Were Hedge Funds the Ultimate Beneficiaries of AIG Bailout?
By: masaccio Thursday March 19, 2009 5:00 pm
Not only do the rich get bailed out, they use those profits to fund a no-lose proposition buying banks out of their problems at non-market prices.The Wall Street Journal explains (subscription required) how hedge funds are the ultimate beneficiaries of a substantial part of AIG bailout money. Hedge fund clients of Deutsche Bank wanted to bet against residential mortgage-backed securities (RMBS). So the Bank sold them protection credit default swaps.
http://online.wsj.com/article/SB123734123180365061.htmlDeutsche Bank wanted to hedge its exposure to its own CDSs, so it set up portfolios of notes, secured by residential mortgages, in off-shore jurisdictions. They called these entities Starts, and designed them to track the value of RMBS. Then it bought protection from the Starts. But that was not enough. So the Starts bought protection credit default swaps aggregating $1bn from AIG. The premiums for this insurance were in the range of $10mn per year. The outcome?
Hedge Funds May Get AIG Cash
Some Bailout Money Is Set Aside to Pay Firms That Bet Housing Market Would Crater
Last fall, after AIG's credit rating was cut, the insurer paid roughly $800 million to START, according to two people familiar with the matter. Much of the money is being held in escrow and will be used to pay off Deutsche's swap contracts if mortgage defaults in the portfolio rise above a certain level. Some of that money could go through Deutsche to its hedge-fund clients.
Goldman Sachs (them again) did the same thing, using CDOs named Abacus.
…Some Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”
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more at:
http://firedoglake.com/2009/03/19/were-hedge-funds-the-ultimate-beneficiaries-of-aig-bailout/
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