People have been calling a bottom to the financial crisis for a long time, even before it fully erupted. Remember Charles Prince's "We're still dancing" comment in July 2007?

So one has a right to be skeptical when a sign of a comeback emerges. Yet a bright green light has flashed in a subprime skeptic's newfound faith in mortgages.

John Paulson, the hedge fund manager who reaped huge profits from betting against mortgages and mortgage-backed securities over the last two years, is now buying those same securities.

Paulson, who took home an astonishing $3.7 billion in pay last year, indicated late last summer that he was preparing to take long positions in mortgage securities and financial institutions. He started buying troubled residential mortgage-backed securities last week, when prices fell after the Treasury Department announced that TARP would not be buying toxic assets as originally planned, Henny Sender of the Financial Times reports.

Paulson has begun a new fund, the Paulson Recovery Fund, to take advantage of deeply discounted mortgage-backed securities. And Sender says he has taken steps to start a new real estate fund.

His track record of late has been spectacular. The Paulson Advantage Plus fund is up 29 percent for the year. A weekly performance review by HSBC earlier this month listed four Paulson funds among its top 20 performers.

Going long on mortgage securities may be a smart investment, but it is also a savvy political move as Washington weighs increased regulation of hedge funds.

The Washington Post relates a  meeting last month between Treasury Secretary Hank Paulson (no relation to the hedge fund manager) and hedge fund managers. Paulson told them that it was time to step up the regulation of hedge funds, a reversal of his previous position.

The hedge fund managers, the paper says, "were stunned. One manager recalled muttering as he walked out: 'What happened to the Hank Paulson we knew?'"