Hank Paulson wants to spend $700 billion to buy up banks bad debt in the hope it can ‘fix’ the crisis on Wall Street.

The audacity is breathtaking. It requires just $100 billion less of the cost of the war in Iraq to date. Moreover, it is a stunning power grab by the Treasury secretary who, if the bill is passed, will be granted “the most incredible powers ever bestowed on one person over the economic and financial life of the nation.” (The New York Times.)

But there are ways to profit from the madness. Martin Hutchinson has picked three winners.

This from Money Morning:

Treasury bonds are a major loser, since inflation is rising and $700 billion of extra debt must be issued. Go for the Rydex Juno Inverse Government Long Bond Fund (MUTF:RYJCX), a fund designed to move inversely to Treasury bonds. Up to now, it’s been a poor play as T-bond yields have trended steadily downward and prices steadily upward, but it’s about to become a good one.

Gold has to be a winner, so you should consider the SPDR Gold Trust ETF (NYSE:GLD), which may be the most efficient way of getting a pure gold play.

Finally, for the first time in two years, I will venture to recommend a U.S. bank. With $700 billion being poured into the sector, one of the major banks has to be a big beneficiary. But the question is, which one?

Avoid Citigroup (NYSE:C): With so many different ways of losing money worldwide, it’s bound to find another one in this downturn.

Avoid Bank of America (NYSE:BAC): I would be very bullish on BAC after its Merrill Lynch (NSYE:MER) buy - if the morons hadn’t previously bought Countrywide Financial - a black hole of losses.

Wachovia (NYSE:WB): The bank’s leaders were as dumb as bricks when they bought a huge California home mortgage operation right at the top of the market in August 2006 - and they probably made other mistakes also.

Wells Fargo (NYSE:WFC): Possibly, but I don’t like the California emphasis or the fact that it was among the most active in the subprime market.

By a process of elimination, I am left with JPMorgan Chase (NYSE:JPM), which was relatively less active in mortgages and picked up a heavily subsidized investment-banking bargain in Bear Stearns.

It will doubtless get its share of the $700 billion, and not be left with so much rubbish that even the Feds won’t buy. With an earnings multiple of a fairly modest 13, an asset multiple (market capitalization/ stockholders’ equity) of a modest 1.1, a dividend yield of 3.2% and a dividend that appears at least moderately secure, there is comfort on the valuation side too.

Source: Dodge the Pitfalls and Uncover the Profits From the $700 Billion Banking System Bailout