Cramer: An Elegy for Fannie and Freddie

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At last, we have now found our own Resolution Trust Corporation for this era of overbuilding. In fact, we have two of them: Fannie Mae ( FNM) and Freddie Mac ( FRE). That's right, we know they are both out of capital, and unlike the ne'er-do-well banks -- almost all of which seem now slated to disappear in one giant bear-market orgy -- there are no saviors.

The dissolution of these two companies is the height of irony. President Bush made it his sub rosa mission to end the hegemony of these two Democrats-in-waiting companies. I don't even think he understood what the guarantee was or what they were supposed to do. That would take a lot of time to figure out. He probably just said, "We have banks, good banks, like Washington Mutual ( WM) and Countrywide; why do we need Fannie Mae, which just makes money for the Democrats?"

How To Play Fannie Options Now

So, over a multiyear scheme, he hamstrung the agencies and let the private banks take over lending and securitizing pretty much anything, because homeownership was another one of his themes, of course, aided by the Fed's insistence that exotic mortgages, especially weird adjustable types, made the most sense.

That created the madness of speculation boom, and now bust, that wiped out almost all of the mortgage issuers, and now, because Fannie Mae and Freddie Mac were at last invited into the party, them, too. They lowered their standards, believed in the fiction of personal mortgage insurance and didn't know they were often being scammed like everyone else.

Now, if they had to be reserved properly, they would be insolvent. But here's where it gets tricky. They were only stroke-of-the-pen operations anyway, relying on an implied guarantee of full faith and credit, something that this administration has not re-implied at any time.

With the companies radically under-reserved even by the bulls' admissions, the equity has to be crushed and the bondholders take over. But that doesn't provide the capital that is needed for the company to keep securitizing. That's going to be the job of the government, because it will have to take these two over in the end.

Notice I am dispensing with the caveats, having hurt enough people by caveating all of the prospective tragedies in this group that have come true already (go back to the Dirty Dozen piece if you disagree.)

So with the government takeover, hopefully we can begin to get some sort of recognition of the seriousness of the situation, something that eluded the Fed last year and now eludes the Treasury and Congress and of course, the most clueless president economically in our history. This man mantra seems to be, "If cutting taxes doesn't solve it, then it can't be solved."

This whole new downturn is not because of Janet Yellen (Fire in a Crowded Theater). She's a good proximate cause. It is a recognition that the banking system could be going down here and the vanguard of the decline is the outfit meant to make housing more affordable, the government-sponsored enterprises (GSEs). After this, they won't be sponsored, they will be owned. Hopefully someone creative enough in this administration will recognize that what is needed is a huge pool of capital to buy mortgages stuck in the system -- I had thought the Fed should issue $200 billion in two-year notes and buy them, but it is way too late for that. The new recapitalized FNM/FRE will have to securitize a trillion in mortgages, offer some guarantee of a payoff, and at last we can get through this.

Of course, that presumes that anyone is at home in the government or even thinking about this.

And that may be too optimistic.

Either way, it's all unwinding now. Let's hope someone sees the potential for the new RTC. It is right in front of us. All you have to do is get rid of the private part of FNM/FRE -- the equity holders.

Looks like that's coming, looks like it is coming like an 18-wheeler down the interstate, right at these two entities that will soon no longer exist at this pace.

At the time of publication, Cramer had no positions in the stocks mentioned.
Jim Cramer writes about all the stock trades in his charitable trust for TheStreet.com in Action Alerts Plus. Recent stocks he's traded in this account include Schering-Plough (SGP), Yamana Gold (AUY) and Freeport-McMoRan (FCX).

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