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NewsToBeRead
March 18th 09, 11:11 PM
http://online.wsj.com/article/SB123734123180365061.html

a.. BUSINESS
b.. MARCH 18,
Hedge Funds May Get AIG Cash
Some Bailout Money Is Set Aside to Pay Firms That Bet Housing Market Would
Crater
By SERENA NG
Some of the billions of dollars that the U.S. government paid to bail out
American International Group Inc. stand to benefit hedge funds that bet on a
falling housing market, according to people familiar with the matter and
documents reviewed by The Wall Street Journal.

The documents show how Wall Street banks were middlemen in trades with hedge
funds and AIG that left the giant insurer holding the bag on billions of
dollars of assets tied to souring mortgages. AIG has put in escrow some
money for at least one major bank, Deutsche Bank AG, whose hedge-fund
clients made bets against the housing market, according to a person familiar
with the matter. The money will be released to the bank if mortgage defaults
rise above a certain level.

In essence, while the U.S. government is busy trying to prop up the housing
market -- by trying to limit foreclosures, among other things -- it is
simultaneously putting up cash that could be used to pay off investors who
bet housing prices would tumble and many mortgage holders would default.

It's unclear how much government money might eventually flow to hedge-fund
investors. Overall, the government has committed up to $173.3 billion to
bail out AIG. Of that amount, AIG's housing-related bets have cost U.S.
taxpayers some $52 billion.

The investment strategies involved are perfectly legal maneuvers. Still, the
losses show how AIG strayed from its core business: selling standard
insurance policies to businesses and individuals to protect against
everything from fires to lawsuits. "AIG's financial-products division went
heavily into the business of speculation, and its gambling debts are what
taxpayers are paying off right now," said Martin Weiss of Weiss Research, an
investment consultant in Jupiter, Fla.

An AIG spokeswoman declined to comment, as did a spokesman for the Federal
Reserve Bank of New York.

The transactions worked like this: Investment banks such as Goldman Sachs
Group Inc. and Deutsche Bank sold financial instruments to hedge funds
letting them bet that mortgage defaults would rise. These instruments were
credit default swaps, a form of insurance that pays out in the event of a
debt default.

It is not known which hedge funds made those bets with specific banks.
However, several large funds made big, ultimately profitable, wagers that
mortgage defaults would increase.

Many of the assets AIG insured were tied to subprime mortgages. The
deterioration of those high-risk mortgages, along with AIG's own financial
woes, forced the insurer to put up billions of dollars in collateral, mostly
to the banks that were its trading partners. AIG sold protection on
securities backed by physical assets, as well as on positions almost
entirely backed by other financial bets.

Some of the U.S.-government exposure traces back to the hedge funds that
spotted problems in the U.S. housing market in 2005. They wanted to "sell
short" -- or bet against -- securities backed by mortgages to questionable
borrowers. These hedge funds entered into trades with investment banks. The
banks then used a complex set of financial maneuvers to pass on some of the
risk of those trades to AIG and other insurers.

The transactions meant that AIG was wagering that the U.S. housing market
would remain robust. With housing markets now in free fall, the hedge funds
stand to collect money from their bank counterparties. AIG is, in turn,
compensating the banks.

The banks that had sold credit default swaps to the hedge funds wanted to
turn around and hedge their own risks. But finding that protection wasn't
easy.

So at Deutsche, the German bank's securities arm created a handful of
offshore companies known as collateralized debt obligations, or CDOs. These
companies carried a series of exotic names, according to securities filings,
mostly based around the moniker "START," short for STAtic ResidenTial CDO.
They allowed Deutsche to neutralize its exposure to the hedge funds' bets by
buying swaps from START on the same securities its clients were betting
against.

START held assets from a hit parade of lenders closely linked to the
subprime crisis, including Bear Stearns, Countrywide Financial and New
Century Financial, according to documents reviewed by the Journal.

In 2005, Deutsche found a willing taker for a chunk of the mortgage risks
held by START: AIG Financial Products. The derivatives arm of AIG agreed to
pay out up to $1 billion under two of the START vehicles, if underlying
assets deteriorated or the insurer's own credit rating fell below a certain
threshold. AIG stood to earn a fraction of a penny each year for every
dollar of protection it sold, according to securities filings, meaning it
made less than $10 million annually on the $1 billion in insurance.

