According to the Federal Deposit Insurance Corporation (FDIC) a total of nine banks have failed this year with five folding since July alone. At this rate, many more banks will fail in the United States as the real estate and credit crisis continues to strain bank coffers to the point of financial exhaustion.

Later today the FDIC will update its list of “problem” financial institutions where a total of 90 such banks were isolated as of March 31. Since then, however, credit strains have accelerated worldwide, especially for inter-bank lending rates, non-government debt securities and the leveraged loan market. Credit spreads are now trading at multi-decade or multi-year highs this morning following a brief rally following the Bear Stearns Cos.’ bail out in mid-March.

Indeed, the credit world has deteriorated markedly since March, suggesting more banks will join the FDIC’s “problem” list.

Bank stocks, of course, remain mired in a secular bear market. Banks are struggling with their worst crisis in a generation amid the deterioration of credit and real estate assets – both still in a freefall. You’ve got to believe many more banks will fail before this bear market is over.

Banks might be cheap but nobody really knows what their true net asset values are or what securities have honestly been booked as mark-to-market. Dividends mean nothing in this market. The majority of banks still have toxic paper on their books with only a few attempting to really unclog their balance sheets. Merrill Lynch (NYSE-MER) is the only institution to come clean this summer following the huge disposition of distressed assets last month at fire sale prices.

Denmark joined Germany on the list of foreign bank failures yesterday following the Danish central bank’s rescue of Roskilde Bank AS, the country’s eighth largest lender.

If the United States really wants to stabilize the financial system now, the first place to start is by bailing out Freddie Mac (NYSE-FRE) and Fannie Mae (NYSE-FNM). A government rescue, which would protect bondholders and lend to a massive rally of Freddie and Fannie debt, would go a long way to instill market confidence and possibly put a floor of this crisis. The systemic risk of letting these huge lenders fail is not even debatable; they must be rescued and quickly.

I’m buying Fannie and Freddie short-term and intermediate-term debt up to a maximum of five years. Yield spreads are the highest in history and the government won’t let them fail. Shareholders in company stock, however, will probably get wiped-out eventually.