This post from over a year ago reviewed the absurdly highly-leveraged deal that Blackstone Group LP was proposing to make for Hilton Hotels. That deal was a head-scratcher even during the heady days of easy money.

As this W$J article from yesterday notes, the deal ended being structured with "only" $20 billion in bank debt rather than $25 billion (with Blackstone pitching in $6 million in equity), but that really didn’t change the fundamental of the deal much. Hilton is projected to generate $2 billion in before-tax cash flow this year, which is enough to cover the $1.3 billion in interest expense on the bank debt. But cash flow is probably going to decline next year because of depressed demand for hotel rooms and Hilton will probably be forced to use its liquidity reserves to make up for any cash-flow short-fall.

Blackstone paid for Hilton at about 13 times estimated 2008 pretax cash flow. Similar public hotel companies are currently trading at about seven times their projected before-tax cash flow for 2008. The WSJ article quotes an analyst on the situation: "It’s very difficult to assume any equity if you have to mark to market those assets. But they may argue it’s a long-term investment for them." Make that a very long-term investment.

But as bad as this deal looks for Blackstone, it looks even worse for the seven banks that put up the $20 billion in financing. They are, as the WSJ puts it tactfully, "struggling" to sell pieces of the debt package in the current strained credit markets.

Gee, I’m sure glad we steered clear of that investment debacle, huh? Except that we apparently didn’t:

[I]t now looks like U.S. taxpayers are on the hook to Hilton’s fortunes, too. That’s because when J.P. Morgan Chase & Co. in March took over Bear Stearns, the Federal Reserve assumed $30 billion of Bear’s illiquid assets. Part of those loans and securities is Bear’s $4 billion unsold portion of the $20 billion Hilton financing package, according to people familiar with the matter.