Lobbying and Hedge Funds By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran


When the sub-prime crisis hit the US in 2008, the US government did what it took to save the world economy from drifting into a serious recession. What the US economy needed immediately was a high level of liquidity to shore up the US companies before they went into bankruptcy. Huge amount of public money was then used even though it was not a desirable thing to do. The US was struck with no choice as the alternative was too dire to contemplate.

To-day after nearly 6 years hedge fund billionaires in the US have collectively launched a law suit to force the US treasury to pay shareholders vast sums from the government sponsored housing enterprises it bailed out in 2008. Fannie Mae and Freddie Mac, the mortgage underwriters were provided with $ 187.5 billion to bail them out of the crisis. If this was not done the entire US housing finance system would have seized and would have taken with it the global economy. Now the richest fund owners and promoters are petitioning the US courts to reward Fannie Mae and Freddie Mac shareholders an amount of $ 213 billion which is the dividend amount since 2009 and which is above the original bailout.

The US treasury has taken the challenge and has argued that the dividends do not qualify as a repayment of the bailout. Moreover it is always the government that will pick up the bill if the housing market goes into reverse and the losses will be socialized (to be borne by the people).

The hedge funds are currently winning the battle. The Fannie Mae and Freddie Mac reform bill ground to halt in the senate and is unlikely to pass in 2014. The fact that they lobbied congress heavily is one reason why the bill is stalling. If the hedge funds win the speculators will receive $ 33 billion of tax payers money and if they lose $ 1.2 bln the amount they spent, a minute sum given the possible returns available. Betting in Washington largesse has become a routine investment strategy. If the hedge funds succeed, it is a challenge to the US political system and also the quality of the US democracy will be at stake. If the hedge funds can shake both the legal and political system which are important branches of the US government, it then becomes safer to conclude that the US democracy and the political system are very vulnerable. Do we want this? Probably not. Let us wait for the judgment.

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