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The secret meeting between Henry Paulson and hedge-fund chiefs

Paulson

In case there wasn't enough anger about the cozy ties between Wall Street and Washington, new revelations this morning suggest that former Treasury Secretary Henry Paulson gave hedge funds an inside scoop about the government's plans for Freddie and Fannie Mac in the heart of the financial crisis.

The revelations come from the new Bloomberg Markets magazine, which describes the exclusive meeting at the Manhattan headquarters of a hedge fund on July 21, 2008.

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., of which Paulson was chief executive officer and chairman from 1999 to 2006.

This was after the investment bank Bear Stearns had gone under — thanks to its bets on subprime mortgages — but before Lehman Brothers declared bankruptcy, and everyone was wondering what would happen to the government-sponsored mortgage giants Fannie Mae and Freddie Mac.

That morning, before the meeting with the hedge-fund magnates, Paulson held meetings with reporters in which he said that government examinations of Fannie and Freddie were likely to prove their health.

At the hedge-fund meeting, though, Paulson sang a very different tune, according to an attendee who spoke with Bloomberg Markets reporter Richard Teitelbaum. The magazine says that Paulson told the gathered magnates that the government could, in fact seize Fannie and Freddie and wipe out their stock.

Such information would be very valuable to investors because it would allow them to sell the stock short — or bet against it. Indeed, just a few months after the meeting, the government did what Paulson had sketched out and stock in both companies lost almost all their value.

Teitelbaum writes that he did not turn up evidence that any of the meeting participants placed such a bet, but he also notes that investors do not have to provide public notice when they make short sales.

Former banker and current writer William Cohan said that such meetings between top government officials and powerful investors are actually quite commonplace. Cohan said he was particularly surprised by the inability of the meeting's participants to remember what happened or what they did with the information.

The blowback against the story has been swift. A well-read economics bloggers, Mike Shedlock, had some of the most scathing commentary:

Anyone who says they do not remember a meeting like that is a liar. Anyone who says "no comment" is indeed commenting and the possible interpretation is not pretty. So what else did Paulson say?

I would like to know who Paulson talked to outside the meeting.

Paulson did not respond to the article, other than to point the magazine to a book he wrote that makes no mention of the meeting.

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U.S. seizes mortgage titans in multibillion-dollar rescue

The Paulson Effect: A rush into Fannie and Freddie bonds

— Nathaniel Popper

twitter.com/nathanielpopper

Photo: FormerTreasury Secretary Henry M. Paulson in 2008. Credit: Al Seib / Los Angeles Times

Jefferies suffers as investors look for the next MF Global

As investors wonder which Wall Street firm might be the next to catch the cold that brought down MF Global last week, most of the suspicion has fallen on one originally founded in Los Angeles, Jefferies.

Investors have sent Jefferies stock down nearly 20% from before MF Global's bankruptcy, leading the firm to spend much of the last week beating off rumors that it may soon suffer from the same problems with European sovereign debt that brought down MF Global.

MF Global took a series of ultimately fatal bets on the bonds of struggling European nations, causing clients to worry that MF Global would find itself unable to sell those bonds and unable to carry out other customer business. That fear proved contagious and ultimately sunk MF Global, according to industry experts.

Just this morning, Jefferies announced that it took the highly unusual step over the weekend of selling off 50% of its holdings of European bonds, just to show that it could.

"We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book,” Jefferies Chief Executive Richard Handler said in a statement explaining the move

The big bets on European bonds at MF Global were part of a strategy -- initiated by its recently hired chief executive, Jon Corzine -- to expand the firm through risky bets made with the company's own funds.

Jefferies has had a similar business model to MF Global's -- at least before Corzine took over -- but Jefferies executives have been trying to convince investors that they did not take the kind of bets that Corzine pushed for at MF Global.

Last week, Handler released a full accounting of Jefferies' holdings of European bonds. 

"We decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed," Handler said in a statement on Nov. 4.

That was not enough to calm worried investors. The stock price continued to sink, leading to the unusual moves over the weekend. This morning, those moves gave Jefferies stock an initial boost, but it has recently sunk down again almost to the level where it closed Friday afternoon. It is currently trading up 1.6%, or 19 cents, to $12.26.

A columnist at the Wall Street Journal this morning wrote evocatively that Jefferies is "being strip-searched at gunpoint by the markets."

