What is happening?

Leverage, these days, is the problem with these government-backed institutions. They bought $1.7 trillion in assets using only $70 billion of investors' money. So these assets only have to decline by $70 billion – 4.1% – to wipe out shareholders. Actually, if mortgage guarantees are included, Freddie and Fannie are liable for $4.8 trillion worth of mortgages. So to wipe investors out, mortgage values only have to decline by 1.4%.

Fannie and Freddie own mortgage assets. The value of these assets is a function of home prices and the solvency of homeowners. The S&P/Case-Shiller National Home Price Index is now down 14.1% year over year. Foreclosures are up 53% from June 2007.

No one knows exactly how much mortgage values have fallen. Every mortgage is different, and there's no benchmark. But one thing's for sure: They've fallen more than 4.1%. In other words, Fannie Mae and Freddie Mac are technically bankrupt.

Fannie and Freddie, directly or indirectly, own half the mortgages in America. Their bankruptcy will be one of the most important events in the history of American capitalism. Here's how I suggest you prepare yourself...

High dividend stocks are by nature defensive stocks. The dividend acts like an anchor and prevents the stock price from falling too far.

The government will bail out Fannie and Freddie and assume their debts. This is inflation. It will meet Fannie and Freddie's trillion-dollar debts by issuing more debt of its own. U.S. government debt will lose its value, and the dollar will keep falling.

So what do we do? Invest in more assets. Factories are assets. So are trees. So are rural telephone networks. Denominated in U.S. dollars, the value of these real assets will rise. So your money is safe... much safer than if you left it in the bank or a money-market account.

But the real bonus comes when foreigners lose confidence in U.S. debt. The only way they'll be able to get any value for their dollars will be if they buy cheap American assets... like farmland, timberland, real estate. There will be a panic into U.S. real asset and manufacturing stocks at some point in the next 12-18 months.

In sum, there's more pain to come in financial stocks. But if one buys stocks with big dividends and lots of cheap American assets, your money will be safe and you may even make a profit.