“The hedge fund guys didn’t build this country,” Donald Trump told “Face the Nation” in August 2015. “These are guys that shift paper around and they get lucky.”
In fact, the paper-pushers got extremely lucky when Donald Trump was elected. Trump’s victory has facilitated one of the most audacious hedge fund plays in recent U.S. history — one poised to pay off in billions of dollars. Billionaire investors are buying worthless stocks in the hope of bullying the government into re-animating them. And now the government just might grant their wish.
The holdings in question are mortgage giants Fannie Mae and Freddie Mac, which the government put into federal conservatorship in 2008. The Treasury Department in 2012 changed the terms of the deal, sweeping all of Fannie’s and Freddie’s profits into the government.
After these maneuvers, shareholders were thought to have been wiped out. But hedge funds continued to buy stock in the companies. They wanted to force the government to recapitalize Fannie and Freddie and release them back into the private sector. In that event, the stock price would shoot up (before the financial crisis, each traded at $60 a share), giving investors an astronomical return on their investment. Hedge funds don’t have to disclose their stakes in individual stocks, but reports indicate that just one, Bill Ackman’s Pershing Square Capital, has $475 million invested in the companies.
The hedge funds mounted pressure on several fronts to ensure they’d win their bet. They lobbied Congress to privatize the mortgage companies. They built advocacy groups to argue for their position. They fought Treasury’s profit sweep in a series of lawsuits. And this year, they embarked upon buying themselves a president.
John Paulson, one of the largest investors in the Fannie and Freddie play, has a history of getting rich off the housing market. He famously worked with Goldman Sachs in 2007 to short subprime mortgage bonds, without informing investors on the other side of the bet about the poor quality of the underlying loans. That was worth $4 billion.
Since profiting off homeowner misery, Paulson has struggled with uneven returns. In the first quarter of this year, his main two funds each fell 15 percent, and his assets under management have dropped from $36 billion to $13 billion in just six years. But Paulson still had his Fannie and Freddie play, and he donated millions to the effort to influence the government on its behalf. Besides, Donald Trump, one of Paulson’s fund investors and business partners (Paulson was one of the owners of the Doral Golf Club when Trump purchased it), happened to be running for president.
Paulson cozied up to Trump. He hosted a $50,000-a-plate fundraiser in New York City. He served as an economic adviser to the Trump campaign. And he personally gave $330,000, the maximum donation, to the effort. Since the election, the market has recognized that this close relationship to Trump likely equals an end to the Fannie and Freddie profit sweep, a partial or total privatization of the mortgage giants, and a personal benefit for John Paulson.
On November 8, Fannie Mae was priced at $1.64 a share and Freddie Mac at $1.55. Since then, both have nearly doubled. Fannie has dropped slightly from its Monday peak at $3.15 but is still significantly higher ($3.07 by the close of Tuesday), while Freddie is at $3.03. The run pushed the stocks to their highest levels of the year.
Paulson, explicitly selected as Trump’s economic adviser for his expertise in housing, would presumably have significant sway over the resolution of Fannie and Freddie and the future of housing finance. His hedge fund told Bloomberg in a statement that Treasury’s profit sweep in 2012 “violated the rights of thousands of shareholders across America. … We look forward to an outcome that restores the rights of shareholders in these companies.”
Other Trump advisers share Paulson’s perspective. Former Ohio Secretary of State Ken Blackwell, overseeing domestic policy in the Trump transition, publicly accused the Treasury Department in 2014 of “a theft of private property” with the Fannie/Freddie profit sweep. Blackwell is a director of the Coalition for Mortgage Security, one of the many shadow groups advocating for privatization of the companies. Carl Icahn, a longtime Trump friend and business partner, has invested at least $50 million in Fannie and Freddie. Bruce Berkowitz, CEO of Fairholme Capital Management, the lead plaintiff in the lawsuit against the government over the 2012 profit sweep, donated $125,000 to Trump’s campaign.
