It was rather timely that the US Securities and Exchange Commission (SEC) chose Sunday to announce that it is to begin aggressively pursuing the rumour-mongering on Wall Street that has apparently been so damaging to the health of otherwise completely sound financial institutions. There's nothing worse than people trying to manipulate prices in financial markets by talking.

The first place that the securities police might want to look is the offices of their colleagues at the US Treasury Department - because even as the SEC was announcing its bold new enforcement crackdown, the folks at Treasury were colluding with their friends at the Federal Reserve to pull off a remarkably clever bit of talk-based manipulation to rescue America's beleaguered mortgage lenders.

Despite the headlines about a massive bailout, the Government carefully committed no actual money on Sunday to the rescue of Fannie Mae and Freddie Mac, the ugly sisters in the complex and dysfunctional family of US finance. They simply promised to make available a lengthy line of credit should the institutions need it and pledged to inject capital into the troubled companies - again, crucially, “if necessary”.

This was a fine example of what is known in financial markets as “open-mouth operations”. The idea is that, by promising or threatening to do something dramatic, you will get the markets to do what you want them to do, without having actually to do anything yourself. Yet as anyone who has reared children will know, open-mouth operations don't always succeed. Sometimes they have to be backed up with action.

Times Archive, 1938: US Housing Bill signed

President Roosevelt has taken the first big step towards ending the business depression

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In Freddie and Fannie's case, it's too early to tell what might still be needed. Yesterday, Freddie had no difficulty tapping the capital markets for $3 billion (£1.5 billion) in funding. But it had no difficulty doing that last week, either. The question is whether the Government's measures will encourage financial institutions to come forward and help to recapitalise the two companies.

There don't seem to be any takers yet for that kind of financial heroism. That's because no amount of jawboning will disguise the basic problem that the massive losses in the American mortgage market are going to fall heavily on Fannie and Freddie's books, since they guarantee almost half the nation's loans. The existing shareholders' equity is hopelessly insufficient to meet those losses.

So a real, as opposed to a verbal, bailout still seems inevitable. How would this work? The assumption in financial markets is still that the United States would, in effect, take over the companies, with the existing shareholders losing all their stake. That was what was behind the falls in the companies' share prices last week. But is that correct? Given the high cost to taxpayers, shouldn't the Government try to share some of it with the creditors?

There is something appealing about the idea that creditors as well as shareholders should get punished for Freddie and Fannie's losses. Keeping a limit on the losses to the US taxpayer seems both politically and fiscally prudent. Investors poured money into the agencies' debt and allowed them to expand to dangerously bloated levels. Why shouldn't they also take some sort of haircut on their investments?

The big problem is that slapping creditors in the face may not be a good strategy for the US in the world right now. The biggest investors in Fannie and Freddie's debt were foreign central banks, who listened to all the talk of the “implicit government guarantee” and treated it as though it were as secure as Treasury bonds . If the US was to say “sorry, guys, we never said the debt was guaranteed, you'll have to take a loss”, the damage to the American Government's financial credibility in the world would be incalculable. Who knows what might happen to US interest rates and the dollar?

So, in the end, the taxpayer will have to cough up. But it's worth remembering that there's a sort of rough justice to it, after all.

Fannie and Freddie morphed over the years from being a benign source of support for the American housing market into nothing short of a racket - and a ruinously destabilising one, at that. Because of the implicit government guarantee of their debt, they were able to borrow cheaply on capital markets and massively expand their books. They paid their executives lavishly and grew into financial behemoths. Then they passed some of the benefit on to borrowers in the form of lower rates.

This all masked the simple fact that the Government was indirectly subsidising the US housing market through interest rates that were lower than they would otherwise have been, a subsidy that directly contributed to the housing bubble of the past ten years. This subsidy did not go to sub-prime borrowers, the sort of low-income, poor-credit Americans who might actually have needed it. Loans backed by Freddie and Fannie are, by definition, prime loans, to borrowers who have easy access to financial markets.

The bill for that massive subsidy is finally coming due. The shame is that it has taken such chaos and pain to get here.

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