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Andy Kessler reckons that if the government buys up bad loans at 35 cents on the dollar and eventually receives 50 cents for them, it could make well over $1 trillion on this bailout. I'm not sure how that works: a 43% return on $700 billion is a profit of only $300 billion.

In any case, it seems clear that even under Kessler's optimistic scenarios, if the government buys bonds at about 60-65 cents on the dollar -- which is very much within the realm of possibility, listening to how Ben Bernanke described the bailout -- then the taxpayer is liable to be on the hook for a very large sum indeed.

All of which only goes to reinforce the central irony of the bailout negotiations. While the politicians argue about things like executive pay and insurance funds, there's only one thing which really matters: the price the government pays for bad assets.

Paulson and Bernanke are leaving that key number deliberately vague, while the House Republicans' plan seems to envisage ultimately paying a full 100 cents on the dollar, through a new insurance fund, with some unknown part of that payment coming from the banking industry itself. Either way, the cost of the plan is very much up in the air. But for reasons I don't pretend to understand, the real sticking point of the negotiations is the "how", and not the "how much". Weird.

Source: Bailout Talks Lose Sight of the Cost Question