Hedge fund managers may even get one of their own installed as treasury secretary. Steve Mnuchin, Trump’s national finance chair and the co-founder of the hedge fund Dune Capital, has been listed as a finalist for Treasury since the election. Mnuchin serves on the board of directors of Sears with Berkowitz, of Fairholme Capital. He also led an investment group to purchase failed lender IndyMac from the Federal Deposit Insurance Corporation in 2009, renaming it OneWest Bank and taking over as CEO. That investment group included John Paulson. In 2014 OneWest was sold to CIT Bank, making Paulson and his fellow investors over $3 billion.
The other main candidate for Treasury, House Financial Services Committee Chair Jeb Hensarling, introduced a bill in 2013 that would phase out Fannie and Freddie within five years, leaving the housing market to private interests. That would help traditional banks but not the hedge fund profit-seekers.
Paulson and his fellow influencers appear determined not to let that happen.
So, a few inane comments on this ‘article’
1. I love how journalistststststs connect the dots to prove their pre-subscribed narrative. I’m glad this article wasn’t about Hillary, and the obvious pay-2-play Foundation that made Enron look like a Girl Scout cookie drive
2. There are great points on the direction of FNMA & FMac that show us all what is going to happen
3. We can continue to bash Trump for being a pompous azz, complain, and focus on bashing him….or do what I did and accelerate my FNMA purchases, which have me at 45,600 shares averaged out a 1 11?16.
NOTE: I’m a seller at 16
I am so grateful to you, Dave, for covering these stories that are so important but rarely discussed in general political coverage. My blood boils when I think of how everyone’s real wages sink year after year while these bastards play games with money and win big time. And of course, if they lose, all of us get the honor of covering their losses.
If it’s hedge funds against the banks, my money is on the banks.
i’ll take the hedge funds
Hahaha!
Derivatives have 2 downsides (100% risk) vs interest payments (5%).
There’s a sucker born every minute… and your Democratic Party owns the Union Trust Funds that buy these pieces of shit.
They got you by the balls.
Trump can’t stop fools or criminal psychopaths by himself, you know.
After the complete failure of the MSM’s presidential polling and predictions articles like this are hilarious . Even TI has joined in the prediction game .
He’s going to do this . He’s going to do that . He’s going to repeal the law of gravity !
Correct.
Let’s just go ahead and install Hillary.
Let the copulating shedog nuke the planet.
You gotta admit, The Establishment created the shithole we gotta deal with. Problem is, they’ll never admit it. It’s YOU, the “piece of shit” that prevents their shitty system from working.
That’s why the copulating shedog and her henchmen would rather blow it all up and start over again.
They have the nuke-proof bunkers…. we don’t.
Great article! at $3.00 a share I am going to take a gamble on a couple of hundred shares.
Daivd, this article is a joke. Obama is the most pro-Wall Street president in the history of the United States. He transferred trillions to them through bailouts and quantitative easing and refused to prosecute any of them for the many crimes they committed. Hillary Clinton was Wall Street’s overwhelming choice as water-carrier:
Clinton, Hillary (D) $104,527,304
Trump, Donald (R) $5,242,852
Finance Sector
https://opensecrets.org/pres16/select-sectors?sector=F
What makes your article border on the Orwellian is that it was Obama that twisted the arms of the CBC to flip the vote for Paulson’s bailout in 2008. Therefore, this article is disingenuous for omitting this fact — nothing less than a lie of omission as Orwell framed it.
The Wall Street bailout, although asked for by a Republican president, was supported 60% by the loving, caring Democrats in the House and only 40% by the evil, subhuman Wall Street Republicans. But this material fact has been memory-holed by liberal thinkers.
Bring back the day when this kind of chicanery is a capital offence.
