Former Treasury Secretary Henry Paulson gave top hedge fund bosses the inside scoop about the government’s plans for Freddie Mac and Fannie Mae at the height of the financial meltdown.
That is the bombshell claim today by the new Bloomberg Markets magazine.
The report details a meeting at the Manhattan headquarters of a hedge fund in July 2008 when Mr Paulson allegedly told the millionaires money managers that the government could seize Fannie and Freddie and wipe out their stock.
There is no evidence that any of the executives attempted to profit from the inside information by selling the stock short or betting against it.
But Bloomberg claimed Paulson gave the hedge fund chiefs a very different story to the one he gave earlier the same day to reporters.
Together, the two home loan giants had more than $5 trillion in mortgage-backed securities and other debts outstanding.
But the Treasury Secretary reportedly gave the impression to New York Times reporters and editors that a government inspection of the companies’ books was likely to offer a signal of confidence to the shell-shocked markets.
During the earlier meeting at the offices of Eton Park Capital management on New York’s 3rd Avenue, Paulson is said to have revealed the government was considering drastic action.
‘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,’ writes Bloomberg.
Government takeover: The headquarters of Fannie Mae in Washington DC
A fund manager who attended said they were told there was a scenario being considered where Freddie and Fannie would be placed into a ‘conservatorship,’ which meant the government would effectively seize control of the companies and allow them to carry on operating despite heavy mortgage losses.
Paulson allegedly told the group the move could mean that the common stock of the government-sponsored companies would be effectively wiped out.
Bloomberg said Paulson didn’t break any laws by disclosing the information.
But while there is no proof that any trades were made as a result of the meeting, investors do not have to make short sales public.
Seven weeks later, the boards of Fannie Mae and Freddie Mac voted to go into conservatorship. The takeover became effective on the Saturday, September 6, and when markets opened the following Monday stocks in both companies plummeted below $1.
William Black, associate professor of economics and law at the University of Missouri-Kansas City, told Bloomberg he can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.
‘You just never ever do that as a government regulator - transmit nonpublic market information to market participants,’ said Black, a former general counsel at the Federal Home Loan Bank of San Francisco. ‘There were no legitimate reasons for those disclosures.’