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Bloomberg – American International Group Inc., the insurer bailed out by the U.S., benefited from hedge funds for the first time in a year as the company returned to profitability in the second quarter.
AIG earned $121 million from hedge funds in the period after the holdings cost the New York-based insurer $2 billion in the nine months ended March 31, the company said last week. Hedge fund at MetLife Inc., the biggest U.S. life insurer, also improved, beating the company’s forecast.
New York (HedgeCo.Net) – Lawrence Summers, who is currently serving as Director of President Obama’s National Economic Council, made millions from his days working as a managing director for hedge fund D.E. Shaw & Co.
The New York-based hedge fund, which oversees about $36 billion in capital, paid the former Treasury Secretary about $5.2 million over the course of 16 months starting in 2006. And that’s not including bonuses.
According to a financial disclosure released by the White House on Friday, Summers also raked in around $2.7 million in speaking fees for appearances at banks like Citigroup and Goldman Sachs. Lehman Brothers Holdings Inc., who collapsed last year, paid Summers over $67,000 for one appearance this past July.
For an administration that wants to convey their dedication and support of increased regulation and the all-out war on corruption and excessive executive pay in corporate America, many feel the President may be choosing individuals who don’t necessarily share that view, at least not privately.
Carol Browner, the White House Energy Policy Coordinator, is another member of the administration no stranger to hedge funds. She still holds an interest in Albright Capital Management LLC, a hedge fund founded by former Secretary of State Madeleine Albright. Browner said her holdings were worth between $450,000 and $1 million, and said she earned $450,000 last year by working for Albright Group LLC, a related consulting firm. She is still owed between $350,000 and $750,000 in member distributions.
David Axelrod, former Chief Strategist for the Obama campaign and now the President’s Senior Advisor, was paid a $1.55 million salary when he worked for a public affairs firm. According to those same disclosures, White House Chief of Staff Rahm Emanuel held about 1,000 shares of American International Group, Inc., although he claims he currently does not hold any shares of the company that was bailed out by taxpayer funded government aid.
Despite the big pay days, the conflicts of interest that potentially exist may play a bigger role in public dismay. In addition to his $3.9 million salary at a law firm, Deputy White House National Security Adviser Thomas Donilon represented clients such as Citigroup, Goldman Sachs and hedge fund Apollo Management LLP. He also worked for Fannie Mae from 1999 to 2005.
“It just may be the reason that money keeps being thrown at banks and companies who have proven they are undeserving, is because the administration, like every single other administration, is stacked full of the same, rich people who would rather dole out money to their own than to the Americans who really need it,” said one blogger who remained anonymous.
The White House contends there is no current conflict of interest with any cabinet member. Speaking of Summers, White House spokesman Ben LaBolt said he “has been at the forefront of this administration’s work to shore up our nation’s financial system and to put in place a regulatory framework that will strengthen the financial system.”
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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Houston Chronicle – Treasury Secretary Timothy Geithner will ask Congress to bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time as part of a revamp of U.S. financial rules.
The Treasury chief will present his proposed framework at a House Financial Services Committee hearing in Washington today. Under the new so-called rules of the road, the government would get powers to seize and wind down any financial company big enough to destabilize the banking system.
The Obama administration is counting on public anger over the taxpayer-financed rescues of American International Group Inc., Bear Stearns Cos. and other firms to help it win approval for the changes, which could be the most sweeping since the 1930s. Policy makers want to improve the oversight of the financial system now rather than wait until the crisis is over, administration officials said on condition of anonymity.
Wall Street Journal – 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.
Bloomberg – Intercontinental Exchange Inc.’s bid to be the top U.S. guarantor of credit-default swap trades won Federal Reserve approval, leaving the Securities and Exchange Commission as the futures market’s final regulatory hurdle.
Intercontinental and larger rival CME Group Inc. are among four clearinghouse owners vying to back the $27 trillion credit- default swap market, with the winner standing to gain as much as $400 million a year in revenue, according to estimates by Wachovia Capital Markets and Keefe Bruyette & Woods Inc.
“I don’t think the SEC will have any issues” signing off Intercontinental’s clearing plans after the Fed approved them yesterday, said Brian Yelvington, an analyst at CreditSights Inc. in New York. “I hope it’s a rubber stamp, because given the new regulatory regime I would hope this has been a carefully coordinated process.”
Regulators on both sides of the Atlantic are developing separate plans to stabilize the derivatives market after American International Group Inc., once the world’s largest insurer, almost went bankrupt last year from its use of credit- default swaps. The unregulated, privately traded contracts stymied government efforts to assess bank credit risk because the full range of trades between dealers was unknown.
SEC spokesman John Nester said he didn’t know when the agency will make a decision. “The proposal is under active consideration,” he said in an interview yesterday.
Bloomberg – Federal Reserve Chairman Ben S. Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him “more angry” than any other episode during the financial crisis.
“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
Bernanke’s comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The U.S. government has had to deepen its commitment to prevent AIG’s collapse three times since September as the company accumulated the worst losses of any U.S. company.
The company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system,” Bernanke said. At the same time, officials “had no choice but to try and stabilize the system” by aiding the firm.
AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.
In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilizing to markets.
Bernanke made the AIG comments in response to a question from Senator Ron Wyden, an Oregon Democrat, at a Senate Budget Committee hearing today in Washington.
BloombergThe financial wreckage of 2008 has left no part of our country untouched. It exposed the bankruptcy of business models employed by mortgage companies, investment banks, and rating agencies as well as the flaws of innovations such as structured finance and credit default swaps. It also highlighted regulatory gaps and failures at almost every level of oversight.
In 2008 Bear Stearns Cos. and Lehman Brothers Holdings Inc. imploded, Fannie Mae and Freddie Mac were placed into conservatorship, mainstay Wall Street firms like Merrill Lynch & Co. Inc. were forced to merge with other companies, and giant institutions such as American International Group Inc. clung to existence on federal life support.
More painfully, too many Americans face the twin perils of home foreclosure and job loss as frozen credit markets signal an increasingly deep economic slowdown.
