Did Henry Paulson Give Hedge Funds Advance Word?

There are reports circulating on Tuesday that Treasury Secretary Henry Paulson gave hedge fund managers advance word that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie Mae and Freddie Mac's books and that he expected their examination would give a signal of confidence to the markets.According to Bloomberg Markets Magazine, on July 21, 2008, “Paulson had been pushing a plan in Congress to open lines of credit to the two struggling firms and to grant authority for the Treasury Department to buy equity in them. Yet he had told reporters on July 13 that the firms must remain shareholder owned and had testified at a Senate hearing two days later that giving the government new power to intervene made actual intervention improbable.”“If you have a bazooka, and people know you have it, you're not likely to take it out,” he reportedly said.Paulson then apparently went to an Eton Park meeting, attended by alumni of Goldman Sachs (NYSE: GS) among other heavy hitters. According to the report, “The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” -- a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.”There is a lot of evidence to at least strongly suggest that Paulson is guilty of wrong-doing. The inevitable full investigation should be worth keeping an eye on.