Paulson Tipped Hedge Funds About Market Meltdown

Posted on Nov 29, 2011

AP / Lauren Victoria Burke

Henry Paulson, in his role as treasury secretary, is flanked by members of Congress as he briefs reporters about the economy on Sept. 19, 2008, two months after the meeting described in Bloomberg’s article on Tuesday.

Back in July of 2008, when most of us were still blissfully ignorant about the approaching economic apocalypse, then-Treasury Secretary Henry Paulson was very aware of some important market distress signals, and he chose to share some of those with an elite group of financial executives, Bloomberg reported Tuesday.

This is a long article that’s worth reading in full, not just to get a sense of how Paulson catered to his Wall Street cronies, but also how blurry the roles and rules are when it comes to the circulation of insider information on that level. And, of course, Goldman Sachs is all over this story.

Bloomberg:

Around the conference room table were a dozen or so hedge- fund managers and other Wall Street executives—at least five of them alumni of Goldman Sachs Group Inc. (GS), of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.

After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship”—a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.

Stock Wipeout

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.
The fund manager says he was shocked that Paulson would furnish such specific information—to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.

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