. The banks are acting as ratings agencies downgrade the SIVs, citing sharp declines in the value of their holdings. Societe Generale said its own SIV bailout will cause its key capital ratio to drop by only five basis points - an argument that some observers cite in favor of Citi making a similar move.

The administration’s subprime bailout plan continues to draw critics. The New York Times reports that two housing-advocacy groups say the plan will reach just a fraction of the troubled borrowers who are supposed to be helped by the plan. Officials say some 500,000  homeowners face the risk of foreclosure over the next year and a half, the Timesreports, but people at the Greenlining Institute and the Center for Responsible Lending see the arrangement helping as few as 145,000 borrowers.

Meanwhile, Bloomberg reports that some investors are worried that the plan will lead to higher U.S. interest rates - an outcome that, contrary to the plan’s intent, could accelerate the decline in home prices. S&P said the decision to freeze interest rates on some mortgages will cut the income on mortgage bonds, resulting in possible downgrades. Others say the decision to change terms of the bonds risks scaring investors away from U.S. debt in the future. It doesn’t seem like the dissent is likely to be short-lived, either: A fixed-income executive at RBS Greenwich Capital Markets tells Bloomberg his clients are “pounding the tables and beating the drums.”

Housing stocks got off the mat Thursday in anticipation of a government-backed plan to limit foreclosures. Among the biggest gainers in early afternoon action were Toll Brothers (TOL), the big luxury homebuilder, Countrywide (CFC), the biggest mortgage lender, and MBIA (MBI), the bond insurer whose shares plunged Wednesday after a rating agency said the firm may need to raise more capital as loan losses pile up. Other big gainers included MGIC (MTG), the mortgage insurer that lost $372 million last quarter as it wrote off an investment in a subprime mortgage venture, and Radian (RDN), whose merger with MGIC blew up after the market for mortgage-backed securities collapsed.

Two things are surprising about this rally. First, these stocks rose sharply last Friday, when word got out that Treasury Secretary Hank Paulson was trying to put together a package to ease the pain of sharply rising payments on adjustable rate mortgages, or ARMs. (Despite rising criticism of that plan, Fortune’s Adam Lashinsky, for one, still wants his frozen.) Second, it’s not at all clear that the Paulson plan — which is to be formally unveiled by the White House this afternoon — will really help borrowers, lenders or mortgage insurers all that much. Foreclosures are already at 20-year highs, going by numbers released Thursday, in a trend that’s certain to be costly for mortgage servicers and investors. And because so many homeowners overstretched to buy houses when prices were appreciating, many borrowers may not be able to continue paying even at their pre-reset interest rate.

Analyst Gary Gordon at Portales Partners says the lesson is that investors want to believe the bottom has been reached in financial and housing names. But he points out that today’s move amounts to the 10th substantial rally this year in the housing stocks, and each of the previous nine ended with the stocks below where they started. He says the poor fundamentals of the housing and mortgage markets make calls for a nascent recovery amount to “false hopes.” Sometimes, Gordon adds, referring to far-fetched hopes that housing will bottom soon, “It takes a while for people to absorb a new concept.”

More trouble for Fannie Mae (FNM). Fortune’s Peter Eavis reports the big government-sponsored mortgage investor could be looking at $5 billion worth of mortgage securities writedowns, based on how Fannie appears to be valuing those securities in comparison to where similar bonds are trading in the market. A big writedown could force Fannie into the market to raise billions of dollars in new capital, along the lines of what sibling Freddie Mac (FRE) did late last month, Eavis writes. Any concerns about Fannie’s capital position could put renew pressure on the shares, which have risen some 35% after they hit a low last month amid worries about the firm’s bookkeeping.

Meanwhile, some observers are wondering if Fannie and Freddie don’t stand to be the big losers in the mortgage bailout being arranged by Treasury Secretary Hank Paulson. The plan seems to hinge on mortgage bond investors accepting a decline in their expected interest payments — an outcome that could hurt Fannie and Freddie, the biggest holders of the triple-A-rated mortgage securities issued by Wall Street. If the bailout plan does hurt Fannie and Freddie, it will further inhibit their ability to keep the U.S. mortgage pipeline flowing — a scary thought for homeowners and investors alike.

