Hedge Funds Borrowed Billions From Bailout Program

Dec 3 2010 | 11:05am ET

Hedge funds were among the biggest beneficiaries of a Federal Reserve bailout program that lent tens of billions of dollars in an effort to inject liquidity into the asset-backed securities market.

Angelo Gordon & Co., FrontPoint Partners, Magnetar Capital, One William Street Capital and Tricadia Capital were among the 177 borrowers who took advantage of the good terms offered by the Term Asset-Backed Securities Loan Facility, the Federal Reserve Bank of New York said this week. Private equity firm Siguler Guff & Co. also participated.

FrontPoint's Strategic Credit Investments fund drew from the TALF 48 times, borrowing a total of $4.1 billion. One William Street borrowed $1.7 billion while Magnetar's Fund II fund borrowed $1.05 billion in seven transactions. Tricadia borrowed about $215 million.

"On behalf of clients, FrontPoint was an early participant in the government TALF program," a spokesman for the Greenwich, Conn.-based hedge fund, which is being spun off from Morgan Stanley, said. "With our clients, we were able to support the government in this important initiative.

All told, the Fed lent $71 billion through TALF, allowing borrowers to buy newly-issued ABS worth $79 billion and to turn profits of between 20% and 40% on average. The New York Fed said more than 60% of TALF loans have already been paid in full, and those that have not been "are current in their payments of principal and interest and no collateral has been surrendered in lieu of repayment."

About $29 billion in TALF loans remain outstanding.

In addition to the alternative investments firms, such market giants as Pacific Investment Management Co. and the California Public Employees' Retirement System took advantage of TALF. So did OneWest Bank, the former failed lender IndyMac, which is owned by a consortium of hedge and private equity funds, among them Paulson & Co., Soros Fund Management, JC Flowers & Co. and Dune Capital Management.

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