TheStreet.com's Jim Cramer says Fannie and Freddie aren't the true culprits here.

The blowhards and bluff artists and the Gang of Four -- Ambac (NYSE: ABK) (Cramer's Take), MBIA (NYSE: MBI) (Cramer's Take), MGIC (NYSE: MTG) (Cramer's Take) and PMI (NYSE: PMI) (Cramer's Take) -- truly have blood on their hands for this moment. So do the ratings agencies, the mortgage insurers and the salespeople who packaged undocumented loans and pushed buying homes with no money down.

The whole apparatus stinks and we are now seeing the unwinding, but I think that the false assurances created by the Gang of Four and their insistence to not worry made everyone way too complacent. Their glib promises as well as the incredibly lax work of the ratings agencies, S&P and Moody's, enabled the whole edifice to be propped up.

And once it was clear to them that they needed more capital, they chose to forgo the window and attack the shorts. Had they raised the capital they needed and had the ratings agencies said they can't bless any more of this junk, we might have never been in this spot.

TheStreet.com's Jim Cramer says the mortgage problem is in the process of cresting, which is why the stocks have largely bottomed.

We are in the heart of default country, and we knew we would be. This is the toughest moment. You need to go back and look at the calendar to realize the astonishing acceleration in defaults. It's simple: This moment two years ago is when the underwriting standards were the lowest, and this is the moment when the defaults will be the highest because the loans are resetting at high levels and most of the lenders, lenders like Countrywide (NYSE: CFC) (Cramer's Take), are more interested in getting as much out of a borrower as possible before kicking him out than working out the loan.

Think about it.

In the second quarter of 2006, the housing industry was going strong. We were in the 7-million-homes-changing-hands mode, and the vast majority of those homes required little money down, with home equity loans being taken out immediately to pay whatever little interest was being charged. These were the moments of the ultimate no-doc-high-fee loans by New Century Financial, Ameriquest, Resmed (Ditech), American Home Mortgage, Novastar, and of course, Countrywide. This was when the homebuilders' mortgage arms lent the most terribly.

MOST NOTEWORTHY: Mortgage Insurers, Thoratec Laboratories and Callaway Golf were today's noteworthy initiations:

• Keefe Bruyette resumed coverage of Old Republic (NYSE:ORI), MGIC Investment (NYSE:MTG), PMI Group (NYSE:PMI) and Radian (NYSE:RDN) with Market Perform ratings and a $16 target, $13 target, $7 target and $6.50 target, respectively, as they expect increased capital needs to generate operational headwinds in the near-term.
  
• JMP Securities expects FDA approval of Thoratec's (NASDAQ:THOR) next generation HeartMate II VAD any day now and for the company to meet/beat 2008 sales guidance. Shares were started with an Outperform rating and $20 target.
  
• Callaway Golf (NYSE:ELY) was assumed at Stephens with an Overweight rating and $19 target. The firm is positive on Callaway's leadership position, strong balance sheet, new products and international opportunity.

OTHER INITIATIONS:

• Kaufman Bros. initiated Bancscares of Florida (NASDAQ:BOFL) with a Buy rating and $15.50 target.
  
• Raymond James started Dialysis Corp of America (NASDAQ:DCAI) with a Strong Buy rating and $9 target.
  
• Intuitive Surgical (NASDAQ:ISRG) was initiated at Lazard with a Buy rating and $420 target.

TheStreet.com's Jim Cramer says Bernanke's laissez-faire "policy" is at the heart of the mortgage crisis.

Spitzer's right. Believe me, much of what is happening in the bond market world in the insurance of bonds is about Darwin and laissez-faire and Ayn Rand. It is about letting the marketplace rule, and of letting capitalism run wild and roughshod. That's why I was so glad to hear Eliot Spitzer say as much on CNBC this morning.

Sure, many of the people who took these mortgages shouldn't have. But we have known since time began that you can fool people who aren't clever and who are greedy, so you have to protect them from themselves.

That's not what we did. Instead, we figured that the marketplace will take care of everything, that capitalism produces the best result.

Key regulators at the New York State Insurance Department met Wednesday with U.S. banks to discuss raising new capital for bond insurers, a department spokesman said, Bloomberg News reported late Wednesday afternoon.

Talks in New York with unnamed banks are part of New York Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, New York State Insurance Department spokesman Andrew Mais told Bloomberg News.

Market rallies on insurer meeting

Word of the meeting sparked a remarkable 600-point reversal rally on Wall Street, with the Dow closing the day up 298.98 points to 12270.17. The Dow had been down more than 300 points earlier in the day. The broader markets also rallied.

