Former Treasury Secretary Paulson Warned Hedge Funds of Fannie and Freddie Takeover

Former Treasury Secretary Henry Paulson reportedly met with several hedge fund managers in July 2008, giving them early warning that a government takeover of Fannie Mae and Freddie Mac was a very real possibility.

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Just a week earlier, he had testified in the Senate and told media outlets that government intervention in Fannie and Freddie was near impossible. He pushed Congress to open lines of credit to the two struggling firms and to grant authority for the Treasury Department to buy equity in them, but said they should remain shareholder owned.

Fannie and Freddie were ultimately bailed out by the federal government just two months later, on September 6, 2008, and placed into the conservatorship of the Federal Housing Finance Agency. “Conservatorship” is a legal status akin to Chapter 11 bankruptcy. Their board of directors and chief executives were fired, while the FHFA appointed new executives. The action was one of the most sweeping government interventions in private financial markets in decades.

However, as recently as July 21, Paulson told the New York Times that a pending examination of Fannie and Freddie by the Federal Reserve and Office of the Comptroller of the Currency would give a signal of confidence in the markets. But later that same day, he met with a dozen or so hedge fund managers who all stood to gain from any disclosure, and warned them that Fannie and Freddie would likely be taken over by the federal government.

Paulson, who served as CEO of Goldman Sachs (NYSE:GS) from 1999 to 2006, addressed at least five former Goldman employees. 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 were also among those warned of the likely takeover.

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Bloomberg Markets is responsible for bringing to light this new information, and notes that the group of managers could have profited off the information, though it is not clear whether they were trading Fannie and Freddie shares at the time, and it is near impossible to track “firm-specific short stock sales” using public documents. There has been no evidence that the managers traded on Paulson’s inside information.