RELATED:

Jon Corzine resigns as CEO of MF Global

Jon Corzine caught up as MF Global inquiries escalate

MF Global is investigated for possible misuse of customer funds

-- Nathaniel Popper in New York
Twitter.com/nathanielpopper

Raj Rajaratnam gets 11-year term in Galleon insider trading case

Rajaratnam
Hedge fund magnate Raj Rajaratnam was sentenced to 11 years in prison -- the longest sentence ever for an insider-trading case, prosecutors said.

The Galleon Group founder was convicted in May on 14 counts of conspiracy and securities fraud following a two-month trial. Many considered the conviction to be the heaviest clampdown on Wall Street bad behavior since Ivan Boesky went to prison for two years in the 1980s.

Rajaratnam’s conduct “reflects a virus in our business culture that needs to be eradicated,” said U.S. District Judge Richard J. Holwell while handing down the sentence.

When asked by Holwell if he wanted to speak, Rajaratnam tersely refrained.

Prosecutors relied on extensive electronic wiretaps to nab Rajaratnam, who was found guilty of making more than $50 million in illicit profits by acting on secrets from contacts at upper-echelon firms such as Goldman Sachs Group Inc., McKinsey & Co. and Google Inc.

Prosecutors had sought a sentence of 15 to 20 years. In handing down a more lenient sentence, Holwell cited Rajaratnam’s advanced diabetes and other factors.

Silence hung over the courtroom as the sentence was read, Rajaratnam sitting motionless. After court adjourned, he turned to face the room with an elusive grin that betrayed no emotion.

Since his arrest in October 2009, more than 20 others involved in the case have cut deals with prosecutors. Rajaratnam must report to prison within 45 days.

RELATED:

Galleon trial showcases a classic — and dwindling — type of hedge fund

Galleon hedge fund billionaire Raj Rajaratnam found guilty in insider trading case

-- Tiffany Hsu and Nathaniel Popper

Photo: Raj Rajaratnam, co-founder of Galleon Group LLC, enters federal court in New York on Thursday. Credit: Peter Foley / Bloomberg

Wall Street Roundup: Drooping bull. Hedge fund as cult.

Bear - national geo Gold: Trading now at $1,597 per ounce, up 0.5% from Friday. Dow Jones industrial average: Trading now at 12,333.28, down 1.2% from Friday.

Debt drag. Worries about European and American debt are overwhelming good earnings reports to send markets down.

Drooping bull. Goldman Sachs economists, once among the most bullish on the street, are once again reducing their forecast for U.S. economic growth. 

Silicon Valley's banker. A Morgan Stanley banker has been willing to go to all lengths -- including playing video games -- in order to maintain his position as Silicon Valley's go-to banker.

Hedge fund as cult. The New Yorker takes a long look at Ray Dalio, the successful hedge fund manager who is known for his eccentric management methods.

-- Nathaniel Popper in New York

Photo credit: National Geographic

Wall Street Roundup: Subprime returns. Luring hedge funds.

Wall sign -- stan honda afp getty images Gold: Trading now at $1,551 per ounce, up 0.1% from Monday. Dow Jones industrial average: Trading now at 12,519.99, up 0.1% from Monday.

Subprime returns. A couple of investment firms are ramping up their lending to home buyers with bad credit, sparking concerns about a return to the practices that led to the credit crisis.

Luring hedge funds. Banks are jockeying to give better terms and easier money to hedge funds.

Wall Street on the page. A number of finance-industry veterans are bringing their experience to readers in the form of fictionalized thrillers.

-- Nathaniel Popper in New York

Photo credit: Stan Honda / Getty Images

Wall Street Roundup: JPMorgan's credit card problem, starving the police

Wall sign -- stan honda afp getty images Gold: Trading now at $1,511 per ounce, down 0.7% from Thursday. Dow Jones industrial average: Trading now at 11,966.59, down 0.7% from Thursday.

JPMorgan's credit card problem. The Wall Street Journal tells a fascinating tale of how JPMorgan Chase is calling off its collection efforts on credit card debt as it deals with internal concerns about its paperwork; the best material is buried low in the story.

Starving the police. Just as the Securities and Exchange Commission is receiving new responsibilities to police Wall Street, Congress voted down a measure to increase its funding.

Details of a default. Moody's explains what it might mean if the United States defaults on its debt.

Perils of celebrity. A number of big-name hedge fund managers have been falling on hard times in recent months -- is all the attention bad for investors?

-- Nathaniel Popper

Credit: Stan Honda / Getty Images

 

Wall Street Roundup: Disappointing returns. Suspicious trading.

