November 29, 2011

When a few Italian-Americans in tracksuits get together it's not necessarily nefarious but get a few Goldman Sachs bigwigs wearing pinstripes in a conference room and it can be rather suspicious.

In a sneak preview of their January cover story, Bloomberg Markets is reporting that former Treasury Head Hank Paulson may have tipped off hedge fund managers that the government was very concerned about Fannie and Freddie Mac in the summer of 2008.

This was months after the Bear Stearns collapse in March 2008 and weeks before Lehman Brothers would implode in September.

According to Bloomberg, the people in the room with Paulson were former Goldman Sachs officers who had left to start their own hedge funds. Paulson was head of Goldmans from before joining the Bush Administration.

Some key graffs:

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.

While Bloomberg reports that there is no evidence that the hedge finds made trades based on the information, one commentator had sharp words for the former Treasury head.

In the article, Janet Tavakoli, founder of Chicago consulting firm Tavakoli Structured Finance, was blunt: "What is this but crony capitalism?" she asks. "Most people have had their fill of it."

ABOUT THE AUTHOR
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...