04/18/2009 05:12 am ET Updated May 25, 2011

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.