Wall sign -- stan honda afp getty images Gold: Trading now at $1,528 per ounce, up 0.1% from Wednesday. Dow Jones industrial average: Trading now at 11953.43, up 0.5% from Wednesday.

Promising signs. The newest housing and unemployment data were hopeful enough to make investors forget about the troubles in Greece and send stocks up Thursday morning.

Disappointing returns. A trio of hedge fund magnates who made billions betting against the sub-prime mortgage market are having a much harder time finding good investments today.

Suspicious trading. Sen. Charles Grassley (R-Iowa) revealed that there have been many more tips than had been previously disclosed about suspicious trading at SAC Capital, one of the most successful and controversial hedge funds.

-- Nathaniel Popper

Credit: Stan Honda / Getty Images

Wall Street Roundup: Hedge funds and lending. Hedge funds and Africa.

Bull -- spencer platt getty Gold: Trading now at $1,539 per ounce, up 0.1% from Wednesday. Dow Jones industrial average: Trading now at 12138.81, up 0.7% from Wednesday.

A good morning. After six rough days, the clouds seem to have broken on the markets after some promising trade data was released.

Hedge funds and lending. With banks guarding their loan portfolio's carefully, hedge funds are increasingly serving as business lenders.

Hedge funds and Africa. A progressive California think tank has released a report accusing hedge funds of displacing local farmers in Africa with their land speculation.

Goldman's Libya problem. The Securities and Exchange Commission is looking at Goldman's dealings with Libya's sovereign wealth fund.

-- Nathaniel Popper

Credit: Getty Images / Spencer Platt

 

Wall Street Roundup: Goldman I, II and III

Wall sign -- stan honda afp getty images Gold: Trading now at $1,551 per ounce, up 0.5% from Friday. Dow Jones industrial average: Trading now at 12,132.79, down 0.1% from Friday.

Goldman I. Goldman Sachs is spreading the word that it is planning to fight back against a Senate report's findings about its behavior during the financial crisis.

Goldman II. Goldman Sachs economists are apologizing for their bullish predictions on the U.S. economy last December, and shifting toward a more cautious outlook.

Goldman III. Goldman Sachs has finally been successful in finding a buyer for the mortgage-servicing business it bought during the financial crisis, and that has caused the bank little other than headaches.

Paulson's rough patch. John Paulson, whose hedge funds made billions of dollars during the financial crisis, has struggled in recent months as his flagship fund has lost 7.6% since the beginning of the year.

-- Nathaniel Popper in New York

Photo credit: Stan Honda / Getty Images

 

Wall Street Roundup: Diving into the hedges. Einhorn's risky bet.

Gold: Trading now at $1,535 per ounce, up 0.7% from Thursday. Dow Jones industrial average: Trading now at 12,432.39, up 0.2% from Thursday.

Diving into the hedges. Pension funds are throwing money back into hedge funds, in part because the higher predicted returns allow the pensions to draw less money from state coffers.

Einhorn's risky bet. David Einhorn, a savvy hedge fund investor best known for predicting the financial crisis, is now putting his money down on an investment in the New York Mets. At about the same time, he was at a conference speaking about his investment likes and dislikes, the latter of which included Microsoft. 

From Alabama to Wall Street. Bloomberg takes a look at the paradox of Rep. Spencer Bachus, who represents an Alabama district that has been slammed by the financial crisis but who nonetheless has been one of Wall Street's biggest defenders, and one of its biggest recipients of donations.

-- Nathaniel Popper


Wall Street Roundup: Big fraud investigation. Hedge fund folds.

Wall sign -- stan honda afp getty images Gold: Trading now at $1,511 per ounce, up 1.3% from Thursday. Dow Jones industrial average: Trading now at 12524.80, down 0.6% from Thursday.

Big fraud investigation. A Huffington Post scoop earlier in the week about a fraud investigation of five giant banks is attracting more attention as the week goes on.

Betting on B&N. Fresh off its success in turning around Sirius XM satellite radio, Liberty Media last night made a  bold $1-billion bid to buy Barnes & Noble.

Hedge fund folds. One of the biggest hedge funds to come under scrutiny in the government's insider trading probe, FrontPoint Partners, appeared as though it would survive but is now throwing in the towel.

Joining the quants. SAC Capital, an old-school stock-picking hedge fund, is joining the rush toward computer-based algorithmic trading.

--Nathaniel Popper

Credit: Getty Images/Stan Honda.

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