Paulson's bailout plan could make trillions for taxpayers, up to $2.2 trillion to be exact, according to Andy Kessler, a former hedge fund manager and author.
Yes, that's trillion with a 't.' The bailout could be the mother of all trades, writes Kessler. in The Wall Street Journal.
Assuming a 50 percent impairment in subprime loans, the plan from Secretary of Treasury Henry Paulson would generate $1 trillion to $2.2 trillion, he contends.
The government would be acting like a humungous investor, a supercharged Warren Buffett. But it doesn't play by the same rules as ordinary investors. The Treasury Department and Federal Reserve, according to Kessler, can advocate growth by pumping capital into the economy.
"While normally this creates a threat of inflation and a run on the dollar and we may see dollar exchange rates turn south near term, don't expect it to last," he writes.
It all depends on how much Treasury pays for the securities. The better ones have been selling for about 70 cents on the dollar. But the truly toxic ones, loaded with defaulting loans, have sold for 15 to 25 cents on the dollar.
The firms may try to bargain but will cave in because they need cash, Kessler predicts. The government could end up buying mortgages with a face value of more than $2 trillion for $700 billion.
Bill Gross, manager of the Pimco fund, thinks the government will pay about 65 cents on the dollar for the mortgage securities.
Because the government can borrow at 3 percent or 4 percent, more cheaply than anyone, it will earn a yield spread of 7 percent or 8 percent, Gross wrote in a recent op-ed piece in The Washington Post.
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