he shapers of the U.S. mortgage finance system hoped to achieve the security of government ownership, the integrity of local banking and the ingenuity of Wall Street. Instead, they got the ingenuity of government, the security of local banking and the integrity of Wall Street.

This month, shares of the two U.S. mortgage companies Fannie Mae and Freddie Mac collapsed. Freddie’s shares have lost 70 percent of their value in a week; Fannie’s 55 percent. Fannie and Freddie are technically known as government-sponsored enterprises. Everybody assumes they carry a government guarantee—even though, in reality, they do not.

This assumed guarantee has allowed them to engage in decades of dubious market activity, which has now come to a disastrous head.

For its first 30 years, the government actually owned Fannie Mae. In those early years, Fannie (formally known as the Federal National Mortgage Association) borrowed at low rates, then loaned the money to banks for middle-class mortgages.

In 1968, the Johnson administration decided to privatize Fannie: The administration realized it could make the government’s accounts look better by moving Fannie Mae’s obligations off the books.

The administration then created a second company to provide competition to Fannie. Thus was born Freddie Mac, the Federal Home Loan and Mortgage Loan Corporation.

Today, the two companies together are responsible for some $5 trillion of mortgage debt. To put that in perspective, that’s more than half the entire U.S. federal debt.

Fannie’s and Freddie’s ability to pay their debts depends on their ability to collect from retail mortgage lenders. And with those lenders dropping dead like roses in a heat wave, collection suddenly looks very much in doubt.

This non-transparency allowed Fannie Mae to engage in serious accounting fraud, overstating its earnings considerably—overstatements that, incidentally, justified the company’s lavish compensation packages.

The loss of confidence that struck the markets this week has been gathering for years. It is the natural by-product of the bad practice of merging private business with government power.

As so often happens with large scandals, the cost will fall on everyone except the responsible parties. In 2006, federal regulators sued Fannie Mae executives to recover $115 million of compensation. The case was settled for $3 million, plus the surrender of some (now probably valueless) stock options and other contingent benefits. The $3 million was paid from Fannie Mae’s own insurance.

And at the polls this November, the voters will likely exact a political price for the debacle from John McCain and the Republicans—even though the party most tainted by the failure ought to have been the Democrats. Indeed, longtime Walter Mondale aide James Johnson – who headed Fannie Mae from 1991 to 1998 – until recently chaired Barack Obama’s vice presidential selection committee.

That’s not close enough to justice, not even close enough for government work.

David Frum is a resident fellow at the American Enterprise Institute.