Could the bailout turn a profit for taxpayers?

Here's the $700-billion question in the financial bailout that Congress is expected to announce today: Could the American taxpayer actually make a profit on the deal?

Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke haven't made any promises on that score. The furthest they've been willing to go in appearances before Congress last week is that not all of the proposed $700-billion commitment would be needed.

But some economists say that the mortgage-backed securities the Treasury proposes to buy from crippled banks have been so beaten down in price that taxpayers could actually profit once the market for these securities -- now virtually nonexistent -- unfreezes.

"It's entirely within the realm of possibility that we'll make money on this deal," says J. Bradford DeLong, professor of economics at UC Berkeley.

DeLong observes that several government bailouts of the past have ended up in the black, including the 1994 rescue of the Mexican peso. The U.S. government eventually recorded a $500-million profit on its share of Mexico's $50-billion international loan package.

Of more immediate relevance, the government's takeover of stricken insurance company American International Group may have already produced a paper profit, and could produce more gains as AIG's asset portfolio is sold off or recovers its value.

"Very senior people in charge of asset portfolios on Wall Street have said they are envious of the terms the government imposed on AIG," DeLong says. "They think the Fed's going to make a fortune." He conjectures that the $700-billion bank bailout could yield somewhere between a $100-billion loss and a $100-billion gain.

Paulson has also endorsed requiring banks that sell troubled assets to the government to give some sort of equity warrant, so that taxpayers can share in profits once those institutions recover financially.

But questions about the ultimate bill to taxpayers continue to drive alternative proposals to contain the credit crisis roiling international markets. House Republicans proposed one such plan last Thursday based on a published paper by economists Laurence Kotlikoff of Boston University and Perry Mehrling of Barnard College.