Outgoing Treasury Secretary Paulson has suggested that Congress should replace Fannie Mae and Freddie Mac with one or two private-sector entities. Those entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, and would not have investment portfolios. The GSEs have been a consistent source of capital for the residential mortgage industry in good times and bad. They have brought much needed standardization to mortgage lending. The unique funding model of the GSEs left them particularly exposed to a liquidity crunch. Their high leverage, which was justified by the historically "low risk" mortgage assets, proved to be their undoing.

As a utility, the GSEs will no longer have portfolios. These portfolios saved previous market disruptions from turning into outright collapses. Should the Fed now bare that responsibility, presumably by buying MBS insured by the "utilities?” Or is there another way forward for the GSEs that preserve their role as a market maker without making taxpayers the ultimate bagholders?