The blowhards and bluff artists and the Gang of Four -- Ambac( ABK), MBIA (MBI) - Get Report, MGIC (MTG) - Get Report and PMI( PMI) -- truly have blood on their hands for this moment. So do the ratings agencies, the mortgage insurers and the salespeople who packaged undocumented loans and pushed buying homes with no money down.

The whole apparatus stinks and we are now seeing the unwinding, but I think that the false assurances created by the Gang of Four and their insistence to not worry made everyone way too complacent. Their glib promises as well as the incredibly lax work of the ratings agencies,




, enabled the whole edifice to be propped up.

And once it was clear to them that they needed more capital, they chose to forgo the window and attack the shorts. Had they raised the capital they needed and had the ratings agencies said they can't bless any more of this junk, we might have never been in this spot.

But we are there. The big problems that everyone has from

Fannie Mae

( FNM)to

Freddie Mac

( FRE) to

Bank of America

(BAC) - Get Report


Washington Mutual

(WM) - Get Report

, frankly, aren't the defaults. The default rate for FNM mortgages is amazingly low, around 1%.

But it is the personal insurance behind those mortgages -- made by PMI and MGIC -- that may not hold up, and that's the layer of help that allowed Fannie and Freddie to be so thinly capitalized. We saw the same thing happen throughout Wall Street and with many banks. The insurance may not hold up, so the reserves are therefore way too low.

A few months ago, we were fretting that the collapse of these monolines could put everything in jeopardy. Somehow, because they haven't "collapsed" per se, we thought we had skated by this issue. We haven't. The unwinding of these two companies and the reserves that must be boosted -- because they can't be counted on -- is behind a lot of these capital raises and behind the lack of belief in anything any financial says.

Today, as we ponder the unthinkable, the nationalization of Fannie and Freddie, we have to recognize that it ISN'T the default rates that are doing it. It is the lack of a small amount of capital relative to the huge amount of guarantees, almost all of which aren't even an issue except the last three years of them.

And it is those guarantees that are being stressed, because the personal mortgage insurance that Fannie/Freddie insist upon to make their loan that they securitize "less likely to default," is being obliterated as surely as MTG and PMI's stocks are being obliterated.

The point here is an absurd one: the value guys are really right. These companies aren't really insolvent, they just need capital badly and have to wipe out the common stockholders to get it.

The real absurdity: If the feds stood behind the debt of Fannie and Freddie specifically in return for, say, $100 billion in capital, you'd have two companies in which you'd love to invest. But, ironically, they wouldn't have a stock to do so, because there is no way that the government would give those companies 100 billion and let the common-stock holders share in the spoils.

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

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