Hedge funds that bet on a falling housing market could benefit from some of the billions of dollars the U.S. government paid to bail out American International Group ( AIG), the Wall Street Journal reports, citing people familiar with the matter and documents the newspaper reviewed. According to the Journal, the documents show how Wall Street banks were middlemen in trades with hedge funds and the insurer that left AIG on the hook for billions of dollars of assets tied to souring mortgages. AIG has put in escrow some money for at least one major bank, Deutsche Bank ( DB), whose hedge-fund clients made bets against the housing market, the Journal reports, citing a person familiar with the matter. The money will be released to the bank if mortgage defaults rise above a certain level. While the U.S. government is busy trying to prop up the housing market it is simultaneously putting up cash that could be used to pay off investors who bet housing prices would tumble and many mortgage holders would default, the Journal notes. How much government money might eventually flow to hedge-fund investors is unclear. Overall, the government has committed up to $173.3 billion to bail out AIG. Of that amount, AIG's housing-related bets have cost U.S. taxpayers about $52 billion, the newspaper reports. Meanwhile, Democrats are threatening to tax away AIG executives' $165 million in bonuses as expressions of outrage swelled in Congress over the massive checks going to employees of a firm that has received billions in taxpayer bailout funds.
The scandal cast a pall over the White House as Republicans declared the Democrats were hardly blameless, accusing them of standing by while the bonus deal was cemented and saying that Treasury Secretary Timothy Geithner could and should have done more. While the White House expressed confidence in Geithner and said his job was not in danger, it was clearly placing the responsibility for how the matter was handled on his shoulders. Geithner said he was working with the Justice Department to determine whether any retention bonuses paid by AIG can be recovered. Geithner sent a letter late Tuesday to congressional leaders informing them that he was working with the Justice Department to determine whether any of the AIG payments could be recovered. He cited a provision in the recent economic stimulus law that gave him authority to review compensation to the highest-paid employees of companies that already have received federal assistance. AIG CEO Edward Liddy testifies before a House subcommittee Wednesday where he can expect a verbal pummeling.