Apparently, Paulson misses his days at Goldman and Bernanke is jealous of other sovereign wealth funds, so together they have both created the largest US hedge fund, with potential assets of over $700 billion. Incredibly, Paulson will have unprecedented powers to use the nearly $1 trillion as he sees fit, with little or no oversight. You can read the details here.

About, the only thing missing from the government hedge fund is the authority to buy stocks and commodity futures. But, I’m sure these asset classes will be added once the “private asset managers” who are supposed to manage the government hedge fund gain control. On the subject of private asset managers: This seems like the business opportunity of a lifetime, and one wonders who is going to get that job.

All kidding aside, the more one thinks about this bailout plan, the more one realizes that it is simply ludicrous, comical, and has potential fraud written all over it. Giving one or two people authority over what will become a fund worth over $1 trillion of other people’s (i.e. US taxpayers) money, is simply a travesty. Is it any wonder that Paulson is pressuring everyone to get this deal done as soon as possible?

The root of the current crisis is: Too Much Leverage by consumers, businesses, and financial institutions.

The way out of this crisis is simply: Reduce Leverage, no matter how painful that will be and how long it will take.

Highly leveraged financial institutions and hedge funds investing in toxic assets have nearly brought the US financial system to ruin. Will setting up a giant hedge fund to buy the assets that many sophisticated investors have already concluded are not worth buying, somehow save the US and world financial system?

Instead of investing $700 billion in worthless assets, why not put $700 billion into developing products and services that society really needs? How about investing $700 billion into implementing alternative energy plans so that we can reduce our reliance on foreign oil and help the environment in the process? Surely, this will do more to help the economy long-term, than setting up a hedge fund.

How to personally profit from the Paulson scheme? For various reasons, I still think commodities, energy/alt. energy, and emerging market shares will continue to soar on this bailout news. Stay away from dollars and US companies with no significant export business. Though I’m biased to a certain extent, I still think Brazil is a long-term winner as this crisis subsides. The country is in great fiscal shape, is politically stable, is energy independent, and has the largest commodity economy in the world. One negative about Brazil is the corruption in politics. But surely, after witnessing what Paulson has done in the last few weeks, Brazil’s corruption seems quite tame relative to what is currently happening in the US. EWZ provides the widest exposure to Brazil, but it is a highly volatile equity (Disclosure: I am long EWZ).