Hedge Funds That Bet Against Housing Could Benefit From AIG Bailout Funds

Hedge funds may benefit from the federal government's bailout of AIG, the Wall Street Journal reports. That is because hedge funds made bets that the housing market would fall, using investment banks as middle men to place those trades. The investment banks then entered into deals with AIG to execute the trades. Now, AIG is scheduled to use the bailout funds to pay what's due to these investment banks, resulting in the eventual restitution of funds for the hedge funds, the paper reports.

In essence, while the U.S. government is busy trying to prop up the housing market -- by trying to limit foreclosures, among other things -- it is simultaneously putting up cash that could be used to pay off investors who bet housing prices would tumble and many mortgage holders would default.

It's unclear how much government money might eventually flow to hedge-fund investors. Overall, the government has committed up to $173.3 billion to bail out AIG. Of that amount, AIG's housing-related bets have cost U.S. taxpayers some $52 billion.

Hedge funds run by Deutsche Bank are among those likely to benefit, the paper said.

AIG has put in escrow some money for at least one major bank, Deutsche Bank AG, whose hedge-fund clients made bets against the housing market, according to a person familiar with the matter. The money will be released to the bank if mortgage defaults rise above a certain level.

Comments

[indyrep]

I really hate to say this but, wasn't it Karl Marx that said that due to greed Capitalism would destroy itself from within?

[Veritas 1]

This just in: Bailout funds may go to those who bet on future fires, floods, auto accidents and death. What is this world coming to?

[HarryParatestis]

this is worse than the bonuses paid to the AIG geniuses who brought the world economy to its' knees

[PhilipTaylor]

HEDGE FUNDS HAVE AND ARE CONTINUING To BENEFIT FROM AIG CREDIT DEFAULT SWAPS!

The "INSIDERS Hedge Funds," many run by the Same WS BANKS that put out the "SURE FAIL TRICK&TRAP" Mortgages, bet Repeatedly and MASSIVELY that the same Mortgages in the Derivatives would "SURELY FAIL" knowing with almost 100% probability that they would.

These BETS MUST be CANCELLED or America Will Suffer EVEN MORE.

Of course, the Hedge Funds have already HAR-VESTED Massive GAINS!

This is "INSIDER TRADE FIXING" at its WORST and must be investigated and prosecuted by Cuomo since FBI and US Criminal Justice seems to be relinquishing its duties!

[WindmillSlayer]

I am absolutely sickened by this. Our economy is not supposed to be a f*ing Monopoly game. Lives, livelihoods, homes... all lost because a mega-corp rolled the dice and got a three instead of a seven.

They win, we lose, and we're supposed to what -- just deal with it? These banks hold our debt -- they've got us by the short hairs. Do we simply refuse to pay our bills until they begin to treat their customers like human beings rather than the thimble on the game board?

[IncludeMeOut]

Why do we insure betting in the first place. That should be illegal

[Prakosh]

You wouldn't be saying that if you were one of the apologists for the betters like our friend BlueStateMan. You see when you are increasing your risk beyond all expectations of ever making a profit long term you almost have to be able to hedge your bets by insuring them in order ot have any possible chance of recouping your funds. So you can't have these things be illegal so you hedge your bets by making sure Congress doesn't interfere. Comprendo Amigo???

[thnk4selfagain]

Jeff Lenzer from Forbes on CNN's Rick Sanchez just pointed out that AIG did not need to *pay* 100% to its counterparties, that all it had to do was put up collateral to back CDSes of securities that were doing fine. Instead there was a payout at top dollar. He added, "There is some funny business going on here."

[thnk4selfagain]

Rep. Brad Miller asked questions about the counterparties. Liddy seemed to not understand, and the usual wall put up about how AIG owed these people plain and simple. The question of why we paid 100% was not asked and not answered though.

[cam]

Credit Default Swaps should only be paid to primary bondholders. All others should be declared invalid.

It might hurt a lot of hedge funds with no real housing equity, but it would limit losses and stabilize the market very quickly.

[bryansmith]

And guess what sort of credit-default swaps are getting popular now?????

US Treasury credit default swaps...!!!!!

Let that sink in for a minute then say it with me.... US Treasury credit default swaps!

[coultersnemesis]

Yep - I'm torn. As long as this is legal, minus well buy me some; if ya can't beat 'em, join 'em. :/

[ThePeacemakers]

Here's the question I want answered:

Why didn't the FED keep the trillions in the US Treasury...then any banks that failed - SO WHAT.

The Treasury would have the money and open up as a bank for the citizens in this country until these crooks got their act together.

Why save the bad banks? Why didn't they just say "good riddance" and open the new "GOOD" bank called US FED Treas Bank to the businesses and people of this country doing things the RIGHT way?

[evaesthetic]

Because that would be SOSHALIZT. And Socialism is bad, mmmkay?

[WindmillSlayer]

So are you basically saying that the US Treasury is acting as a hedge fund and betting that AIG, Bank of America, et al will pull through this mess?

[marriea]

Hedge Funds?? AIG betted that the housing market wouldn't fail against some other company that said it would???

Isn't that something akin to a baseball or football coach betting for or against it's own team. Wasn't Pete Rose banned from baseball because of something like this. Maybe I'm wrong, but didn't he get time for doing that.

Should I bet that we're going to lose the War in Aghanistan or Iraq or win it? MY goodness!!!! What else have people in authority in this country betted on. Was a bet placed by our country heads with binLaden also?