U.S. Federal Reserve Chairman now has more leeway to reduce interest rates further and quicker, after concluding that inflation concerns have subsided enough, Bloomberg News reported Wednesday.

However, economist David Wang told BloggingStocks Wednesday that although there's a tendency among some media outlets "to fixate on the Fed and interest rates," investors should concentrate on the multiplicity of tools at the Fed's disposal, as well as the global effort that Wang believes is necessary to prevent both a U.S. recession and a major slowdown in global growth.

"Look for the Fed's term auction facility to play just as important a role as the Fed's rate cuts in the months ahead," Wang said.

Last fall, the Fed established a term auction facility to provide short-term liquidity to banks. Bernanke has underscored that the term auction facility will remain open, "for as long as necessary."

Given the U.S. market's 400-point sell-off in its initial minutes of trading, "a Dow close down just 300-points would look like a moral victory" according to one economist.

"All things considered, from a market standpoint, a 300-point down day is a relatively small consequence," economist David H. Wang told BloggingStocks Tuesday.

Amid the sell-off, the U.S. Federal Reserve, in an emergency monetary policy action, cut key interest rates Tuesday morning - - cutting both the Fed Funds rate and the discount rate by 75 basis points. The Fed cut the Fed Funds rate to 3.50% and the discount rate to 4.00%.

Larger matter: mortgage insurers

Of utmost importance, in Wang's interpretation, is the health and fate of mortgage insurers, primarily MBIA (NYSE: MBI), and Ambac (NYSE: ABK), but also PMI Group (NYSE: PMI), and MGIC (NYSE: MTG).

Wang said the mortgage insurers "form a critical foundation in mortgage insurance, and as a result, in the mortgage process."

"A failure by MBIA or Ambac would mean several banks would not receive insurance payments for mortgages that go into default, substantially reducing the asset values of those banks," Wang said. "That would prompt another market sell off, possibly resulting in a failure by one or more banks."

Last March I suggested that mortgage insurance companies such as MGIC Investment Corp. (NYSE: MTG) might be in some peril. Since then, MTG stock has lost 76% of its value.

Back then, MGIC had negotiated a merger with Radian Group Inc. (NYSE: RDN) but that deal fell apart in September. Both mortgage insurers were on the hook if mortgagees ended up not making their payments. But mortgage insurers hoped they would be able to argue that they didn't have to pay if they could prove there was mortgage fraud.

Last March I hesitated to recommend shorting MGIC since it was generating cash and had ample capital. But since then its credit rating has been downgraded, which makes it hard for it to position itself as an insurer. This after it restructured a subprime-mortgage joint venture without a bankruptcy filing, amid news that it received a request from the SEC to provide information related to the joint venture.

With its stock down 11% today and a 24.2% short interest, it's clear that investors see blood in MGIC's water.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

TheStreet.com's Jim Cramer says until the public feels they won't lose money on a home, no problems will get solved.

Would you ever buy a house in this environment? That's really the ultimate question that has to be asked -- that the Fed should be asking -- if this junk is ever going to come back to life.

I know some of it is so short-term that the jury's back and the verdict is guilty, but most of it hinges on a simple issue: housing depreciation. If you think that your house is going to lose value, default on the second home lien. Which then, we know now, means defaulting on the ultimate mortgage.

The Fed can tinker with LIBOR (I still can't believe they wasted the banking system's time with the LIBOR/auction plan). It can issue statements that are a little more pro-growth than neutral.

Or it can try to change the psychology of the home buyer and homeowner.

TheStreet.com's Jim Cramer says that when every major financial institution is insolvent, none of them will be insolvent -- and reminds you that insolvency is not bankruptcy.

When everyone is insolvent, no one is insolvent.

If you took all of the loans in the SIVs and the CDOs and you looked where they really reside, if you look at where all the second-liens reside, if you opened up the books to everything, what you would see is massive insolvency across the board.

And I am telling you to forget about it. When everyone is insolvent, no one is insolvent. Do you really think it matters? Do you think at this point that the government is going to let Fannie Mae (NYSE: FNM) (Cramer's Take) and Freddie Mac (NYSE: FRE) (Cramer's Take) fail? You think it has that choice? Can the monolines be left to fail? I don't even know if they will let Radian (NYSE: RDN) (Cramer's Take) fail, that's how dicey everything is.

TheStreet.com's Jim Cramer says the fresh troubles for IndyMac make it more imperative for the Fed to act.

We keep coming close to losing these companies that are fighting for their lives.

Yesterday we had First Marblehead (NYSE: FMD) (Cramer's Take) on student loans.

Is CIT (NYSE: CIT) (Cramer's Take) next with its student loan portfolio (as opposed to its mobile home portfolio and its subprime portfolio...sheesh!)?

