Hedge Funds May Be Getting a Bailout via AIG's Payments

People, it's time to get really really pissed off!

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by: Dow Jones | Visit article original @ Dow Jones

http://money.cnn.com/news/newsfeeds/articles/djf500/200903181338DOWJONESDJONLINE000826_FORTUNE5.htm


New York - The fact that some payments made by American International Group Inc. (AIG) to hedge funds are coming from government bailout money raises a question: Are hedge funds receiving a de facto bailout?

If the answer is yes, it would signify the first taxpayer money yet to reach hedge funds since the financial crisis began back in late 2007. Hedge funds - investment pools made up primarily of high net worth individuals, pension funds and university endowments - have suffered like most during the crisis, but have pointed out with pride that as of yet their industry hasn't requested any government handouts.

Officially, of course, any payments made by AIG to hedge funds wouldn't change that fact. It was AIG that requested the bailout, not the hedge funds. The insurance giant is now simply meeting its contractual obligations.

In some cases, AIG has already paid out fairly hefty amounts to hedge funds with U.S. taxpayer funds. AIG said in a press release Sunday that it paid $200 million each in "public aid" to Citadel Investment Group and Paloma Securities. These payments were made to settle short-term trades last year in which the hedge funds loaned AIG cash in exchange for bonds.

Also, as reported Wednesday in The Wall Street Journal, AIG reportedly may be paying out many different hedge funds for bets in which the hedge funds waged that the housing market would crater against AIG's bets that it would remain robust.

It isn't clear how much in total that hedge funds stand to gain through the AIG payments, but the payments call into question the government's decision, whether out of haste or for any other reason, to allow the AIG bailout money to be dispersed to any counterparties, including hedge funds.

"Taxpayer money is being paid to hedge funds by a Treasury that could have limited the payments to domestic banks but decided not to risk letting anyone big fail," said John Coffee, a professor of securities law at Columbia University. "In short, everyone of importance is being protected."