The asset side of the mess could be plugged by Fed injections, but the liabilities side cannot (and yet this is what is being done via AIG).

Whatthis means, though, is that lots of people (like Paulson) are making outrageously large profits from having bet on supposedly rare failure events - and this money is being created for them by the Fed.

In the long run, we're all dead. John Maynard Keynes

Accordingly, his funds generally eschew leverage, or making bets with borrowed money. He insists that his fruitful subprime trade, far from being stunningly clever, was a no-brainer for anyone who bothered to analyse the complex securities' underlying collateral. "It was obvious that a lot of the stuff...was practically worthless at the time of issuance," he says. He finds it "perplexing" that the banks holding the higher-rated tranches could not see this danger, and that so few others were prepared to believe that Wall Street's finest could have miscalculated so badly.

Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust. Though the CDS market has been good to him, he believes it "blew out of control" and needs to be regulated and moved onto exchanges, with margin requirements to limit excessive speculation. He also advocates tighter oversight of hedge funds.