More Financial Woes, Courtesy of Fannie and Freddie

The miserable action in Annaly (NLY - commentary - Cramer's Take) and Capstead (CMO - commentary - Cramer's Take) of late is saying that the housing system -- the system that is based on Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take) -- is about to break down. That's because these companies borrow short -- Merrill Lynch (MER - commentary - Cramer's Take), for example, had provided NLY with a credit line -- and invest in Fannie Mae/Freddie Mac bonds and pocket the difference. Anytime the government agencies are in trouble or thought to be in trouble, these stocks get crushed.

We saw this once before, when analysts questioned the capitalization of these companies, but this time it's just happening so fast that you have to believe that all faith is being lost -- right here, right now.

Some of this is the gradual realization that if the Treasury and the president think the housing crisis is behind them, which is the current chatter, then there is certainly no reason to help consumers or "bail them out," which is what we keep hearing.

If that is the case, you have to understand that investors and traders are concerned that the equity of FNM and FRE disappears and therefore NLY and CMO have risk, because the bonds of Fannie Mae and Freddie Mac will lose their good ratings and the patina of government guarantee. That was the worry last march when NLY got to $11.50, and it is appears to be the worry today, despite the fact that NLY has an incredible 12% dividend right here.

This is a really negative development, and these two stocks, NLY and CMO, are perfect canaries in the coal mine. I have faith in Mike Farrell at Annaly, but I do not have faith that there is much upside in NLY if these are the worries.

I am very bearish about the banking system. EVERY RALLY must be sold. Every one.

Because if NLY and CMO are going much lower, the signals are too obvious about what will happen with FNM and FRE.

Terrible if you own anything banking. Anything. And it is not over, as I articulated in my Lehman (LEH - commentary - Cramer's Take) call. I don't think either CMO or NLY is a good short. But owning them with a business model that will be broken if FNM and FRE common is at risk to go to zero will be dangerous even though the companies would tell you that the bonds are safe even if the equity is wiped out.

By the way, this news would also be very bad for Washington Mutual (WM - commentary - Cramer's Take), which is soon getting into the no-hope category. Frankly, I just don't know how they make it. And I am stunned that Kerry Killinger is still on the mound there. But then again, since Marty Sullivan is still running AIG (AIG - commentary - Cramer's Take), anything's possible in this horrid group.

Random musings: Speaking of breaking down, have you seen the action in the HGX? Miserable.

At the time of publication, Cramer had no positions in the stocks mentioned.

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