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December 2, 2010 8:14 pm
The US Federal Reserve lent billions of dollars to hedge funds as part of its emergency liquidity programme during the financial crisis, data released by the central bank show.
According to Fed data, $71bn of loans were made through its term asset-backed securities loan facility (Talf) mostly to non-bank institutions. They included hedge funds run by managers including FrontPoint, Magnetar, and Tricadia, many of which reaped handsome rewards from the collapse of the housing market.
The Talf programme was set up in early 2009 and designed to kick-start lending to small and medium-sized businesses by pumping liquidity into the secondary loan market. US authorities later expanded the programme to cover mortgage-backed securities.
Most of the loans taken out by hedge funds through the facility were drawn as cheap finance for investment opportunities rather than as emergency liquidity provision, according to people familiar with the investments.
Among the biggest borrowers from the Talf were hedge funds run by FrontPoint Partners, Magnetar and One William Street Capital.
FrontPoint-run funds borrowed $4.1bn, while Magnetar-linked funds borrowed just over $1bn. The two fund managers were among the most prolific shorters of the US housing market.
FrontPoint said on Thursday that it had been an “early participant” in the Talf programme on behalf of clients. “With our clients, we were able to support the government in this important initiative,” it said.
Magnetar did not return a call for comment. The fund manager still owes the Fed about $920m of the $1.05bn it borrowed.
Tricadia, another prominent housing market bear that took huge short positions against mortgage-backed securities, borrowed $215m. It did not respond to a request for comment.
One William Street Capital borrowed $1.7bn. The hedge fund manager, which did not return a call for comment, was started in 2008 by ex-Lehman Brothers executive David Sherr, who was in charge of mortgage securitisation at the bank
The Talf allowed such hedge funds and other specialist vehicles to swap illiquid asset-backed securities into the facility as collateral to back cash loans.
The facility accomplished it main aims in spite of also making many hedge funds and their clients huge amounts of money, many of those who borrowed money through it say.
Distressed asset-backed bond and loan markets saw significant rallies last year as opportunistic investors rushed to take advantage of the liquidity provided by the facility and buy up cheap securities.
Although the facility has now been shut down, about $29bn of Talf loans are still outstanding, analysis of the Fed data shows.
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