If F&F had only bought loans with 20% or more down and verified funds (not borrowed piggyback funds), they wouldn't have failed.
But that's not what happened, since their executives were motivated to enrich themselves, their lobbyists had Congress in their pocket, and their auditor was criminally negligent.
So now, we have by far the biggest financial failure in the history of the world on our hands. The taxpayer's hands, who backed up these pigs with an 'implied' guarantee that is now a real guarantee.
So what should be done now?
If the US doesn't make good on their bonds, economies around the world will collapse, including the US who'll never be able to borrow another dollar from China and friends again. So take that off the list - the US taxpayer will make good on their bonds, and hundreds and hundreds of billions if not trillions will be lost.
If F&F are allowed to continue, even after wiping out the common and preferred shares, there's nothing from stopping this mess from happening again in the future - privatize the gains while making the losses public.
So what's my solution?
Liquidate Fannie and Freddie - now. As fast as possible, as it'll only get worse. Wipe out the shareholders. And let the free market buy up any mortgage they want - WITH NO F*CKING GOVERNMENT GUARANTEE OR INVOLVEMENT.
I'm sure real companies with real desires to stay in business won't be buying Option-ARM, Negative-Am, Liar's Loan garbage in the future. And if they do, and they fail, Congress needs to pass a law that no bank or investment house in the future can legally be bailed out by the US taxpayer (got that Bernanke? got that Paulson?). Nobody is too big to fail. Once the market knows that, and it's codified into law, it's a new day.
Government is the problem, and has no business being in business. Fannie and Freddie proved it.