If the U.S. Treasury were smart, it would bring on hedge fund manager John Paulson to advise it on how to evaluate the toxic assets banks hold on their books that the government is preparing to take over. That’s because Paulson has already done the work for them and it made him a mint in 2008 when many other funds were being taken to the cleaners.

In a year-end investor letter obtained by The New York Times, Paulson’s firm Paulson & Co. laid out its blueprint for generating positive returns during down times; his largest fund was up 37.6% net of fees for 2008.

The biggest return for Paulson was betting against financial institutions that were exposed to the subprime mortgage crisis, the crisis that he already made $3 billion off in 2007.

“Due to our deep understanding of the assets on bank balance sheets, we analyzed the balance sheets of numerous banks and estimated what the total expected losses would be,” the investor letter said.

The hedge fund firm said it bet that those financial institutions that would have to raise money to cover their losses would dilute equity and depress their stock prices.

“As the year progressed, eight out of the top ten banks on our list either failed, were recapitalized by the government, or were sold off to other banks as part of government backed transactions,” the letter said.

Going into 2009, Paulson said his firm expected to take advantage of long opportunities in the credit distressed area. The firm didn’t pick up subprime mortgages in 2008, as it expected prices to continue dropping.

The firm also wound up winning in its merger arbitrage fund, generally a strategy that took a beating in 2008 as deal after deal didn’t go through. Paulson bet that the Anheuser Busch/Inbev merger would go forward and cleaned up when it did. The firm said it would be looking at more action in merger arbitrage in the financial sector in 2009.