State bailout to AIG will benefit hedge funds

According to the Wall Street Journal, the funds paid by the U.S. government to American International Group (AIG) Inc, an insurance company, among other things could bring benefits to hedge funds betting on a falling housing market. So far AIG has received federal bailouts of $173 billion.

The journal said AIG had put some money in escrow for at least one large bank, Deutsche Bank AG, whose hedge fund clients bet against the housing market. It continued by saying, in case if mortgage defaults rise above a certain level, the money will be released to the bank. 

Moreover, such investment banks as Goldman Sachs Group Inc and Deutsche Bank sold their financial instruments, namely credit default swaps that pay out in the event of a debt default, to hedge funds.

The paper also pointed at the data provided by the insurer, which showed that AIG and the government had paid $5.4 billion to Deutsche and $8.1 billion to Goldman under credit default swap contracts last year.

Although the names of the hedge funds that made those bets with specific banks are not known yet, the paper states, several large funds made big, ultimately profitable wagers that mortgage defaults will increase.