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