Barron's (subscription required) cites a government source who warns that absent raising at least $10 billion in capital each, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) common and preferred shareholders will be wiped out or severely wounded in a government takeover of the two government-sponsored entities (GSEs).

The problem with Fannie and Freddie is that depending on how you count the beans, their liabilities are worth more than their assets. Using so-called fair value accounting -- which marks their assets and liabilities to immediate market value -- Fannie is worth $12.5 billion (a sliver of equity supporting $2.8 trillion in assets) and Freddie has a negative net worth of $5.6 billion. Others calculate that both have a negative net worth of $50 billion.

The Bush administration wants to gut these GSEs (they're Democratic strongholds). How will the GSEs perish? Barron's reports that if Fannie and Freddie fail to raise at least $10 billion in fresh capital, the administration is "likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends." But wait, there's more.