OpenMic: Did Hank Paulson Give Hedge Funds Advance Notice?


NEW YORK – A recent Bloomberg story reports that Henry Paulson, who served as Secretary of the Treasury under President George W. Bush, gave hedge funds advance word that the government was getting ready to bailout Fannie Mae and Freddie Mac in 2008.

 

The story, which used the Freedom of Information Act to get documents, says that on July 21, 2008, Paulson told New York Times reporters that Fannie and Freddie were healthy. But, later that day in a private meeting with hedge-fund managers, he told a different story:

 

"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."

 

Law professors say that Paulson's disclosure were not illegal. Government officials are not liable if they do not profit or trade on insider information. But, any trades put on by the managers would be considered insider trading. 


Weigh in: What rules, if any, shoud be put in place against government officials sharing sensitive information? Should government officials be liable for facilitating insider trading?


Photo Credit: CSIS: Center for Strategic & International Studies