The markets are deep in negative territory again today and investors are not too happy with Henry Paulson. Is he changing the rules in the middle of the game, or is he merely reacting because the game has changed?

Earlier today, the Secretary of the Treasury stood in front of an audience of Wall Street reporters and gave the country an update on the Trouble Asset Relief Program (TARP) and his team’s efforts to shore up the nation’s economy. What he had to say is taking some investors by surprise.

Most importantly, Paulson noted he would not use the TARP to buy the troubled assets of the nation’s financial institutions (like the name of the program implies). Instead, the Treasury Department will use the hundreds of billions of dollars allocated to it to directly buy stakes, in the form of preferred stock, in troubled companies.

Investors have raised eyebrows, for several reasons. Most notably, this is not the plan we were originally sold back in October. When Congress authorized the original $700 billion bailout, investors thought it would help erase illiquid assets from bank balance sheets.

Now, those banks will not get such an easy reprieve from Paulson. Instead, the Treasury will give the banks more capital to deal with troubled portfolios and pay off their burgeoning debt. In exchange for this much-needed cash, the nation’s banks will have a new owner… you and I the taxpayer.

If you did not like the government getting involved in this mess in the first place, you are absolutely going to hate the latest chapter in the bailout book. In less than three months, the Obama administration is going to own a sizeable stake in dozens of American companies.

Socialism anyone?

With all the major equity indices deep in negative territory today, it is obvious Wall Street is not a fan of the revised plan. But what does it mean for the individual investor like you and I?

First, it means heavy dilution. With Washington taking a multi-billion dollar, dividend-paying stake in companies like AIG (NYSE:AIG), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and possibly American Express (NYSE:AXP), common share investors are going to see a drastically smaller proportion of profits flowing their way. It is no wonder the share price of each of the companies is down by at least four percent at the moment.

Fortunately, today’s news gives us a clue as to what the future will hold. We all know politics will prevail in Washington and General Motors (NYSE:GM), and most likely Ford (NYSE:F), will receive a sizeable bailout.

***** Oil at $50 a Barrel — Gold at $500 by Christmas? *****
With stocks as volatile as nitroglycerin, gold should be trading above $2,000 an ounce! But the dollar insurrection has shaken up the commodities markets. Some experts now put gold’s downside at $500… even $400.

What if they’re right?

TFN’s options strategist Andrew Snyder has developed a gold hedge strategy that could make you money on your gold position either way. Find his Special Report on the Members Only Reports section of HotStockConfidential.com. To become an instant member, click here…

——————

With the government buying such a large stake in the banking sector, it is much easier to believe it will do the same for the automotive industry. If we see the Treasury purchase a sizeable stake in General Motors, do not expect its share price to climb out if its hole anytime soon.

Remember, GM is asking for $25 billion in relief. Right now, all of its common shares are worth just shy of $2 billion. It will be interesting to see what Congress can come up with next.

Right now, the folks that will walk away looking like bandits will be the General Motors and Ford bondholders. Bonds are selling at unbelievably low prices with yields approaching 40%. The risk of default is high, but when the government steps in, it will diminish greatly and bond prices will soar.

The markets may look scary today, but you must remember, as long as they are moving there is money to be made. There are some very unique opportunities presenting themselves today.

If you are too scared to enter the equities market, take some time to check out the bond industry. You will like what you see.

Source: Paulson’s TARP revision spooks the market