Should the government take mortgage price risk?

Felix Rohatyn and Everett Ehrlich had some suggestions in the FT yesterday for how the bailout of the agencies (and the rest) might proceed.

One option would be to design terms on which the Treasury would create “certificates” that would be swapped for conforming mortgage assets up to a predetermined percentage of banks’ capitalisation, together with a schedule for swapping these certificates back to the Treasury over the next three to five years. This would give banks breathing space to meet capital standards while the housing market stabilised. The prospect for government participation in any upside could parallel the Chrysler bailout that worked quite successfully almost 30 years ago.

Presumably these certificates would carry the faith and credit of the U.S. government and hence would trade like T bonds. But how would the upside participation work? If the government sells the mortgages back at their then current market price - however that is determined - it is taking mortgage price risk. Possibly hundred of billions of dollars of it. For the authorities to fund illiquid assets for three to five year is reasonable: for them to take market risk over that period surely introduces massive moral hazard. Central banks are de facto funders of first resort: asking even more of them is probably a mistake.