The following editorial appears on Bloomberg Opinion.

It’s official: The Trump administration has a plan to deal with mortgage giants Fannie Mae and Freddie Mac — by returning them to the same quasi-governmental form that set them up for failure in the 2008 financial crisis. If executed, it’s likely to be a win for a small coterie of hedge funds, and a big loss for everybody else.

Fannie Mae and Freddie Mac play a central role in U.S. housing finance. By guaranteeing payments of interest and principal on home loans (in return for a fee), they make the ubiquitous 30-year mortgage possible. For decades, they operated as a public-private hybrid. Their congressional charter to promote homeownership created a perception of government backing, which allowed them to get by with extremely little capital and deliver outsize profits to their private shareholders. After the housing bust, they suffered overwhelming losses and were rescued at taxpayer expense.

Since then, as wards of the state, Fannie Mae and Freddie Mac have actually done quite well. They have supported lending throughout the recession and recovery, boosted fees to better cover their risks and paid more than $300 billion in dividends to the Treasury. Yet a rump of private shareholders, including hedge funds that have bought in since the crash, keeps clamoring for a piece of the profits.

In the absence of congressional action, the Trump administration might go it alone. Its plan, released this month by the Treasury, is to put the companies back into private hands, but this time with an explicit government backstop. This means the companies would retain more of their earnings — potentially a huge windfall for the private shareholders. The resulting structure would be much the same as before the crisis: Shareholders would reap profits until the next housing bust, when taxpayers would again be on the hook — only more firmly than last time — to cover losses. Granted, the Treasury plan does call for shareholders to take on more risk in the form of added equity capital. It also requires the government to charge a fee large enough, supposedly, to compensate taxpayers for providing a backstop. Such a setup gives the private shareholders every incentive to press for low fees and light capital requirements.

There are better options. For example, Fannie Mae and Freddie Mac could be merged into a single, fully government-owned corporation that would transfer most of its credit risk to private investors, retaining just the catastrophic risk that only the government can bear. This would get private capital involved without letting it so easily shift risk to taxpayers. Pricing the guarantee correctly would be easier. This in turn would promote more competition from completely private lending channels. Fannie Mae and Freddie Mac have already been moving in this direction.

The Trump administration’s plan still has many details to iron out and various political forces to align. As the idea moves forward, one can only hope inertia will prevail: Doing nothing would be better than this.

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