It looks like Hank Paulson was wrong about not having to use his bazooka; this weekend it gets fired right at the bosses of Fannie Mae and Freddie Mac and the investors foolhardy enough to have bought their shares.

Now that the Federal government’s rescue of the mortgage industry’s twisted siblings is assured, Paulson has a huge job ahead of him. Holding the chiefs of each company accountable for the debacle and temporarily soothing markets isn’t enough; the two companies must be transformed so they don’t again have to live off Washington’s largesse.

As the weekend began, reports said Paulson would be removing Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron from their jobs and putting the two companies into a conservatorship, where they would be removed from their jobs.

Friday, according to press reports, the Treasury Secretary and ex-Goldman Sachs CEO met with two executives and was joined by Federal Reserve Chairman Ben Bernanke, and the companies' new regulator, the Federal Housing Finance Agency.

Now, as outlined by the New York Times, the Journal and others, Treasury will be knocking off the top executives and the boards of the each company, wiping out holders of common stock, providing periodic payouts to the company to shore up its finances, and backing distressed mortgages. There was no estimate on how much money the government would be pumping into the companies.

In July, Paulson told the Senate Banking Committee that merely knowing Treasury has the authority to inject money would reassure the markets and preempt a government bailout of the pair or any other financial giant. "If you have a bazooka in your pocket and people know it, you probably won't have to use it," he boasted on Capitol Hill.

Last year at this time, Fannie and Freddie shares traded at over $60. Since then, investors have seen roughly 80 percent of their holdings evaporate en route to the single digits.

Syron and Mudd have been heavily criticized for ratcheting up the Fannie and Freddie lending machines, often getting involved in mortgage lending that fell outside of the historical guidelines by which the companies operated. Syron, especially, has been hit for being paid $38 million during the past three years.

Critics charge that as the U.S. housing market rallied, the bosses at Fannie and Freddie took on more risk, backing mortgages from less qualified borrowers and in larger amounts as property prices skyrocketed.

The swift demise of the U.S. real estate market—especially weakness in Southeast and West markets—left the twin GSEs in a financially precarious position.

In early August, Freddie reported a larger-than-expected loss of $821 million for the fourth quarter—the fourth straight losing quarter. It also said it expected to cut its dividend of 25 cents per share to 5 cents or less, illustrating again that its scramble to raise capital was far from over.

As their shares plummeted, the same overseas investors who once snapped up Fannie and Freddie bonds dumped them back on to the market—including the Bank of China, which has cut its debt holdings in the pair by more than a quarter, from nearly $11 billion at the end of June, according to the Financial Times last week.

Critics have long called for the pair to be totally privatized so the government wouldn’t be forced into bailing them out in the midst of a housing and economic crisis.