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 insurer.

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.

If the housing market improves, AIG could recover some or much of the cash
it transferred to START. But that outcome won't be known for years. The
portions of START to which AIG is exposed were originally rated triple-A by
Standard & Poor's. They've since been downgraded to "junk" status by the
ratings firm.

The START CDOs share some similarities with mortgage pools created by
Goldman named "Abacus" and also insured by AIG Financial Products, according
to people familiar with the matter.

These pools were made up of credit-default swaps tied to individual mortgage
securities. AIG had to post collateral to Goldman when the assets dropped in
value. Some of this money, too, could go to hedge-fund clients of Goldman.

From mid-September to the end of last year, AIG and the government paid $5.4
billion to Deutsche and $8.1 billion to Goldman under credit default swap
contracts the insurer had written.

A spokesman for the German bank said, "Our exposure to AIG was
well-collateralized and hedged." A Goldman spokesman also said his firm's
exposure was collateralized and hedged.

Write to Serena Ng at

dearcilla
March 19th 09, 04:35 AM
On Mar 18, 7:11*pm, "NewsToBeRead" > wrote:
> http://online.wsj.com/article/SB123734123180365061.html
>

The problem is, we can't decide if we want to reward the people who
made smart bets or the people who made stupid ones.

The Moderator
March 21st 09, 10:57 AM
"dearcilla" > wrote in message
...
On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
> http://online.wsj.com/article/SB123734123180365061.html
>

The problem is, we can't decide if we want to reward the people who
made smart bets or the people who made stupid ones.
***************************

What Obama policy rewards the hard working smart people?

The moderator
March 23rd 09, 01:49 PM
"The Moderator" > wrote in message
. ..
>
> "dearcilla" > wrote in message
> ...
> On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
>> http://online.wsj.com/article/SB123734123180365061.html
>>
>
> The problem is, we can't decide if we want to reward the people who
> made smart bets or the people who made stupid ones.
> ***************************
>
> What Obama policy rewards the hard working smart people?

I seems clear that NONE is the answer based on the lack of responses.

William Clark
March 28th 09, 09:56 PM
In article >,
"The Moderator" > wrote:

> "dearcilla" > wrote in message
> ...
> On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
> > http://online.wsj.com/article/SB123734123180365061.html
> >
>
> The problem is, we can't decide if we want to reward the people who
> made smart bets or the people who made stupid ones.
> ***************************
>
> What Obama policy rewards the hard working smart people?

I would be much more concerned if such a policy rewarded the likes of
you.

The moderator
March 30th 09, 05:07 PM
"William Clark" > wrote in message
...
> In article >,
> "The Moderator" > wrote:
>
>> "dearcilla" > wrote in message
>> ...
>> On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
>> > http://online.wsj.com/article/SB123734123180365061.html
>> >
>>
>> The problem is, we can't decide if we want to reward the people who
>> made smart bets or the people who made stupid ones.
>> ***************************
>>
>> What Obama policy rewards the hard working smart people?
>
> I would be much more concerned if such a policy rewarded the likes of
> you.

So clearly there is no Obama policy that rewards the hard working smart
people and you would be upset if there were.

That is no surprise.

