You may now exhale. As of Monday's market close, both Fannie Mae and Freddie Mac were still alive. Investors snapped up $3 billion in Freddie Mac bonds; the firms' stock prices sank only about half a buck each, in contrast to the dizzying plunge of recent days. Treasury Secretary Henry M. Paulson's announcement of a rescue plan for the two "government-sponsored enterprises" (GSEs) achieved its intended effect, sort of. The panic that threatened to slay the mortgage giants, upon whose shoulders the American economy rests, has abated. But for how long?

Mr. Paulson and other policy-makers have purchased this respite at a considerable price. They have abandoned the carefully cultivated fiction that Fannie and Freddie were regular shareholder-owned companies &

despite the GSEs' pivotal role in the U.S. financial system and the raft of congressionally bestowed advantages that made them dominant in the secondary mortgage market. Investors have always assumed otherwise &

that Washington would bail out Fannie and Freddie in a crisis. Thus, bond buyers treated Fannie and Freddie debt almost like ultra-safe Treasuries; able to borrow cheaply on their government-backed reputations, the GSEs passed (some of) the savings on to homebuyers. But you could view the recent run on the GSEs' stock as a jittery market's way of forcing the government to make the implicit explicit. Mr. Paulson had no realistic alternative.

As outlined by Mr. Paulson, the government's plan consists of dramatically increasing the $2.5 billion credit line each GSE already has with the Treasury for the next 18 months, as well as offering to buy stock in the companies if their sources of private capital dry up. (The Federal Reserve offered separate access to credit.) It also adds the Fed's oversight to that of the proposed new regulator created by pending housing legislation.

The hope is that the mere promise of a bailout will be enough to restore confidence &

so that this expensive promise will never have to be kept. Fannie and Freddie do back mostly high-quality mortgages, and housing prices can't keep going down forever. But, just to be on the safe side, the government has to attach some strings. At a minimum, Congress and the Bush administration should be rewriting pending housing legislation to require the GSEs to maintain greater capital reserves, as banks do, once the crisis is over. Mr. Paulson, however, has said only that "use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer." To be sure, if the government bought equity, it would presumably be preferred stock; once the companies were producing profits again, the Treasury would be first in line for a share.

Yet either way, we would be going from letting privately owned and privately financed firms seek profits using an implicit public subsidy to allowing them to put the public's money DIRECTLY at risk &

albeit under tighter government regulation. Perhaps the GSEs would resist the temptation to gamble with other people's cash, but perhaps their losses would become even worse. Given the uncertainties, Congress should at least reserve the right to take the companies over outright. May it never come to that. But if the last week teaches anything about Fannie and Freddie, it is the wisdom of hoping for the best and planning for the worst.

"" The Washington Post