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« Bank Bailout By The Numbers - $7.7 Trillion | Main | The Unbearable Lightness Of TARP Reporting »
Tuesday
Nov292011

How Hank Paulson Warned Hedge Funds In Advance

Very interesting new read from the January edition of Bloomberg Magazine.  Anyone else find it suspicious how many at the meeting were former Goldman executives.

---

Bloomberg

Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM).

Now, amid tumbling home prices and near-record foreclosures, attention was focused on a new source of contagion: Fannie Mae (FNMA) and Freddie Mac, which together had more than $5 trillion in mortgage-backed securities and other debt outstanding.

Paulson had been pushing a plan in Congress to open lines of credit to the two struggling firms and to grant authority for the Treasury Department to buy equity in them. Yet he had told reporters on July 13 that the firms must remain shareholder owned and had testified at a Senate hearing two days later that giving the government new power to intervene made actual intervention improbable.

“If you have a bazooka, and people know you have it, you’re not likely to take it out,” he said.

On the morning of July 21, before the Eton Park meeting, Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets.

At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.

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.

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.

There’s no evidence that they did so after the meeting; tracking firm-specific short stock sales isn’t possible using public documents.

And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.

Continue reading...

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Reader Comments (13)

As someone who was actively trading Fannie & Freddie during this period, I can say that it was no secret that both were in their death spiral. I'm not sure Paulson provided any new information. However, it shows a remarkable lack of concern for ethics on Paulson's part. I wonder which hedge fund manager leaked this story to Bloomberg.
Nov 29, 2011 at 2:48 PM | Registered CommenterDailyBail
I'm not sure Paulson provided any new information.
---
Except that bondholders would be saved and that preferred would be wiped out under "conservatorship." But yeah, it seems all the smart guys who were paying attention already knew they were done for.
Nov 29, 2011 at 8:20 PM | Registered CommenterDr. Pitchfork
Wasent it Ron Paul that was the first one to call out the sky is falling................and no one would belive him, evan after the sky was laying on the ground. Bush's reply was..................Ah, the ecomany is "Robust" and doing good...?

Funny, it took all these years to get the rest of us to understand what Ron Paul was warnning us about..........
Nov 30, 2011 at 6:18 PM | Unregistered CommenterTexas Dar
Solar, Wind Stocks Rise, First Time in a Long Time

http://www.sustainablebusiness.com/index.cfm/go/news.display/id/23204

Yesterday's announcement that the world's central banks would step in to help resolve the EU debt crisis, combined with China raising its feed-in payments for renewable electricity, boosted solar and wind stocks for the first time in a long time.

Solar stocks are at all-time lows.

The liquidity added to the system by the central banks will make it easier to finance solar and wind projects and aid short-term demand.




Today, Bill Clinton announces his new initiative....

http://blogs.wsj.com/washwire/2011/12/02/bill-clinton-gets-last-word-on-green-buildings/

(he has yet to paint his roof white)...

http://www.treehugger.com/sustainable-product-design/bill-clinton-says-paint-your-roofs-white.html
Dec 2, 2011 at 3:56 PM | Unregistered Commenterjohn
What if the Constitution
doesn't exist anymore?

Hi Tex, It exists. It's a matter of getting people to either learn and or use it. I get it through Ron Paul as you do. Strange really, I had to loose so much first before I really took notice. Perhaps you would agree on this topic? That is giving us just enough to remain complacent (The media with news of troops coming home, Unemployment is at it's lowest in two years etc etc) until they really "sink the hook" if you will, seems to get people involved.

I truly wish it was not in our nature (and that does not apply to all people) as a whole to learn the hard way. I am guilty of judging a book by it's cover. Certainly was the case for me in the last Presidential Election. Had I found DB then and surrounded myself with information........ man would I had ever done it differently.... Or at least I fancy the idea that I would have. I read so many posts here that I admittedly do not understand. Which is to say honestly that it is due TO MY ignorance of what I thought was going on. But hey, we march on.

I can even see where some perhaps see Ron Paul is "Extreme" or what ever they seem to think of him and his ideas when he is under fire at a debate etc. The set up for a debate in my opinion is terrible for any candidate. I have heard Dr. Paul say that he would rather not waste 89 seconds that was afforded to him in a debate and rather go to a discussion via the way of a sit down on a decent interview and I totally agree. How can you get to know of anyones experience, resume, intentions. In a twist of words in a debate where the moderate is smart, cleaver and bias because she/he has their choice already in line as well and the media is just plane corrupt on mainstream? It just doesn't work and in turn another message is conveyed to the audience who GOT A CHANCE to see it.

There are rules in place. The Constitution exist. It's a matter of will people choose to ignore it, or look into who they want to vote for. Will they be fair and look at the big picture? I guess we shall see. I hope it is not a case of people loosing everything before they look back and think...... What the........... Happened???????????? That can't be right! Can it?

DB, I've listen to your interview more than a few times and shared it with others I thought would find it interesting. If you don't mind my saying, I equate your passion of one part where your were speaking of how you were blown away at the fact Geithner had blatantly committed insider trading with B of A as I recall..... to Dylan Ratigan speaking to a Congresswoman about the health care reform bill. I could see how frustrated Dylan was and actually turned to outright anger because she simply did not understand that the effect of the market actually reflected how horrible the bill was. It was a matter of utter rage at the end of the interview (not yours) but his because he really understands something most people do not.

