How Henry Paulson may have tipped hedge funds

Former U.S. Treasury Secretary Henry Paulson (C) waits for the beginning of a hearing before the Financial Crisis Inquiry Commission May 6, 2010 on Capitol Hill in Washington, DC. The hearing was to examine 'The Shadow Banking System.'

Steve Chiotakis: We've got the current debt crisis going on in Europe now. But at the height of the last financial crisis, the government took drastic action to save the mortgage giants Fannie Mae and Freddie Mac after they had taken on mounds of bad debt.

A new report sheds some light on what was said during that time -- behind the scenes -- by then-Treasury Secretary Henry Paulson. Who, in a meeting, may've tipped off Wall Streeters and hedge funders about those drastic measures.

Richard Teitelbaum wrote the story for Bloomberg Markets. And he's with us from New York. Hey Richard.

Richard Teitelbaum: How are you doing?

Chiotakis: I'm doing well. What are the implications here? Did Hank Paulson do something illegal?

Teitelbaum: No. The implications are not that he did something illegal. But what it does speak to is the issue of what kind of non-public information is being divulged to market participants -- information that shouldn't be.

Chiotakis: There's of course the chorus, Richard, that he himself -- Hank Paulson -- didn't profit from knowing this information, but several people did. I mean, if these were other people in another situation, would we see prosecutions here?

Teitelbaum: Well, if they traded on that information, then that would be a case certainly to look into. However, there is no indication here that any of the people here did trade on that information. Although, we do know around that time that short positions were quite high in both Fannie Mae and Freddie Mac stock.

Chiotakis: Does stuff like this happen a lot -- specially with government officials -- someone, say, of the echelon of treasury secretary, or even secretary of state, the president?

Teitelbaum: Well, it's hard to say. What we do know is that it's come under increasing scrutiny. The divulgence of non-public information -- not from just the Treasury Department but other agencies -- to market participants -- in this case, hedge funds. Increasingly, the SEC has been taking a broader view of what constitutes inside information. And they've been going after maybe some of the smaller players that maybe five to 10 years ago they wouldn't have bothered with.

Chiotakis: So maybe some prosecutions in the future on something akin to this?

Teitelbaum: I wouldn't be the person to ask that. But it certainly wouldn't surprise me.

Chiotakis: All right, Richard Teitelbaum, reporter for Bloomberg Markets. Richard, thank you.

Teitelbaum: You're welcome.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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