As I pointed out yesterday, the once mighty financials are perhaps the meekest of them all and while there may be tradable rallies from time to time there has to be hardcore evidence these companies have the ability to continue amid growing concerns.

The two big questions are how much lower will their core assets decline in value and how much junk is still being overvalued. Level 3 assets, which are marked to models cobbled buy management and high paid nerds, are under assault. There are so many assumptions being made with these assets that professionals say they're marked to make believe.

And then the bombshell yesterday hit when it was reported Fannie Mae (FNM) and Freddy Mac (FRE) may have to raise $46.0 and $29.0 billion respectively if forced to bring off balance sheet assets back onto their balance sheets. I must say I'm not sure what part of the story is the bombshell:
 

• The amounts in question.
• The timing (did anyone else crunch these numbers?).
• The reaction by investors.

For a long time government sponsored enterprises held out the disclaimer that they're not backed by the full faith and credit of the government of the United States and for the most part everyone ignored the warning like a patient that's had laryngeal cancer surgery and still smokes cigarettes through the hole in their neck. (I must say, for years Jim Rodgers told me these companies were frauds and even when my firm made money in them on the long side I always felt he was onto something.)

Now we may have to see if the government would walk away from Freddy and Fannie. I think there is absolutely no way that would happen -- none. Yet, the amount needed to keep them going, if assumptions are correct, is staggering. The crazy thing is these are the vessels that must hold up in order to provide liquidity in housing loans. Right now it's like putting a rotting beam against a house devastated by termites.

I think whatever monies are needed to get these companies on track will materialize, but there isn't a magical well of funds out there. Where will the midsized financial institutions go to for their money? If Merrill (MER) is forced to sell its most valuable assets, UBS (UBS) sells Paine Webber and Bank of America (BAC) sells its vital mortgage assets; it underscores the resistance out there toward funding these entities. Last week Morgan Stanley (MS) had to sell a stake in MSCI. These asset sales aren't going to plug the dam. Keep an eye on the regional banks, which were clobbered yesterday. There's enough money floating around to save the big boys, but we may have to brace for a series of failures on the regional banking level.