[coultersnemesis]

You can only make bets on "assets" ie securities that receive flows of cash - as mortgages derive value from the payments mortgage holders pay, plus the interest, discounted. While I won't be surprised that Hedge Funds are capable of betting directly against their own country for some profits--the only way they could somehow bet against the wars would be to bet against US power and wealth via shorting the dollar, or as mentioned above, betting against t-bills, municipal bonds, or US defense companies, perhaps.

[hollybork]

Put AIG into bankruptcy and put the American economy out of its misery. This is absolutely insane. Investigate the guys who wrote the insurance at AIG while their customers were shorting the housing market. This sounds like a shady deal, and the public should not have to pick up the cost.

[coultersnemesis]

I agree. But let's not delude ourselves: the failure of AIG ain't gonna be pretty for the economy. Tough times ahead, either way. No pain, no gain. And there will be pain if AIG, and all these other companies - yes, even hedge funds! - fail. It's called counter-party risk. It's called systemic risk. And there's lots of it.

[trotskylives]

This is insane. The Hedge funds bet, and bet right, and should get paid. If AIG failed, I am sure they had a CDO with some other firm if AIG failed. It is a moot point because the government rescued AIG, it has not failed, and legally they should get paid on the bets they made.

If hedge funds fail, the government does not bail them out. If the hedge funds win, they should get their money via whatever contracts they signed.

You don't fault somebody for being right on a call. These hedge funds would not be rescued if they were wrong.

[Ironquill]

AIG did not collateralize properly the insurance deals they made with Goldman Sachs, etc. Remember the alumus Paulson cut the original deal with AIG, which included payments to Goldman Sachs. Why doesn't Goldman take part of the hit along with taxpayers?

[coultersnemesis]

I agree. Although Goldman made the right bets -- they and all firms that entered in to contract deals with AIG were dumb for not checking the health of AIG before getting in to these deals. AIG needs to go in to bankruptcy, restructure these deals, and banks that made bets with them need to lose some money for doing business with an, essentially, very risky, and now insolvent, firm.

[coultersnemesis]

I agree with you - it's unfair to save AIG and then cut off contracts with the hedge funds. The only way the hedge funds will not get paid/get paid less than dollar for dollar, is if AIG goes into bankruptcy, period. Essentially, it's a zombie firm already, we need to just let it fail. Yes, the Hedge Funds made SMART, CORRECT bets against the housing market--but they were dumb if they put all their eggs in AIG's basket. As you said, I'm sure they made trades/entered into CDO contracts with other insurers/firm--so they will be able to wing it if AIG collapses. It'll worsen the economy, but it doesn't matter. It's necessary.

[Ironquill]

There has been chatter in the financial media about hedge funds and private equity buying toxic assets from banks in Geithner's "public/private" partnerships. By the way "public" doesn't mean taxpayers and small investors individually, but collectively, as in "the government".

On CNBC former Rep. Sen. Sununu practically drooled when he said that "our" Treasury officials are meeting with hedge funds and that "hedge funds are the only ones with money".

I think Geithner would face an even greater wave of negative sentiment than he already is if he unveils a plan to offload toxic assets from bank balance sheets onto hedge funds and private equity. These predators will extract a pound of flesh. In the end, through greenmail, they will receive a no money down loan with government guarantees which they will then leverage to buy these assets.

In the end, hedge funds and private equity will make a fortune, because as the economy bottoms out and improves, the assets, which have been artificailly marked to market--that is, valued at practically nothing because there is no market at the present, will rise in value.

The problem with Geithner's approach, probably assisted by the Fed, is that the same players who enabled the financial crisis will be given spoils to correct the situation. This is essentially the flip side of the AIG bonuses and I think it is a powder keg waiting to blow.

[bryansmith]

Well put sir...

These hedge funds and investment banks all saw this coming. The reason they had the foresight to buy all these credit-default swaps in the first place was because they were the ones who pumped up trading on mortgage-backed securities in the first place... They knew it was about to blow! But, instead of trying to sound the alarm, they covered their collective butts by purchasing the swaps as insurance.

The bastards made money on the way up - causing the crisis which helped them make money on the way down through AIG and other firms that sold them the swaps (without the capital to actually pay them). Then the government stepped in to guarantee the under-capitalized swaps (sold by a-hls who are now receiving taxpayer funded bonuses) and is slowly making good on those commitments to keep the system afloat.

And now, these a-hls are going to get first pic on devalued assets, allowing them to make money on the recovery!!!!!!!!!

I'm so pissed off right now I can hardly type!!!! Prison is not good enough for these people!

[coultersnemesis]

Under FASB rules, don't banks have the option--if the security is considered "level 3" i.e. if there is no market -- to value the derivatives or loans or whatever security they own that derives its value from the housing market with their OWN PROPRIETARY models?? Why don't banks just do that ?? claim their assets are illiquid, have no credible market, and value these things at the "fair" value, using their own models, thereby saving their balance sheets?? Why MUST they sell them at a fire-sale to hedge fund "public-private partnerships"? If they sell them at low prices, how is this helping the banks' balance sheet at all?

[Ironquill]

In the last hour the earth has shifted with the Fed's expansion of their balance sheet.

I don't know the answer to your question on level 3, I'm going to try to find out.

As to capital, it's my understanding that capital would be impaired. Also that Bernanke would convert debt to common to replenish capital, over time.

[Donnat]

What's with the giant print? The more outraged HuffPo gets, the larger the print? We're all furious, please get the type face down so you can put more info on it.