Hedge funds win from AIG's bad mortgage bets

Hedge Funds knew. Investment banks knew. But someone forgot to clue in AIG. According to today’s Wall Street Journal, hedge funds saw the writing on the wall for mortgages and began shorting the housing market big time back in 2005. Hedgies placed the bets with investment banks like Goldman Sachs and Deutsche Bank. Those firms wanted the hedge fund business, but not the exposure to the subprime dreck. As a result, some slice of the $52.5 billion in housing losses at AIG may end up lining the pockets of savvy hedge fund investors, the WSJ says.

“Up until AIG exited the market in 2006, ‘AIG was by far the single largest ultimate taker of risk in the [subprime mortgage] CDO space,’ says a senior investment banker whose firm bought credit protection from the insure,” the Journal reports.

Even more galling: both the investment banks and hedge funds appear to be getting paid 100 cents on the dollar, says the New York Times: “What upsets some people is that the government paid the counterparties in full even though the underlying securities had not experienced widespread, or perhaps even any, defaults.”

NYT writer Gretchen Morgenson observes: “Every day, insurance companies sell policies to homeowners to cover the cost of damage in the case of fire. Why would those companies agree to pay out in full to a policyholder even if a fire had not occurred?”

The bailout package was thrown together in haste. Now it is a multi-armed monster; no one knows where the next appendage will come from to grab another fistful of taxpayer money. Congress and the White House are busy playing the blame game, threatening to wrest $165 million back from some seriously amoral AIG executives as billions and billions of dollars slip through the cracks of the financial rescue program to unintended recipients.

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