March 18, 2009

AIG funds could wind up in gamblers’ hands

Bailout funds given to American International Group Inc. may wind up in the hands of hedge funds that bet against the U.S. housing market, sources said.

The Wall Street Journal said Wednesday it had reviewed documents that show hedge fund clients at Germany's Deutsche Bank would be recipients should the mortgage default rate rise above a certain level, the Journal said.

In essence, while the U.S. government is scrambling to support the housing market, taxpayer funds may end up in the hands of those who bet against it.

The sum owed on these bets could end up close to $52 billion out of $173 billion the government has used to support AIG.

Although it is perfectly legal to sell insurance on debt default, the practice shows how AIG's financial-products division went heavily into the business of speculation and its gambling debts are what taxpayers are paying off right now, investment consultant Martin Weiss said.

A spokeswoman at AIG declined to comment. A spokesman at the Federal Reserve Bank of New York also declined an invitation to comment, the Journal said.