Maybe the $30 billion in new money Merrill Lynch & Co has raised still isn't enough. In any case, Merrill and its three big Wall Street rivals must be required to have fixed amounts of capital, certainly more than they would maintain on their own.

Goldman Sachs Group and the others also must be forced to switch much of their short-term debt to long-term bonds. Bank of America and all other banks must be told to increase their capital, too.

Fannie Mae and Freddie Mac, which own or guarantee $5.2 trillion of the USA's $12 trillion in home mortgages, should be forced to hold as much capital as banks. While we're at it, Fannie and Freddie should be split into four companies - and their ties to government eliminated.

Now that the Federal Reserve, Congress and the US Treasury have saved the banking system and propped up the mortgage industry, they should insist that financial companies curb their wanton ways. The government must make rescues less likely.

There has been much moaning about the government bailing out companies caught in the subprime crisis. But the government did what it's supposed to do and what the markets couldn't do after the financial giants' mortgage securities blew up.

Investors had pulled their money from Bear Stearns when the firm needed it most. Bear's inability to pay its debts would have led to runs on other investment firms and banks. Money managers abandoned Fannie and Freddie shares and even looked askance at their bonds, which have the government's implied backing. Without the support of these two government-sponsored enterprises, mortgage rates might have skyrocketed.

Quid pro quo

The next step: If the government is to be the lender of last resort for financial companies, it has to demand more control over their daily business. Not too much regulation, just more. New capital ratios and the exact percentages of long-term debt to short-term are for the regulators to decide. There are enough of them to provide wisdom. Fannie Mae and Freddie Mac just got a new overseer, supposedly stronger than the old one.

Perhaps no amount of capital can save these companies from their own stupidity and cupidity. Still, Citigroup's recent need to raise $49 billion in new money clearly shows it wasn't prepared for its subprime misadventures. Merrill Lynch's recent sale of underwater mortgages for 22 cents on the dollar gives investors little confidence that Wall Street won't succumb equally to some new scheme.

Steady goes it

If Morgan Stanley and Lehman Brothers Holdings had more debt due in 10 years or 20 years instead of overnight, they wouldn't have to worry as much about a run on their cash. Increasing capital and reducing short-term borrowings would cut into profit for financial concerns. That's the price of leaning on government during a crisis. Shareholders of big banks such as Wachovia Corp. may prefer less volatile earnings.

Fannie Mae and Freddie Mac have clearly messed up their designated roles as keepers of a secondary market for mortgages, buying loans from banks, which can then lend again. Their mission to promote home-ownership was forgotten as they cooked their books to make the earnings reports look good to stockholders and spent millions on lobbying to keep government reformers at bay.

Divide each company in two and emphatically end government sponsorship for all four entities. If one went bust, it needn't panic the whole mortgage industry. Truly independent companies would no longer be able to sell bonds at lower cost than other mortgage companies.

The government created Fannie and Freddie to encourage people to buy real estate. With almost 70 per cent of Americans owning their homes, the job is complete. Get out the lassoes.

David Pauly is a Bloomberg News columnist. The opinions expressed are his own.