This is getting ridiculous. Last week, a Lehman Brothers analyst, Bruce Harting, put out a report recommending Fannie Mae (FNM $10) and Freddie Mac (FRE $7.35), and also suggested that under very unlikely (and theoretical) circumstances the companies might require big capital infusions. The report sent those stocks into a tailspin.

Yesterday, National City (NCC $3.70) and First Horizon (FHN $5.06) were clobbered because a Ladenburg Thalmann analyst, Richard Bove, issued a report over the weekend demonstrating that the banks are in much better shape than at other critical points in the past, and that, in fact, none of the banks he covers have dangerously low capitalization ratios. He eventually was forced to put out a “clarification,” saying that he is not suggesting that the above-mentioned banks are in trouble, and indeed reiterating his “buy” recommendation on both.

What is going on? Are investors just very, very frightened, or are there darker forces at work? In a possible response to some of the markets’ trading hysteria, the Securities and Exchange Commission announced yesterday that it will “immediately conduct examinations aimed at the prevention of the intentional spread of false information” for the purpose of stock price manipulation.

Although it’s not clear what the word “immediately” means in the mind of a government regulator, many investors consider such a measure long overdue. The recent collapse of Fannie Mae and Freddie Mac, the repeated assaults on Lehman (LEH $13.56 ), and the fatal attack on Bear Stearns have convinced many that short sellers are wreaking havoc with stocks by illegally spreading rumors that drive the stocks lower.

A New York Stock Exchange spokesman, who would only speak on background, confirmed that the exchange has asked a number of member firms for so-called blue sheets, or trading information on stocks that have moved outside of normal parameters for no apparent reason. The investigation is being carried out jointly by the NYSE regulatory division and the SEC, in conjunction with the Chicago Board Options Exchange and the Financial Industry Regulatory Authority.

Concern over the impact of disruptive short selling increased last summer when the SEC decided to remove the so-called uptick rule. This regulation was created in 1938 to limit short selling in a declining market. It prohibited traders from selling short a stock except when the price moved higher, and was designed to prevent just the kind of “piling on” that we have seen recently in certain financial issues.

In conversations with several senior investment professionals over the weekend, the uptick rule was frequently cited as a major reason for the damaging volatility in today’s markets. Sorrell Mathes, head of an eponymous money management firm, says categorically: “Getting rid of the uptick rule has exacerbated short selling.” On the other hand, Mr. Mathes says he thinks the authorities will have a tough time trying to track down those spreading false rumors.

A hedge fund manager who would not comment for attribution says that the uptick rule is a problem, but more important is the lack of disclosure. “A short-seller who has the staying power can keep hitting the bids, run the stocks down, and eventually blow through stop-loss thresholds, risk control thresholds, and cause owners to become sellers. I definitely think that rumor spreading is virulent and an important force,” the manager says.

Needless to say, the disastrous meltdown in the mortgage markets is at the heart of the stock woes experienced by Fannie Mae and Freddie Mac. Concerns about the spreading contagion of subprime losses continue to hurt bank stocks as well. It is a confluence of factors that is causing the wholesale junking of financial services stocks, including the unknowable extent of failing mortgages in the financial system. After all, homeowners have never walked away from their mortgages in such numbers. It’s a new and imponderable ballgame.

This uncertainty lends itself to panic, and to confusion. It also gives those attempting to disseminate false information the perfect opportunity. If well-regarded analysts can cause runs on bank stocks while actually recommending them, those spouting liquidity rumors will find a ready audience.

Meanwhile, serious investors are trying to figure out whether there’s value in these broken down securities, or simply more risk. Yesterday’s announcement of life support measures for Fannie Mae and Freddie Mac brought little relief to the stocks. The government announced that it would allow the companies to borrow from the Treasury and that it might provide equity capital to the two firms as well.

To mollify critics of the firms (the number of which have recently multiplied geometrically), the Fed will become a consulting regulator. This provision is in keeping with Secretary Paulson’s proposed new regulation scheme that seeks to set up the Fed as a grand overseer of the markets. The beauty of this approach is that if things simmer down, the government may not have to do anything.

Over the weekend, Mr. Bove reviewed Fannie’s and Freddie’s situation, and then looked at the financial position of the banking system overall. Like many observers, Mr. Bove has contended all along that Fannie and Freddie are “too big to fail;” however, he concludes that they are simply too big. He also acknowledges that these companies are necessary, now more than ever, to the smooth functioning of the mortgage markets.

Mr. Bove also reviews the banking system at large, looking for other large financial institutions at risk. Here are the facts: though the ratio of nonperforming assets to total loans has ticked up, the percentage of bad loans was still under 2% as of March, compared to more than 5.5% in the late 1980s and early 1990s.

He also looks at nonperforming assets divided by reserves, plus common equity for the nation’s more than 8,000 FDIC-insured banks; in this case the banks are stronger than at any time in the past two decades.

As he asks, why then the panic? The answer, according to Mr. Bove, is that the bankers do not know what they are doing and the regulators have not been energetically going after stock manipulators. Perhaps the SEC got a copy of the report.

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