We obviously had a giant problem with MBIA (NYSE: MBI) (Cramer's Take) over the amount of capital it needs to raise. Will it have to raise capital and cut the dividend?

TheStreet.com's Jim Cramer says most people -- including the Fed governors -- haven't spotted this market Achilles heel.

Round up the usual suspects: Radian (NYSE: RDN) (Cramer's Take) - MBIA (NYSE: MBI) (Cramer's Take) - MGIC (NYSE: MTG) (Cramer's Take) - Ambac (NYSE: ABK) (Cramer's Take) - PMI (NYSE: PMI) (Cramer's Take).

Throw in walking dead ACA Capital (NYSE: ACA) (Cramer's Take) and Security Capital (NYSE: SCA) (Cramer's Take), and I think you produce what is really wrong with this market.

Anybody who takes even a casual look at the October delinquencies knows that these companies are going to be severely capital-challenged. Meanwhile, value guys like Third Avenue Management (Radian) and fellow travelers (Old Republic and PMI) make Pyrrhic stands and engender short squeezes that are mistakenly not used to recapitalize. And outfits from E*Trade (NASDAQ: ETFC) (Cramer's Take) to Fannie Mae (NYSE: FNM) (Cramer's Take) are left holding the bag on this stuff.

TheStreet.com's Jim Cramer says that as counterintuitive as it seems, there are many stocks that will rise despite this huge bad news.

We're back in 1990 again. That was when commercial construction threatened to wipe out the U.S. banking system and the S&P 500 went down 13% in a heartbeat between the spring and the fall.

I trotted out this analogy in the summer to explain what a disaster could look like if the Fed, which at that time knew nothing, didn't do anything or, heaven forbid, did what the clueless Bill Poole wanted them to do, and tighten.

The market's been fighting with 1990 ever since. When I read about the losses and the need for the banks and the insurers to shore up capital -- $7.9 billion for Merrill, Dougie? Say it ain't so! -- I think to myself, "Oh my, it is 1990 when funding became a problem for every major bank." (Tremendous credit to my friend Doug Kass for flagging this.)

MOST NOTEWORTHY: Obagi Medical, Medical, Microsemi, Marathon Oil and Encore Energy were today's noteworthy initiations:

• Obagi Medical Products (NASDAQ: OMPI) was initiated with a Positive rating at Susquehanna, as they like Obagi's growth opportunity in the aesthetics-dermatology market and views the company as an interesting take-out target for a larger specialty pharmaceutical company.
  
• Montgomery believes Microsemi Corporation's (NASDAQ: MSCC) core business is on track and gaining momentum based on leverage in both high-reliability and high-performance analog. The firm started shares with a Buy rating and $34 target.
  
• Goldman initiated Marathon Oil Corporation (NYSE: MRO) with a Buy rating and $72 target, as they view Marathon as most favorably leveraged refining company and would use seasonal weakness in refining margins as a buying opportunity.
  
• RBC Capital sees a large opportunity for Encore Energy Parners (NYSE: ENP) to grow its reserves from internal negotiated transactions from its parent, Encore Acquisition Companies (NYSE: EAC), starting shares off with an Outperform rating and $26 target.

OTHER INITIATIONS:

• BMO Capital initiated DCT Industrial Trust (NYSE: DCT) with a Market Perform rating.
  
• Lehman started shares of Darden Restaurants (NYSE: DRI) with an Overweight rating and $52 target.
  
• The firm also reinstated Radian Group (NYSE: RDN) and MGIC Investment Corporation (NYSE: MTG) with Underweight ratings.

Over the weekend, Barron's provided an excellent list of financial stocks that have been directly affected by the mortgage market blow-up and the downturn in the private equity business.

Names included MGIC Investment Corporation (NYSE: MTG), Countrywide Financial Corporation (NYSE: CFC), JP Morgan Chase & Co (NYSE: JPM) and Lehman Brothers Holdings Inc (NYSE: LEH), to list a few. Beware of bottom fishing too quickly. As Newton's third law of motion says, for every action there is an equal and opposite reaction. With the housing bubble lasting three to four years, do not expect the housing and mortgage stocks to have sustainable rallies. It will take a number of years for the market excesses to balance out.

However, financial institutions that have exposure to the private equity market might be worth looking at and are in a better financial position to handle the excesses. Citigroup Inc. (NYSE: C) and JP Morgan stand out. Although it will take four to six months to work through the massive excess inventory these companies have committed to finance, these committed loans are not at risk of driving these two financial institutions out of business. Conversely, in the mortgage business, there are still plenty of companies that could go belly up.