Treasury Secretary Hank Paulson spent Tuesday trying to convince Congress to give him an authority that he says “hopefully will never be used.” Paulson wants the power to buy blocs of stock in Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that are teetering on the brink of insolvency. We’re not sure if Paulson’s pitch convinced Congress, but the stock market certainly didn’t seem to buy it. Shares of both enterprises fell by more than 26 percent — a bet by investors that the U.S. government will indeed take a large position in Fannie and Freddie, thus diluting the value of existing stakes.

If Congress is determined to grant Paulson the authority to bail out the mortgage giants, it must not be in the form of a blank check. The legislation Treasury has submitted to Congress does not cap the amount of taxpayer money Paulson would be able to invest in Fannie and Freddie stock, nor does it cap the new line of credit Fannie and Freddie would be able to draw upon at Treasury. That should be rectified, for starters.

Second, if taxpayers are going to risk billions to save Fannie and Freddie, they should have an equity upside with a chance to profit if Fannie and Freddie recover. The payment of dividends to other shareholders should cease until taxpayers are in the clear. Furthermore, this taxpayer-class of preferred stock should get a significant number of directors on Fannie and Freddie’s boards, giving Paulson the power to replace their management.

Conservatives should insist on these bare-minimum prerequisites for bailing out Fannie and Freddie, and House Republican Study Committee chairman Jeb Hensarling of Texas is working to ensure that they get a chance to do so. Hensarling wrote a letter to Speaker Nancy Pelosi and House Financial Services Committee chairman Barney Frank requesting, on behalf of House conservatives, “the opportunity to offer amendments to modify the proposal before a vote on final passage.”

Hensarling has reason to be worried, because Frank and his Senate counterpart, Chris Dodd, have both endorsed the idea of simply attaching the Treasury initiative to the housing bill that passed the Senate last week and bringing it to the floor for a vote. That approach would bypass regular procedures — hearings, amendments, debate — on an initiative that would authorize hundreds of billions of dollars in new spending.

This is to say nothing of the housing bill to which it would be attached. That bill has a few good features. On the plus side, it would create a new regulator for Fannie and Freddie that could put them into receivership if they become insolvent. A federal receivership with an eye toward winding down and breaking up the GSEs might be the best option for taxpayers in the long run.

But the housing bill also has a lot of flaws. Its centerpiece is a gargantuan, unworkable bailout for subprime-mortgage lenders and borrowers that would offload the worst of these loans onto the Federal Housing Administration (i.e. taxpayers). It would also make permanent a temporary increase in the size of the mortgages that Fannie and Freddie are allowed to buy. Congress passed the temporary increase earlier this year to inject liquidity into the jumbo-mortgage market at the height of the credit crunch. Making the increase permanent now would be dangerous folly.

Many jumbo mortgages are considered subprime because they are so large, and the only reason Fannie and Freddie aren’t in worse financial shape than they are is because they were barred from purchasing such loans at the height of the housing boom. In fact, most of their troubles stem from the subprime mortgages they were allowed to buy in the form of mortgage-backed securities. National Review Online’s Larry Kudlow reports that Fannie and Freddie are holding up to $1.4 trillion worth of these shaky securities in what he likens to “a high-risk internal hedge fund.” That’s what’s got the markets spooked.

Congress should sever the good GSE-reform provisions from the rest of the housing bill and add them to the Treasury initiative, creating a single package of GSE reforms. Democrats are unlikely to agree to such a plan, because GSE reform is their bargaining chip to get Republicans to vote for the objectionable provisions of the housing bill. Nevertheless, it is the best approach.

Barring that, the Treasury initiative should at least be subject to the regular order, rather than folded into the housing bill and passed without debate. The stakes for taxpayers — not to mention the economy — are far too high.