The near-panic trading of Fannie Mae and Freddie Mac stock could not have come at a more delicate moment. Shares in the government-sponsored enterprises (GSEs), which back over $5 trillion worth of mortgages, fell to 1995 levels on Monday, just as the Senate returned to pass a housing bill. With respect to the GSEs, the bill pulls in two directions at once: It would regulate Fannie and Freddie more tightly, probably forcing them to raise more capital. Yet it would also expand the use of the GSEs to prop up the housing market &

by having them pay for a government-backed refinancing of troubled mortgages and by allowing them to support much larger home loans.

The action on Wall Street shows that GSE shareholders were already fretting about how the firms could do all this while covering their own losses ($12 billion combined since June, and more on the way). Indeed, the immediate trigger for the Fannie-Freddie sell-off (the stocks rebounded Tuesday) was a Lehman Brothers report that noted that the two enterprises would have to raise a combined $75 billion in new capital if they were required to meet the same accounting standards that a federal board is considering for all other financial institutions.

These fears were overblown, in the sense that the two companies will probably never be required to meet the tougher accounting standards. But that reflects a political reality &

Congress' wish to use the GSEs for housing relief, plus the government's implicit guarantee of a GSE bailout &

rather than economic reality. As a mental exercise, it is useful, and sobering, to consider how differently Fannie and Freddie operate from other financial institutions. In the first quarter of 2008, Freddie's mortgage portfolio and mortgage-backed securities exceeded shareholders' equity by 50 to 1, according to the Wall Street Journal, while Fannie's ratio was 21 to 1. By contrast, J.P. Morgan Chase is leveraged 13 to 1.

It is not so much the short-term viability of Fannie and Freddie that is in doubt &

though their collapse is all too thinkable. Rather, it is the inherently risky concept of a "government-sponsored enterprise" that is supposed to maximize return to shareholders but whose losses, if they become too large, must be covered by taxpayers. For most of the two firms' histories, homeownership grew, home prices rose, and the companies and their sponsors in Congress experienced only the upside of this arrangement. In an environment of rapidly &

and apparently indefinitely &

sinking home prices, it suddenly looks uncomfortably fragile.

Though shareholders may not like it, from the public's point of view, the saving grace of the Senate housing bill is that it tries to offset the new risks assumed by the GSEs with tighter regulation (tighter, in some ways, than the House version). It creates a new agency empowered to make the GSEs hold more capital if necessary for their financial stability. Still, even this long-awaited and much-needed measure does not go as far as it might have. The proposed new regulator could not impose higher capital requirements based on risks to the entire financial system that the GSEs' operations pose. In other words, the bill probably could be strengthened; this week's events suggest that it should be, while there is still time.

"" The Washington Post