Dinosaur_Sr
March 30th 09, 09:23 PM
On Mar 18, 6:11*pm, "NewsToBeRead" > wrote:
> http://online.wsj.com/article/SB123734123180365061.html
>
> * a.. BUSINESS
> * b.. MARCH 18,
> Hedge Funds May Get AIG Cash
> Some Bailout Money Is Set Aside to Pay Firms That Bet Housing Market Would
> Crater
> By SERENA NG
> Some of the billions of dollars that the U.S. government paid to bail out
> American International Group Inc. stand to benefit hedge funds that bet on a
> falling housing market, according to people familiar with the matter and
> documents reviewed by The Wall Street Journal.
>
> The documents show how Wall Street banks were middlemen in trades with hedge
> funds and AIG that left the giant insurer holding the bag on billions of
> dollars of assets tied to souring mortgages. AIG has put in escrow some
> money for at least one major bank, Deutsche Bank AG, whose hedge-fund
> clients made bets against the housing market, according to a person familiar
> with the matter. The money will be released to the bank if mortgage defaults
> rise above a certain level.
>
> In essence, while the U.S. government is busy trying to prop up the housing
> market -- by trying to limit foreclosures, among other things -- it is
> simultaneously putting up cash that could be used to pay off investors who
> bet housing prices would tumble and many mortgage holders would default.
>
> It's unclear how much government money might eventually flow to hedge-fund
> investors. Overall, the government has committed up to $173.3 billion to
> bail out AIG. Of that amount, AIG's housing-related bets have cost U.S.
> taxpayers some $52 billion.
>
> The investment strategies involved are perfectly legal maneuvers. Still, the
> losses show how AIG strayed from its core business: selling standard
> insurance policies to businesses and individuals to protect against
> everything from fires to lawsuits. "AIG's financial-products division went
> heavily into the business of speculation, and its gambling debts are what
> taxpayers are paying off right now," said Martin Weiss of Weiss Research, an
> investment consultant in Jupiter, Fla.
>
> An AIG spokeswoman declined to comment, as did a spokesman for the Federal
> Reserve Bank of New York.
>
> The transactions worked like this: Investment banks such as Goldman Sachs
> Group Inc. and Deutsche Bank sold financial instruments to hedge funds
> letting them bet that mortgage defaults would rise. These instruments were
> credit default swaps, a form of insurance that pays out in the event of a
> debt default.
>
> It is not known which hedge funds made those bets with specific banks.
> However, several large funds made big, ultimately profitable, wagers that
> mortgage defaults would increase.
>
> Many of the assets AIG insured were tied to subprime mortgages. The
> deterioration of those high-risk mortgages, along with AIG's own financial
> woes, forced the insurer to put up billions of dollars in collateral, mostly
> to the banks that were its trading partners. AIG sold protection on
> securities backed by physical assets, as well as on positions almost
> entirely backed by other financial bets.
>
> Some of the U.S.-government exposure traces back to the hedge funds that
> spotted problems in the U.S. housing market in 2005. They wanted to "sell
> short" -- or bet against -- securities backed by mortgages to questionable
> borrowers. These hedge funds entered into trades with investment banks. The
> banks then used a complex set of financial maneuvers to pass on some of the
> risk of those trades to AIG and other insurers.
>
> The transactions meant that AIG was wagering that the U.S. housing market
> would remain robust. With housing markets now in free fall, the hedge funds
> stand to collect money from their bank counterparties. AIG is, in turn,
> compensating the banks.
>
> The banks that had sold credit default swaps to the hedge funds wanted to
> turn around and hedge their own risks. But finding that protection wasn't
> easy.
>
> So at Deutsche, the German bank's securities arm created a handful of
> offshore companies known as collateralized debt obligations, or CDOs. These
> companies carried a series of exotic names, according to securities filings,
> mostly based around the moniker "START," short for STAtic ResidenTial CDO..
> They allowed Deutsche to neutralize its exposure to the hedge funds' bets by
> buying swaps from START on the same securities its clients were betting
> against.
>
> START held assets from a hit parade of lenders closely linked to the
> subprime crisis, including Bear Stearns, Countrywide Financial and New
> Century Financial, according to documents reviewed by the Journal.
>
> In 2005, Deutsche found a willing taker for a chunk of the mortgage risks
> held by START: AIG Financial Products. The derivatives arm of AIG agreed to
> pay out up to $1 billion under two of the START vehicles, if underlying
> assets deteriorated or the insurer's own credit rating fell below a certain
> threshold. AIG stood to earn a fraction of a penny each year for every
> dollar of protection it sold, according to securities filings, meaning it
> made less than $10 million annually on the $1 billion in insurance.
>
> 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 insurer.
>
> 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.
>
> If the housing market improves, AIG could recover some or much of the cash
> it transferred to START. But that outcome won't be known for years. The
> portions of START to which AIG is exposed were originally rated triple-A by
> Standard & Poor's. They've since been downgraded to "junk" status by the
> ratings firm.
>
> The START CDOs share some similarities with mortgage pools created by
> Goldman named "Abacus" and also insured by AIG Financial Products, according
> to people familiar with the matter.
>
> These pools were made up of credit-default swaps tied to individual mortgage
> securities. AIG had to post collateral to Goldman when the assets dropped in
> value. Some of this money, too, could go to hedge-fund clients of Goldman..
>
> From mid-September to the end of last year, AIG and the government paid $5.4
> billion to Deutsche and $8.1 billion to Goldman under credit default swap
> contracts the insurer had written.
>
> A spokesman for the German bank said, "Our exposure to AIG was
> well-collateralized and hedged." A Goldman spokesman also said his firm's
> exposure was collateralized and hedged.
>
> Write to Serena Ng at

