This fight between bailed-out banks and Fannie Mae and Freddie Mac about who has to take the hit for soured mortgage loans really demonstrates how screwed up the financial system is, and why the Federal Reserve failed in its role of regulating securitization.

Fannie and Freddie claim the deals were "improperly written," so the banks have to buy them back, but the banks say that will blow holes in the balance sheets that taxpayers just restored.

And of course, the government-sponsored enterprises enjoy the implicit backing of the taxpayer, so either way the taxpayer may be in for more pain.

Barney Frank insists that's not the case, and that implicit backing doesn't mean explicit, so bondholders will have to take the hit if banks don't. That suggests the GSEs continue to operate in a neither fish-nor-fowl, quasi-public, quasi- private state of being.

But that form of existence will only drag out the disputes between the parties over who gets the losses, and add to the uncertainty hanging over the financial system like the fog that it intellectually resembles.

I've argued in favor of making the GSEs public agencies, so as to put a floor under home prices during a crisis like the one we just went through. But now I'm not so sure, if it means putting the taxpayers even further in hock for bank losses.

Maybe there's a way to square the circle along the lines Frank suggests. Frankly (no pun intended), I don't see how. But whether they're turned into agencies or privatized completely, the GSEs' roles should diminish, and the process for getting mortgages off of banks' cleaned up, so they can't just sell crap to the public without regard for the consequences.

The thing is, when I was at CFO Magazine, I asked an economist at an Economist conference not too many years before the crisis (the Economist owned CFO back then) whether he thought problems were brewing with the GSEs and he just shrugged and asked me what I thought.

I mention this because this economist soon became a Federal Reserve board governor. I can't mention his name because the conference was off the record. (While I may, strictly speaking, be violating the terms of that discussion, I seriously doubt anyone could identify him based on this description, not after so many years.) But given the rules for engagement, why was this bank regulator-to-be so unwilling or unable to share his views? Either way, I thought his response, or lack of one, was pusillanimous, which pretty much characterizes the regulatory approach of the Fed before and during his tenure.

As I just noted the other day, Greenspan was all for the unregulated securitization of risky mortgages.

And that as much as anything explains how we got where we are today. Yet here come the district presidents, asking for more power they would rather not use.