Earlier this week, Fannie Mae told mortgage bankers that it’s now a “holder and mover” – not a warehouse – of mortgage credit risk. Freddie has previously described itself as a “buyer and seller,” also taking itself out of the GSEs’ bread-and-butter guarantee business. With this transformation, the GSEs are complying with the Administration’s demands and sharing what was once their wealth. However, it’s not that easy. Fannie and Freddie can shed credit risk while the market is devouring high-yield deals with an “effective” USG guarantee. At any point at which the music stops, the GSEs may well find themselves stuck with a big pile of non-transferable credit risk and a portfolio they cannot fund unless Treasury bails them out again or the market absorbs a huge, sudden issue of GSE debt backed by an “effective” USG guarantee. In short, we can pretend we’re making Fannie and Freddie disappear, but we’re actually turning the GSEs into still bigger simulacrums of their old, risky selves.

I don’t blame the GSEs for coming up with their new gig.   They didn’t. While the Obama Administration can’t get Congress off the GSE dime, it can and, through FHFA, has done as much as it can to restructure Fannie and Freddie into entities that serve national need without posing systemic risk.   A sweet thought, but there’s flat-out no way for Fannie and Freddie to do their master’s bidding and support the entire U.S. residential-mortgage market without being way big and, thus, ultra-systemic.

To be sure, the White House, Treasury, and FHFA have done a lot to the GSEs’ on- and off-balance sheet books. Through stringent portfolio restrictions, they’ve whittled away the big on-balance sheet portfolios of all sorts of stuff that long supported GSE earnings as well as, some say, sparking the financial crisis. To shrink the GSEs even more, policy-makers have now also gone after the still more-intransigent part of the book – guarantees – not by hiking g-fees in ways that would allow private competition (maybe), but rather by forcing Fannie and Freddie to hive off their guarantee risk after taking it on. A growing series of risk-share transactions is thus establishing just how the GSEs can do this, who will take the risk, and how much it costs to execute this complex risk shuffle.

So far, the deals are moving well and FHFA and the GSEs have thus decided to do more – hence the new GSE mission statements. It seems like the perfect no-action sort-of solution – Washington’s favorite kind. In it, Congress and the Administration do nothing, while seeming to do something because the GSEs’ on- and off-balance sheet books dwindle without any decrease in originations of the thirty-year, fixed-rate mortgages so beloved of constituents and, thus, also of policy-makers regardless of party.

The only problem is that this solution only works for as long as interest rates are low, macroeconomic growth is positive, and no one rattles the cage. Despite the good times, private investors now gobbling up GSE risk-shares could decide not to play. This decision could be made gradually as rates rise and deals better pair risk and reward, especially if risk perceptions discount the GSEs’ federal backstop as any real reform demands. Or, far worse, the market could snap shut because hedge funds, insurance companies, pension funds, and the others bellying up to the risk-share bar come under acute market stress – the 2007-08 scenario that shut down bank mortgage securitization at terrific cost to their liquidity and, then, the financial market.

The GSEs have no capital against their credit risk because of the USG’s backstop. The holder/mover and buyer/seller plan is designed to self-privatize the GSEs by substituting private capital for the GSEs as credit risk changes hands. However, it’s not just credit risk that sparks systemic debacles – liquidity risk is even more pernicious.

It was liquidity risk that created solvency risk, although admittedly highly-leveraged companies like AIG and Lehman were sitting ducks. Maybe they could have made it out of their credit-risk holes given time and access to the federal liquidity support that buttressed banks until the storm grew too ferocious. But, without liquidity or Federal Reserve access, non-bank risk – including that at Fannie and Freddie – went from bad to really worse with breath-taking speed.

The real road to GSE reform requires a comprehensive prudential framework that recognizes what sparks risk across an on- and off-balance sheet book of business, builds in protections at shareholder cost, backs them with federal facilities for public policy purposes, and ensures orderly resolution if all else fails. Covering up GSE solvency problems with risk transfers only makes Fannie and Freddie still more vulnerable to liquidity risk –in short, it’s no way out.