So in the end, I understand that I would seek guidance on the issue of investment etc. Not my game. The Congresswoman does not understand either. Or she pretended not to know. (?) Either way I saw it, I got it. He knows..... She doesn't. If I were to enter the investment area I would employ a professional who understood these things that I could trust. Dylan might as well have interviewed me on the topic which is my point.

In seeking assistance through a professional, it's my job to asses who that person may be. When I heard Mr. Obama say just before the Aug 1, bail out "Well that's not for the people to worry about. Thats for us who are Professional Politician's to take care of" in some way he is very much right. But we just didn't hire the right person for the job. As Dr. Paul would have said, "We made the wrong diagnosis and we need to change the treatment" he too was spot on. For it's worth, I'm with you on Dr. Paul as the best choice for that position.

On a humorous note, I found this really cool short video about a sea creature that I never knew existed. It has the ability to change shapes of itself to any form it wants for reasons to survive. Incredible really. Though it is in the Octopus family, I affectionately dubbed it the "Baroctopus" or Obactapus. I like em both.... You get the idea.... LOL!! Good to see you all.

http://www.youtube.com/watch?v=t-LTWFnGmeg&feature=related


DB, miss having you around. Were all going through detox. he he. Hope all is well with you and yours. Hope your feeling refreshed and at ease. As always your in my prayers. I for one appreciate and love the Daily Bail. You have taught me so much and it's been a great help. Hang in there my friend.

Your friend,
Dec 4, 2011 at 12:27 AM | Unregistered CommenterDave
It's too bad that more lawyers who admire Judges Hand and Cardozo are unfamiliar with an exceptional contemporary jurist, Judge Jed Rakoff.

http://www.nysd.uscourts.gov/judge/Rakoff (note that the C.J. is one Loretta Preska, she of the Bloomberg FOIA beat down of the Fed, affirmed by the 2nd Circuit Court of Appeals in an en banc decision).

Judge Rakoff hit the blogosphere in 2009 (I think) with the S.E.C. v. BAC, concerning the fraudulent concealment of Merrill Lynch planned bonuses by BAC executives from their shareholders prior to the proxy vote on the (shotgun) merger.

When I first read Judge Rakoff's opinion from his most recent case, S.E.C. v. Citigroup, I thought it was just rehash; it starts out almost verbatim the same as Rakoff's seminal blast in the BAC case. But alas, Rakoff covers new turf this go-round:

"An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard, solid facts, established either by admissions or by trials – it serves no lawful or moral purpose and is simply an engine of oppression."

"Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances."

http://www.forbes.com/sites/billsinger/2011/11/29/judge-rakoff-rejects-secs-contrivances-in-citigroup-settlement/

THAT is a jurist who takes his Article III duties to heart. The above link in turn links the pdf of Rakoff's Citi opinion. It's well worth the read.
Dec 4, 2011 at 8:28 AM | Unregistered CommenterCheyenne
WOW, 60 minutes (Steve Croft) is doing another dynamite report called 'Prosecuting Wall Street'. When the program is over I will put up a link. Those who will be picking up the on the west coast feed should tune in.
Dec 4, 2011 at 7:26 PM | Unregistered Commenterjohn
Wow, didn't know Paulson is a B cup. Serves the bastard right though.
Dec 4, 2011 at 7:55 PM | Unregistered Commentermendolover
60 Minutes "Prosecuting Wall Street".

http://www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street/

Has both transcript and Video
Dec 4, 2011 at 8:02 PM | Unregistered Commenterjohn
Very cool articles! Cheyenne, perhaps you were right. I sure hope so. It validates that there are good people out there. I found this in the article and thought it worth the post.

@John. Thank you as well. At current I can only get that type of info through the internet. Anything that reads "prosecuting- the bad guy" so to speak is music to the ears of simply too many here at home in the US.

From the Forbes article Cheyenne posted.

Judge Rakoff Rejects SEC's "Contrivances" In Citigroup Settlement.

@the lower portion was;

Bill Singer’s Comment:  As I have often commented in connection with Department of Justice and SEC settlements, checkbook diplomacy results in little more than miscreants engaging in a cost-benefits analysis that seeks to quantify the cost of doing (bad) business.  This is a bankrupt approach to regulation.

Hard not to agree with that. Truth is one rare commodity these days and so very needed. I also found this from Forbes going to the article and thought, how appropriate?


Forbes Thought Of The Day
“ Hidden talent counts for nothing. ”
— Nero

We do have so many smart, talented people here in the US. Neither counts for anything in the end of the grand scheme if wasted on greed as it has. Thank god we have some good people still lingering among them.
Dec 4, 2011 at 9:02 PM | Unregistered CommenterDave
Couldn't help this one. Fresh off Yahoo News.

US agents laundered drug money: report

http://news.yahoo.com/us-agents-laundered-drug-money-report-180012421.html

Thought this might be worth sharing with a question of why? Related to the futile "War on Drugs" I ask myself why or even how much money was wasted for this project? Call me provincial, but ah......... It's articles like this that, to me, pose as impostors for justice. I think it's just a colossal waste of our counterfeit currency. LOL!!!
Dec 4, 2011 at 9:46 PM | Unregistered CommenterDa

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