The government’s first try at a housing bailout took another baby step this morning, when Treasury Secretary Hank Paulson sketched the outlines of a plan that could lead to an interest rate freeze on some adjustable rate mortgages. Paulson told an audience in Washington that along with  an industry-community partnership called Hope Now, the government aims to do three things to keep a lid on spiking foreclosure rates on loans to less-creditworthy homebuyers.

“First, we are increasing efforts to reach able homeowners who are struggling with their mortgages,” he said in prepared remarks for the national housing forum in Washington. “Second, we are working to increase the availability of affordable mortgage solutions for these borrowers. Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages.”

No formal agreement has been reached, and details are still lacking. But however the final plan shapes out, it will be hamstrung by one significant fact: ARM resets aren’t what has been driving the surge of foreclosures in recent years. Rather, the problem is that buyers came to see house price appreciation as a sure thing and stretched to buy houses they couldn’t afford on their income. That’s why defaults spiked on 2006 and 2007 subprime loans even before those borrowers faced resets.

As economist Dean Baker wrote in August, “resetting subprimes are just a single wave in an ocean of bad mortgage debt.” He says the spike in defaults on subprime mortgages over the last two years owes more to the borrowers’ tenuous personal finances than to any reset phenomenon. “Less well-situated borrowers are more likely to have taken out ARMs since the payments are typically lower than fixed rate mortgages,” he writes.

On that note, analysts at Portales Partners in New York estimate that any bailout plan will help just 10% of the roughly 1.5 million borrowers due to face a reset in the next year, though analyst Gary Gordon at Portales stresses that no one knows how any bailout effort will play out. He adds that he expects holders of subprime mortgages, ranging from hedge funds to overseas banks, to object to any solution that depends on investors forgoing interest income. That could mean a wave of lawsuits – the one result that would help absolutely no one.

Update: Maybe a legal free-for-all isn’t in the offing. “A bond-fund manager who sues over an attempt to mitigate the subprime mortgage mess,” Felix Salmon writes at Portfolio, “is going to be someone who calls attention to himself as a dupe of an investor and also an enemy of homeowners.” Even fund managers don’t want to look like weenies.

Brace yourself: Wall Street is looking at more writedowns. Adding to the growing chorus of analysts predicting more doom and gloom for Citi (C) and Merrill (MER) are Credit Suisse number crunchers. They took a back-of-the envelope approach in the wake of the E*Trade (ETFC)-Citadel transaction, which valued the struggling firm’s mortgage holdings at between 11 and 27 cents on the dollar. The Credit Suisse report says Merrill could be due for $9 billion worth of charges were it to mark its collateralized debt obligation holdings to market at levels dictated by the E*Trade deal, The Wall Street Journal reports. That pales, though, in comparison to Citi, which Credit Suisse says could face $26 billion in new markdowns.

To make matters worse, Moody’s is considering downgrading some structured investment vehicles, which will only add to pressure on bank sponsors such as Citi. Citi-backed SIVs holding $65 billion in debt were among those downgraded or put on review Friday by Moody’s, Bloomberg reports. The fourth quarter is certainly shaping up as another bruising one for the big banks.

E*Trade (ETFC) continues to slide, a day after it announced a big bailout deal with vulture-oriented hedge fund Citadel. Much was made of E*Trade’s success in getting out from under a deteriorating $3 billion mortgage portfolio, albeit at the deeply distressed price of 27 cents on the dollar. But E*Trade stock fell Thursday and it continues to give up ground Friday as investors worry about assorted other issues, including the company’s still substantial home equity loan exposure. As Phil van Doorn writes on TheStreet.com Friday, E*Trade has $2.4 billion worth of home equity loans in which the loan-to-value ratio is above 90%. With house prices falling sharply, it’s all too likely that many of these loans will end up defaulting — and the potential for recovery appears low.

Meanwhile, E*Trade still hasn’t filed its current report on form 8-K with the Securities and Exchange Commission, which is unusual given that yesterday the company reported three separate events that would seem to call for that sort of disclosure: the departure of its CEO, a transaction that gives one shareholder 20% of the stock, and more than $2 billion in writedowns. E*Trade didn’t immediately return a call seeking comment.

Update: A Citadel spokeswoman says an E*Trade investor relations rep tells her he expects the filing to be made in the next day or so.