Treasury Secretary Henry Paulson Tipped Off Prominent Hedge Funds Regarding Fannie Mae While Telling the US Senate and General Public a Different Story

I have on numerous occasions made the claim that Henry Paulson is guilty of coercion and fraud. For those actions, he should be arrested and criminally tried.

However, the latest disclosure in which hedge funds say they were tipped off by Paulson while he told Congress and reporters blatant lies is allegedly not even criminal behavior.

Bloomberg reports Paulson Gave Hedge Funds Advance Word

Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM)

On the morning of July 21, before the Eton Park meeting, Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets.

At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.

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.
Stock Wipeout

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.

Law professors say that Paulson himself broke no law by disclosing what amounted to inside information.

At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals -- and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.

William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.

“You just never ever do that as a government regulator -- transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”

The fund manager who described the meeting left after coffee and called his lawyer. The attorney’s quick conclusion: Paulson’s talk was material nonpublic information, and his client should immediately stop trading the shares of Washington- based Fannie and McLean, Virginia-based Freddie.

Seven weeks later, the boards of the two firms voted to go into conservatorship under the newly created Federal Housing Finance Agency. The takeover was effective Sept. 6, a Saturday, and the companies’ stock prices dropped below $1 the following Monday, from $14.13 for Fannie Mae and $8.75 for Freddie Mac (FMCC) on the day of the meeting. Various classes of preferred shares lost upwards of 85 percent of their value.

Who Was at the Meeting?

• Mindich, a former chief strategy officer of New York- based Goldman Sachs, started Eton Park in 2004
• Daniel Stern of Reservoir Capital Group
• Singh, a former head of Goldman’s proprietary-trading desk, also began his fund in 2004, in partnership with private- equity firm Texas Pacific Group Ltd.
• Frank Brosens, founder and principal of Taconic Capital Advisors LP, who worked at Goldman as an arbitrageur and who was a protege of Robert Rubin, who went on to become Treasury secretary.
• Non-Goldman Sachs alumni who attended included short seller James Chanos of Kynikos Associates Ltd., who helped uncover the Enron Corp. accounting fraud;
• GSO Capital Partners LP co-founder Bennett Goodman, who sold his firm to Blackstone Group LP (BX) in early 2008;
• Roger Altman, chairman and founder of New York investment bank Evercore Partners Inc. (EVR);
• Steven Rattner, a co-founder of private-equity firm Quadrangle Group LLC, who went on to serve as head of the U.S. government’s Automotive Task Force.

Tipping Hands

Brosens and Rattner both confirmed in e-mails that they had attended and said they couldn’t recall details. They didn’t respond when asked whether they traded in Fannie Mae- or Freddie Mac-related instruments after the meeting. Chanos declined to comment.

A Blackstone spokesman confirmed in an e-mail that GSO’s Goodman attended the meeting. Blackstone doesn’t believe market- sensitive information was discussed, and in any event Blackstone didn’t take any positions in Fannie or Freddie between the luncheon and Sept. 6, he wrote.

Paulson often contacted Wall Street participants throughout his tenure, according to his calendar. On that July trip to New York alone, he talked to Lehman Brothers Holdings Inc. CEO Richard Fuld, Washington Mutual Inc. CEO Kerry Killinger and Citigroup senior adviser Rubin.

Morgan Stanley and BlackRock Inc. both helped the Federal Reserve and OCC prepare the reports on Fannie Mae and Freddie Mac that Paulson told the New York Times would instill confidence the morning of the Eton Park meeting.

The manager who described the Eton Park meeting says he also discussed it with an investigator from the FCIC. The discussion was confirmed by a former FCIC employee.

That manager says he ended up profiting from his Fannie Mae and Freddie Mac positions because he was already short the stocks. On his lawyer’s advice, he stopped covering his short positions and rode Fannie and Freddie shares all the way to the bottom.

What did PIMCO know and When?

Anyone who says they do not remember a meeting like that is a liar. Anyone who says "no comment" is indeed commenting and the possible interpretation is not pretty. So what else did Paulson say?

I would like to know who Paulson talked to outside the meeting.

Bill Gross at PIMCO put on a huge bet, buying not equity shares but Fannie and Freddie bonds in the belief their debt would be guaranteed by the government. Gross bet the firm and won his bet as shareholders were wiped out.

So, what did Gross know and when? Was it a guess, or a known deal?

Sadly, there is no way to avoid questions of this nature when treasury secretaries and other high-ranking public officials have routine conversations with former colleagues giving them valuable inside information while telling blatant lies to the public.

How many people were suckered into buying Fannie and Freddie while hedge funds were told in advance to dump shares?

What Paulson did may not have been illegal (acting on the information would have been), which makes the comment by William Poole, a former president of the Federal Reserve Bank of St. Louis seem downright bizarre.

Said Poole ... "It seems to me, you’ve got to cut the guy some slack, even if he tipped his hand. How do you prepare the market for the fact that policy has changed without triggering the very crisis that you’re trying to avoid? What is he supposed to say without misleading these people?"

On second thought, Poole's comments are not bizarre, they are 100% inane, well beyond the inane idea that the market needs to be prepared for anything, even IF there was a legal way to do it.

Poole's idea of preparing the market means telling the big boys how to make billions, while screwing the little guy. Poole is another player deserving your contempt and scorn.

Rolling List of High Profile Fraud Targets

This list is incomplete. I have stopped updating it, it got so long.

• October 10, 2010: FDIC Authorizes $1 Billion Lawsuits Against Failed-Bank Executives; Token Search for Low-Profile Scapegoats
• April 29, 2010: Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal, TARP Insider Trading; New York Fed Implicated
• April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed
• March 2, 2010: Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”
• January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP
• January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels
• January 26, 2010: Questions Geithner Cannot Escape
• January 07, 2010: Time To Indict Geithner For Securities Fraud
• October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation
• July 17, 2009: Paulson Admits Coercion; Where are the Indictments?
• June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"
• April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

Please note that last item on the list, the first chronologically (as well as the two right above it), all involving Paulson.

His actions are a disgusting tribute to the failed ethics of a man truly deserving of being spit in the face by every citizen in the country.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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