While Wall Street was busy celebrating the sudden fall of its crusading nemesis, Eliot Spitzer, yesterday, shares of one of its top five banks were taking a dive on rumors that the company is out of cash, while mortgage backers Fannie Mae and Freddie Mac also took a beating as the stock market punished companies with heavy exposure to mortgages.

The Financial Times notes on its front page that Bear Stearns tumbled 11 percent, helping push the S&P 500 to its lowest point in more than a year and a half, while a Barron’s cover piece that asked, “Is Fannie Mae Toast?” helped wipe out 13 percent of its value.

Bloomberg reports that Bear Stearns’ CEO had to publicly announce that his company—one of the five big Wall Street banks&mdah;wasn’t going under— something that doesn’t seem so out of the ordinary in the current environment, but would have been astonishing a year ago—after a credit-rating outfit downgraded its mortgage bonds. Bear was the No. 2 underwriter of mortgage securities in 2007.

”There’s an insolvency rumor and concerns on liquidity, that they just have no cash,” said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York.

The Wall Street Journal reports that debt-insurance markets are implying a 33 percent increase since Friday in the likelihood that Bear Stearns will go into default. That number is also up 300 percent since September.

Worries that Bear might run into difficulty in gaining enough access to capital or even deeper troubles sent investors scrambling to buy credit protection against a debt default by the firm.

The Barron’s piece slammed Fannie Mae and its cousin Freddie Mac, which are both crucial to the health of the nation’s home market, saying Fannie in particular faces losses of more than $50 billion and may be nationalized.

Its balance sheet is larded with soft assets and understated liabilities that would leave the company ill-equipped to weather a serious financial crisis. 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.

Should Fannie or the similarly hobbled Freddie Mac buckle, the government would no doubt bail them out and honor their debt and mortgage guarantee obligations. Fannie common and preferred shareholders would likely suffer grievously in such a scenario.

The roof, the roof, the roof is on fire.

The FT also notes that shares of Citigroup were down 6 percent, while Lehman Brothers plunged more than 7 percent.

The Swooning Buck

We figure you can get all your prostitution news elsewhere this morning, so here’s Story No. 2…

The WSJ reports above the fold on A1 that inflation is causing a sort of feedback loop with the weak dollar, as central banks shore up their currencies to fight inflation in their own countries. The Journal says in its second paragraph that even the Vietnamese dong is rising rapidly against the buck. We’ll leave it at that.

The weak dollar has played a role in the latest surge in commodity prices…

When the dollar weakens, commodities priced in dollars effectively become cheaper for buyers holding other currencies, spurring demand. At the same time, the producers of these commodities have an incentive to boost prices, since they are getting paid in less-valuable dollars…

In the past, many developing countries, in particular, have been reluctant to allow their currencies to strengthen because it makes their exports more expensive in global markets. But in the past year or so, as investors have flooded into these countries, the upward pressures on their currencies have grown—raising the costs of government efforts to hold them down.

China in particular is boosting its currency after years of grousing by U.S. politicians to do just that. While it cared little for the gum-flapping of the American government, it’s much more concerned about reports like Bloomberg’s yesterday that showed its inflation rate hit nearly 9 percent in February—something the WSJ’s story misses.

Countrywide Drumbeat

The WSJ on A3 follows up on its Saturday scoop on Countrywide’s burgeoning legal problems. It says federal investigators are discovering that the mortgage lender’s loan docs were replete with either false or possibly false information. They’re essentially trying to find out whether the company uses these lapses to overstate the quality of the mortgages it bundled into securities and sold to investors.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.