Financial cowboys need to be lassoed, corralled

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Markets end week on a positive noteWorld stocks tumble on credit worries

: 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 Inc and the others also must be forced to switch much of their short-term debt to long-term bonds.

Bank of America Corp 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 nation'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 the 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 Cos 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 the 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.