Sell Block: Hedge Funds Cash In on AIG

Hedge funds, which have been selling stock endlessly to meet client redemptions, must be frothing at the mouth for next Tuesday, Oct. 21. That’s payday for everyone who took out insurance against Lehman Brothers' bonds. And bear-raiding hedge funds took out a heck of a lot of insurance against that investment bank.

In fact, while Lehman Brothers sold only $158 billion worth of bonds, the SEC allowed hedge funds to take out $365 billion in insurance.

This was all part of the short-sellers grand – and legal – plan to bring down Lehman, Cramer said. Hedge funds bought the insurance knowing they could push the stock down virtually unrestricted, spurring the ratings agencies to downgrade Lehman, further inciting fear, and on and on until the company collapsed. The fact that the U.S. government said it was done saving investment banks only aided the hedge funds’ cause. To them, that insurance was money in the bank.

And this doesn’t even take into account the myriad other issues at AIG. Watch the video for Cramer’s take on last December’s analyst meeting, executive bonuses and company junkets and other legally challenging activities at the insurer.

-- Correction: The payday date is Tuesday Oct. 21 not Oct. 18.

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