Hedge Funds to Deliver Eviction Notices

Lionel Barrymore as the bitter banker Henry F. Potter and Jimmy Stewart as the idealistic George Bailey in It's a Wonderful Life. Photograph by Bettmann/CORBIS

It seems some hedge fund managers prefer Potterville to Bedford Falls. They don't want subprime borrowers to catch a break.

Like the ruthless Mr. Potter in It's a Wonderful Life, hedge funds are attacking banks for being too soft on homeowners at risk of defaulting on their mortgages.

The reason? Simple. Hedge funds would make more money if they didn't.

According to a report in the Financial Times, a group of 25 hedge funds has asked the International Swaps and Derivatives Association to tell the banks to stop helping the poorest homeowners avoid foreclosure.

Of course, the hedge funds don't quite put it in those terms. Instead, they suggest that the banks are engaging in "market manipulation."

Some hedge funds invest in derivatives contracts that pay investors when bonds backed by subprime mortgage loans take a hit. Since the $1.2 trillion subprime mortgage bond market has had a rough ride of late, the hedge funds that invested in these derivatives have profited handsomely. The more defaults, the better.

The funds' beef is that the same banks that sell these derivatives can decide to give the homeowners a break on their monthly payments instead of defaulting. The funds say the banks can avoid paying out on the derivatives contracts by lending a hand to the borrowers.

One hedge fund representative told the FT they aren't out to evict people from their homes. They just want to make sure the banks are operating above board.

Right. And that debt collector on the phone? He just wants a minute of your time.

by Megan Barnett