I think you have a good idea here, it makes sense, and that's why it won't happen. If the politicians & bureaucrats had any common sense at all, we wouldn't have this problem to begin with. So, do we really expect them to listen to a good idea? I don't think so. Also I have to disagree that there was no pressure from the public to stop the dot com bubble collapse from spreading, Greenspan lowered interest rates to 1%, this effort created the housing bubble and the inflation that we are experiencing today. Bernanke's effort to save the housing market by lowering rates now will cause more future inflation.

Your argument would only begin to make sense if Fannie Mae and Freddie Mac were just regular lenders. They are not, they are primarily bond insurers.

What this means is that they help transform mortgage loans made by banks into mortgage backed securities, by guaranteeing that monthly payments on the loans will continue to be passed through to the investor even if the end borrower doesn't pay or if there is a loss on the sale of the property in foreclosure.

This is why this statement makes no sense:
"Similarly, the holders of mortgage-backed securities (MBSs) around the world would no doubt be delighted to know what proportion of their MBSs are good and what proportion are bad."

Fannie Mae agency MBS are not thought of to be good or bad, they are all thought to be equally good because they are guaranteed by Fannie Mae. The bonds pay a low interest rate based on that assumption of safety. A gigantic amount of domestic and foreign investors buy these bonds as a safe haven for their money, if Fannie Mae failed, all of them could realize losses on their holdings because of the guarantee going away (because people wouldn't pay them the same price for the bonds as they themselves paid because of the potential of risk due to there being no gaurantee). Now, its possible that most of them, if they held the bonds until the mortgage pools underlying them paid off, may not actually lose any money because the mortgage borrowers aren't late or default, but many investors didn't plan to hold the bonds that long.

The bottom line is that as of the last few months, no new mortgage back securities have been created except for those backed by Fannie Mae, Freddie Mac, or the Federal Housing Administration/Ginnie Mae. If Fannie Mae and Freddie Mac were left to die, it would essentially mean that almost no new mortgages would be made (or that the rates and terms of mortgages would be increased and made more strict). Banks do not have the lending capacity to make up for the elimination of the secondary mortgage market.
The implications for the economy are massive and the effect on homeownership would be detrimental to the public good and policitally disasterous.

Now, the holders of Fannie Mae and Freddie Mac stock should be wiped out in the event of a government bailout. In addition, the institutions should be restructured so that they act as just a guarantor of last resort, not the primary vehicle by which the secondary residential mortgage securities market functions by.

Buyers of mortgage back securities should indeed understand the underlying underwriting and actuarial assumptions of the mortgage pools and tranches they purchase. However, the quasi governmental aura around Fannie Mae and Freddie Mac distorted this system and it wouldn't make sense to do anything to damage the agency purchasers.

My view is that the two agencies should be immediately seized by the government, for even if they might not experience enough losses to go belly-up, the fact that they might ever in the future need to be bailed out at the taxpayer's expense is reason enough for the government to control their policies to ensure prudent underwriting.

"If the free market is good enough for citizens who buy dot-com stocks that crash, why not institutional investors who buy MBSs from Fannie and Freddie?"

Again, this is not about a bailout of investors, but about ensuring that mortgage lending continues.

In addition to the observations of Benjamin Vanderford (above), the blogger's comparison to the dotcom bust is also questionable. He seems to forget that the dotcom bust wiped out the stock market and had every appearance of sending the economy into a humdinger of a recession which seems to have been forestalled only by the aggressive rate-cutting of the Fed during the early years of the decade, resulting, ultimately, in the mess we have today. Maybe we would have been much better off had there been some way to bail them out, rather than what actually did happen.