Hedge Funds have already recieved over $50 billion in bailout cash.
Hardly news. The real news will be that's not enough...they need more.

William Clark
March 31st 09, 12:55 AM
In article >,
"The moderator" > wrote:

> "William Clark" > wrote in message
> ...
> > In article >,
> > "The Moderator" > wrote:
> >
> >> "dearcilla" > wrote in message
> >> ...
> >> On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
> >> > http://online.wsj.com/article/SB123734123180365061.html
> >> >
> >>
> >> The problem is, we can't decide if we want to reward the people who
> >> made smart bets or the people who made stupid ones.
> >> ***************************
> >>
> >> What Obama policy rewards the hard working smart people?
> >
> > I would be much more concerned if such a policy rewarded the likes of
> > you.
>
> So clearly there is no Obama policy that rewards the hard working smart
> people and you would be upset if there were.
>
> That is no surprise.

Actually, there is. It is the middle class tax cuts, and I am very
pleased about it.

15 - 0.

The moderator
March 31st 09, 04:23 PM
"William Clark" > wrote in message
...
> In article >,
> "The moderator" > wrote:
>
>> "William Clark" > wrote in message
>> ...
>> > In article >,
>> > "The Moderator" > wrote:
>> >
>> >> "dearcilla" > wrote in message
>> >> ...
>> >> On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
>> >> > http://online.wsj.com/article/SB123734123180365061.html
>> >> >
>> >>
>> >> The problem is, we can't decide if we want to reward the people who
>> >> made smart bets or the people who made stupid ones.
>> >> ***************************
>> >>
>> >> What Obama policy rewards the hard working smart people?
>> >
>> > I would be much more concerned if such a policy rewarded the likes of
>> > you.
>>
>> So clearly there is no Obama policy that rewards the hard working smart
>> people and you would be upset if there were.
>>
>> That is no surprise.
>
> Actually, there is. It is the middle class tax cuts, and I am very
> pleased about it.
>
> 15 - 0.

When is the middle class going to see a tax cut?

William Clark
April 1st 09, 03:26 AM
In article >,
"The moderator" > wrote:

> "William Clark" > wrote in message
> ...
> > In article >,
> > "The moderator" > wrote:
> >
> >> "William Clark" > wrote in message
> >> ...
> >> > In article >,
> >> > "The Moderator" > wrote:
> >> >
> >> >> "dearcilla" > wrote in message
> >> >> ...
> >> >> On Mar 18, 7:11 pm, "NewsToBeRead" > wrote:
> >> >> > http://online.wsj.com/article/SB123734123180365061.html
> >> >> >
> >> >>
> >> >> The problem is, we can't decide if we want to reward the people who
> >> >> made smart bets or the people who made stupid ones.
> >> >> ***************************
> >> >>
> >> >> What Obama policy rewards the hard working smart people?
> >> >
> >> > I would be much more concerned if such a policy rewarded the likes of
> >> > you.
> >>
> >> So clearly there is no Obama policy that rewards the hard working smart
> >> people and you would be upset if there were.
> >>
> >> That is no surprise.
> >
> > Actually, there is. It is the middle class tax cuts, and I am very
> > pleased about it.
> >
> > 15 - 0.
>
> When is the middle class going to see a tax cut?

They go into effect tomorrow. Along with the purchase credit for new
cars, which started yesterday. Or have you just been reading the GoP
budget version - the one with no actual numbers in it?