Evanston’s Magnetar benefited from TALF

By Dow Jones Newswires-Wall Street Journal
Posted Dec. 2, 2010 at 5:57 a.m.

Hedge funds and investors whose bearish trades on housing helped them profit amid the credit crisis were among those that benefited from a U.S. government emergency rescue program to kick-start lending, according to Federal Reserve data released Wednesday.

That program, known as the Term Asset-Backed Securities Lending Facility, or TALF, and established during the financial crisis, provided low-cost loans from the Federal Reserve to investors buying bonds backed by student, auto and commercial-property loans and other assets. The program, which lasted from March 2009 until June 2010, was aimed at helping banks move loans off their books by repackaging them into bonds and selling them.

Funds managed or backed by Evanston-based Magnetar Capital, Tricadia Capital and FrontPoint Partners, which made large profits betting on a downturn in the U.S. housing market before the crisis, were among those who obtained low-cost loans from the Fed to buy securities, according to the Fed data.

The Fed on Wednesday released the names of 177 borrowers that obtained a total of $71 billion in low-cost loans from the TALF program to buy newly issued asset-backed securities with a market value of about $79 billion. In effect, buyers were able put up a small amount of their own money and borrow about 82 percent to 95 percent of the securities’ value.

The program generated big returns for investors — as high as 48 percent in some cases at the height of the crisis, though more commonly in the range of 20 percent to 40 percent, analysts say. Toward the end of the TALF program, as yields on many securities fell, returns for borrowers were closer to 10 percent.

The fact that some investors who profited amid the financial downturn benefited from TALF could elicit questions about why a U.S. bailout using taxpayer money helped finance new investments for them.

A spokesman for the Federal Reserve Bank of New York, which administered the TALF program, said it was meant to increase the flow of credit to consumers and businesses and achieved that purpose. “The program was designed to encourage very broad participation, as long as borrowers met specific eligibility criteria,” he added.

TALF borrowers also included New York distressed debt investors such as Angelo, Gordon & Co. and Siguler Guff & Co. Pension funds such as the California Public Employees’ Retirement System and the municipal pension plan of Milford, Conn., took part, as did scores of large mutual funds and little-known funds set up specifically to invest in securities using money from TALF.

John Paulson, whose hedge fund Paulson & Co. made large profits betting against subprime mortgages, also was an indirect beneficiary of the government’s rescue progra OneWest Bank, a Pasadena, Calif., bank previously known as IndyMac, which now counts Paulson and his fund among its private-equity backers, borrowed $34.4 million from TALF in July 2009 to buy securities backed by mortgage-servicing advances, the Fed data show. It repaid the money a few months later.

Representatives for the hedge funds and other borrowers either declined to comment or weren’t available for comment.

When TALF was set up, funds hoping to establish new investment vehicles had to move quickly before prices on asset-backed securities rebounded from super-distressed levels, said Sreeniwas Prabhu, managing partner of Atlanta money manager Angel Oak Capital Advisors LLC, which invests in mortgage securities but didn’t participate in TALF.

“A lot of the guys in our business had already figured out that the valuations had gotten way out of whack,” Prabhu said.

Ernie Patrikis, a partner at New York law firm White & Case who previously served as general counsel for the Federal Reserve Bank of New York, said the Fed likely will learn lessons about who benefited from the rescue progra But Patrikis said that the investor money in the TALF program did help stabilize markets.

“They got that money, and what did they do with it?” Patrikis said. “They recycled it, presumably, and that’s a good thing.”

Like other Fed lending programs, the TALF program wasn’t designed to exclude any particular firms; as long as they met the program’s eligibility criteria, they could obtain loans to buy securities. The program did impose restrictions on borrowers’ ability to hedge or make bearish bets on the securities they purchased using Fed money.

Most of the Fed loans carried interest rates of between 1 percent and 2 percent and were used to purchase securities with higher yields. The borrowed money juiced some of those returns to double-digit levels at relatively little risk to the buyers.

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