Bloomberg sums up the disorientation of the Treasury in two articles: “Paulson Indicates Need to Purchase Bank Equity `Soon as We Can'” and “Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets”. In "Paulson/Bernanke: A Conspiracy of Dunces", I wrote that the dynamic duo has shown no consistency in their rescue methodology and sent the markets into panic with the Lehman failure and doomsday predictions related to the $700B package. Thank God they are now looking to the British for inspiration. Trouble remains in that neither the Treasury nor the Brits are giving details on bank equity purchases and the associated punishments.

If the Treasury learned its lesson regarding the market’s reaction to excessively punitive help, will they retroactively ease up on the 79.9% solutions to American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE)? Monday (10/13) Paulson’s TARP manager Neel Kashari is scheduled to give a way forward speech. The question of fairness will surely come up if Morgan Stanley (MS), Goldman Sachs (GS) and the four anointed mega commercial banks (BAC, C, JPM and WFC) are able to sell equity to the Treasury on less onerous terms than AIG and the GSEs.

I have not heard either Paulson or Bernanke utter the words moral hazard for the last two weeks and they continue to struggle to explain the benefit of Lehman bankruptcy. Now that they know they failed, and the bank equity purchase program cannot be unduly harsh, it’s time to revisit AIG and the GSEs. CEO Edward Liddy alluded to this in AIG’s most recent conference call. He said that if AIG behaves well and pleases the Federal Reserve, the Fed might ease up on the equity conversion.

But clandestine activity persists. The government is forcing Fannie and Freddie to buy $20B each per month of subprime, Alt-A and non-performing mortgage securities. This program is in addition to the $700B TARP, but the GSEs can sell their existing $210B of toxic mortgage to the TARP. Talk about twisted logic. As usual, sources were not revealed because the plans are supposed to be confidential.

Even though Paulson clearly stated the GSEs will not be run “to maximize shareholder returns”, they should not run for shareholder annihilation either. Paulson has not laid out a clear direction for the GSEs and loading more toxic mortgages on their books will not return them to health. If his objective is to use the GSEs to cleanse mortgages (buy cheap and modify or foreclose), than Paulson must state whether the operation will be for profit or charity. Here again, we need to know what the plan is or even if there is a plan.

As Paulson shifts the TARP to purchasing bank equity, it appears that he is using the GSEs to pick up the rear. Even in conservatorship, shareholders have a right to know how their company is being run.

Disclosures: Author is long AIG, BAC, C, FNM, FRE and WFC.