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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.

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