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Paulson Tipped Off Hedge Funds on Fannie and Freddie Takeover

Henry Paulson, former U.S. Treasury secretary, pauses during an address at the Boao Forum for Asia in Boao, Hainan province, China, on Saturday, April 10, 2010. The Boao Forum takes place from April 9 to 11.
Paulson. Photo: Nelson Ching/Bloomberg via Getty Images

During a July 2008 meeting at the offices of hedge fund Eton Park, Hank Paulson might have tipped off several top hedge companies run by fellow ex-Goldmanites in advance of the news that Fannie Mae and Freddie Mac were going to be taken into governmental conservatorship, according to a new report from Bloomberg Markets Magazine:

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.

The group included representatives from Lone Pine Capital, TPG-Axon Capital Management LP, and Och-Ziff Capital Management Group LLC; all managed to avoid the fate of many other firms that took a big hit when the Fannie–Freddie news broke. Paulson’s little chat wasn’t illegal, but at least to Felix Salmon’s thinking,” he was downright pathological in giving inside information to his old Wall Street buddies.”

[T]he crazy thing is that we have no idea how many of these meetings there were, or how long they went on for — the only way that we ever find out about them is when reporters like Sorkin or Bloomberg’s Richard Teitelbaum manage to find a source who was in the meeting and is willing to talk about what happened.

Given that it’s taken two years since the release of Sorkin’s book for the Eton Park meeting to be made public, it’s fair to assume that there were other meetings, too — possibly many others. Paulson was giving inside tips to Wall Street in general, and to Goldman types in particular: exactly the kind of behavior that “Government Sachs” conspiracy theorists have been speculating about for years. Turns out, they were right.

Did Matt Taibbi tell Salmon to post that after they had a secret meeting in advance of this news?

Paulson Tipped Hedge Funds Off