Super Nationalization Treasury Bonanza Time!

WOW! For the low, low price of $2 trillion taxpayer dollars, nationalizing YOUR mortgage industry will get YOUR US Treasury OODLES OF CA$H (KA-CHING!)

But these are small-time deals. My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

WOW! How do I get in on this GREAT DEAL?

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Wow that's great! And all we have to do is pay off our mortgages like we've been doing? I mean the fact people couldn't pay their mortgages off in the first place and are already tapped under mountains of personal debt and are tapped out got us into this mess in the first place, but yeah we'll just all eat ramen for the next decade and GIT R DONE!

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

That's AMAZING! We should have nationalized these mortgages a long time ago! We can pay off our national debt just through the power of crappy securitized mortgage products! It's all so clear to me now!

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.

What a financial genius! It's almost like he planned this so America could make BIG BIG BUCKS!

So the U.S. will be stuck with a portfolio in the trillions of dollars in bad loans and last-to-be-paid derivatives. Where is the trade in that?

OH NO! Tell me there's a bright side to this problem, because I'm thinking that as a taxpayer, I'll be stuck with a nationalized super-disaster that will drive the US into becoming a third world economy where it takes a hundred dollars to buy a loaf of bread!

Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." 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.

WOW so the Feds can CHEAT! That's AWESOME AND GREAT! You say the dollar will eventually turn around because everyone will want to buy dollars because we really have these super-valuable mortgages on the books the taxpayers bought for LOW LOW PRICES?!?! Why didn't we do this EARLIER?!?!

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly.

WOW! Ten years from now we'll be the richest company on Earth!

Of course in the meantime we'll be in breadlines facing double digit employment and a dollar not worth the paper it's printed on, but hey, what a GREAT INVESTMENT OPPORTUNITY!

Somebody should tell McSame, I'm sure he'll be interested!