The hobnobbing of the wealthy and powerful aside (that has always happened, and always will), it’s a little disingenuous of you to imply that paying Fannie and Freddie shareholders for their property – or giving them their property back – is something that will benefit only a few billionaires with political influence. For every hedge fund manager who stands to benefit, hundreds of thousands or millions of “average people” will benefit as well. The vast majority of the shares of those companies are owned by average Americans everywhere. And even those who don’t own shares directly most likely have some in their 401(k) accounts that they are unaware of.
If you knew the true story behind the government’s seizure of the companies (and title to more than half the homes in America) – the accounting fraud used, etc. – you probably wouldn’t be villianizing the hedge funds. I, for one, am very glad that at least a FEW people with money have been willing to stand up for what is right and to defend average Americans against the actions of a corrupt and abusive government.
The American Dream is a dream they’d like you to keep on having while they pick your pockets.
this is a job for Congress that has failed miserably to address . An honest days work for an honest days pay – a.k.a. “FAIR MARKET VALUE” Get Rich Quick? You get some-one down KICK THEM so they do not get back up. Take advantage of every little loophole you can find…
Screw Them – they aren’t family…… The rich get richer – and the poor get poorer – the rich get tax breaks the little guy can not afford to use or get….I have never heard of a poor person getting abatement to build a house….B-U-T it sure as hell raises the cost of everyone’s rent……
Yep, with Donald the game will change only in terms of who gets the profits, not the profit misery system of capitalism itself.
This article focused on hedge funds, but there are tens of thousands of other investors in Fannie & Freddie. Retirement and pension funds and private investors who never believed the United States would nationalize and expropriate privately owned corporations and take all after-tax profits for 8 years. $132Billion was injected to fund a backdoor bailout of the big banks (Fannie & Freddie used the money to buy toxic loans off the TBTF banks and keep the entire system from collapsing). Over $250Billion has been repaid, yet still Obama’s treasury has kept FnF locked up and important evidence covered up.
Hedge funds were big enough to fund the legal fight against the government, but the government was absolutely wrong nationalizing and expropriating Fannie & Freddie. Officials did admit repeatedly these are shareholder-owned companies. It’s 4 years past time to release them from government conservatorship and return to shareholders.
«The government was absolutely wrong nationalizing and expropriating Fannie & Freddie»
Yes–the govt should have let these companies go under. Good riddance!
Neither Fannie nor Freddie needed any money from Goverment untill the government placed them in Conservatorship. After that the Goverment made them borrow, rather then fund, themselves to clean the market of bank fraud. In case you missed it the GSEs have run TARP for federal government at private owners expense rather then use federal funds to run federal TARP programs. To this day the GSEs run TARP at a loss even though they are privaetly owned.
This article focused on hedge funds, but there are tens of thousands of other investors in Fannie & Freddie. Retirement and pension funds and private investors who never believed the United States would nationalize and expropriate privately owned corporations and take all after-tax profits for 8 years. $132Billion was injected to fund a backdoor bailout of the big banks (Fannie & Freddie used the money to buy toxic loans off the TBTF banks and keep the entire system from collapsing). Over $250Billion has been repaid, yet still Obama’s treasury has kept FnF locked up and important evidence covered up. Hedge funds were big enough to fund the legal fight against the government, but the government was absolutely wrong nationalizing and expropriating Fannie & Freddie. Officials did admit repeatedly these are shareholder-owned companies. It’s 4 years past time to release them from government conservatorship and return to shareholders.
Forget crooked Hillary, here comes crooked Trump and his extended family and business associates.
There is a lot more going on here than this piece covers.
The GSE’s never needed the “Bailout” and it was a real backdoor bailout for TBTF banks who sold the GSE’s all of their toxic assets at par.
http://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship
nah. Only the ones associated with the real-estate-husband of DT’s daughter who wants to be a part owner of jerusalem so they can demand that real christians and fony christians make an annual pilgrimage for the low low price of $4,500 per family of 4, taxes and tips not included, baggage limited, upgrades available. Ask your wallstreet broker about the special loan program for your pilgrimage at discounted rates!
You have a one track mind.
compared to what, a no-track mind?
