Making it more difficult to short Fannie or Freddie is not going to do one thing for their balance sheets, which is the real source of their problem. As former Fed governor William Poole said a few weeks ago, they are basically insolvent. Five-year bonds sold by Fannie Mae yield 90 basis points (0.9%) more than US Treasuries of similar maturity, almost double the average over the past 10 years, according to data compiled by Bloomberg. That spread, which translates to $90,000 in extra annual interest per $10 million of bonds, exists even after Treasury Secretary Paulson signaled the US would ensure the debt is repaid by offering larger amounts of backup financing and potential capital infusions.

Given Paulson's guarantee, why would you buy US bonds when you can get the same guarantee and almost 1% more?

Fannie and Freddie are private companies where the profits go to shareholders and losses go to taxpayers. There are a lot of people (including your humble analyst) who have complained about the current set-up. Basically, they were allowed to leverage their capital beyond what even your most leveraged hedge fund would think prudent. How could the value of homes go down? Leverage up and show huge profits, pay monster salaries and bonuses to management who did nothing but increase risk, and spend $170 million on lobbyists to make sure that no one changes the rules.

Paulson had no realistic choice but to do what he did. But the true point is, he should have never had to make that choice. A real regulator would not have let them leverage their capital to the extent they did. If taxpayers have to invest one penny before shareholders are wiped out, then there is no justice. Fannie and Freddie should be broken up into several much smaller firms which are not too big too fail, their shares floated to new owners, and taxpayers should get preferred shares until they are made whole. And the implicit, but now explicit, guarantee should be taken away