Barb is blaming the jews for his hero Trump conning him. Too funny.
Haters gonna hate. Sorry bud but these stocks aren’t “worthless”. What is available publicly is 20.1% of 2 of the most valuable companies on earth. They are critical to the housing market and one of the reasons why 30 year mortgages are so low. Ackman pointed this out years ago, its the ultimate risk / reward play in the market right now. The gubmnt had their shot to kill fnf and didnt, I suspect the emails they are trying to protect in the court cases will say as much when they are eventually released. I suspect assuming an additonal $5T on the gubmnt balance at the time wouldnt have been politically palatable, so they kept the 20% outstanding and the hedgies found their opening. If you’ve got the liquidity and stomach I suggest jumping in the water with them, this one has a 10 bagger written all over it.
Hedge funds hedge. Meaning they bet on a variety of different possible outcomes, some of them small positions which are far out of the money. Because one or more funds put money into any such position is no evidence they have any certain expectation it will pay off. The further out of the money, the bigger the return if it ever does pay off.
But over a large number of such out of the money bets, an (entirely unpredictable) few will pay off like a cash register. Which ones these will be remains a mystery until it actually happens.
Cf. mathematician Nassim Taleb, who explains how his hedge fund lost money on virtually every (far) out of the money position he took — and he took lots of them — and still made millions for himself and his investors on those rare few that paid off.
It’s a game of applied mathematics. Not a game of emotional hunches (like this article).
This is true. But it would be near sighted to not take notice of the convergence.
If you think the HF investing into Mac and Mae aren’t also positioning themselves to have the government turn those investments into profit, then I feel that’s incorrect.
It’s math. But it’s also common sense. If one has the opportunity presented to them (trump), it’s in your best interest to use the opportunity the best you can for the max amount of profits it garners.
You take the word “hedge” far too literally.
There is no requirement or even the notion that every investment fund has to offset every investment.
This is not an emotional hunch.
I could be wrong, but it sounds to me that instead of the traditional hedging of an investment/bet, they’re now using those funds to lobby for a change in policy that will benefit them greatly.
Of course Trump’s lying when he says he’ll “shake up the establishment in D.C.”. Just look at many of his appointments and potential ones as well. Lobbyists. Multimillionaires. Notorious racists. Every one of them hungry for getting some of Trump’s money and power.
A politician who literally can’t handle ANY criticism is a dictator. Anyone who voted for Trump and can’t admit that he’s a racist needs help.
Just as bad as a racist, he’s a conman to boot!
Did hedge fund managers donate to Trump’s foundation so they could gain access to him in his role as Secretary of State? Oh, wait a minute. That was Hillary Clinton’s foundation. Never mind.
Obama did the networth sweep in 2012 taking all profits to treasury to fund obamacare. Follow the lawsuits and watch what happens #fannigate
Didn’t you read the article Ed? They donated directly to the Trump campaign and they got the access. The chumps who supported Trump because he wasn’t going to be beholden to wall street must be feeling betrayed right now. Oh wait a minute they are too busy still bashing Hillary to notice.
They will never care. Did you think he was kidding when he said he “could shoot someone on Fifth Avenue & still get votes?”
it’s the fools who wrote checks to crooked hellary who were betrayed – imagine thinking they could buy themselves a winner or, thinking they could turn a loser into a winner with a fistful of dollars or, thinking for a few dollars more they couldn’t lose. Them fools weren’t just fools, but also LOSERS.
Donald isn’t going to run from wallstreet or hedge funds. nah. no betrayal here. What he is going to do is steer the investments into America and away from the god damned middle east conflicts. Hedgies want to make money investing in America? OK.
have a nice day.
Whatever you need to tell yourself Barb. Trump didnt just take the money, he is appointing them to important positions. Face it you are just another fool who got scammed by trump.
You just threw a dead cat on the table, mate.
True, and anyone who can’t see that really needs help.
FYI, Hedge funds do disclose holdings quarterly on form 13F with the SEC