Hedge Funds Bet Big on Massive Foreclosures
Thursday, March 6, 2008 5:07 p.m. EST
A major hedge fund may have attempted to manipulate the housing market by funding a consumer advocacy group whose work would potentially help the fund’s positions in the market.
Shorting subprime mortgage-backed securities proved to be the winning ticket for Paulson & Co. which quadrupled its assets to $29 billion and became one of the 10 largest hedge funds last year.
The fund’s bets against subprime mortgages pay off only if lenders with defaulted don’t recoup losses through foreclosure sales. *
Paulson donated $15 million to the Center for Responsible Lending (CRL).
Coincidently, that group has led the push for bankruptcy reform that would further reduce subprime mortgage values – which would directly benefit any investor in Paulson’s position.
The CRL has pushed Congress to allow bankruptcy judges to erase mortgage debt if it exceeds the home’s value, allowing what lenders call "cramdowns” which further devalue subprime mortgage securities.
The Senate blocked a bill with the cramdown feature, although it could return to the Senate floor. President Bush has threatened to veto any bill with the provision.
Elected officials are promising an investigation.
Rep. Patrick McHenry (R-NC) is calling for the House Financial Services Committee to investigate this "highly questionable” donation.
In a letter to the committee’s chairman, Barney Frank (D-Mass.), McHenry said some investors are "abusing public policy processes to enrich themselves on the backs of struggling homeowners.”
John Paulson, the hedge fund’s founder said in a statement that the donation was made "to ensure that homeowners get fair treatment from mortgage lenders.”
But McHenry, who wants the House committee to hold hearings on the issue, said Paulson would surely benefit by forcing home values down further through the bankruptcy bill.
"These reports indicate the existence of highly questionable practices among some investors who are gaming the public policy process to their own financial benefit,” McHenry wrote in his letter to Frank, citing the Paulson & Co. donation.
"As the committee with primary jurisdiction over capital markets, we have an obligation to look into these potentially abusive practices,” he wrote.
CRL said the donation will be used to provide legal advice to homeowners facing foreclosures and denied the money was being used for lobbying, although Paulson executive Michael Waldorf has admitted his company is involved in lobbying efforts with consumer groups.
Both CRL and Paulson & Co. deny the bankruptcy bill would affect mortgage values.
Other hedge fund managers, however, see a connection.
"Losses would be realized much faster and they'd be larger,” if the bill passes, said Kyle Bass, managing partner of Hayman Advisors, another fund that shorts subprime mortgages.
"It would good for people who are positioned the exact same way I'm positioned,” he says.
Lenders, understandably, are enraged.
"The hedge funds have bet that Americans will lose their homes,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group representing mortgage lenders.
"If the bankruptcy bill is enacted, they stand to make considerable profits,” he says.
Helped by subprime shorts, Paulson was named to the Forbes Magazine list of the 400 richest Americans for the first time last year. The magazine ranked him at 165th on its list, estimating his personal wealth at $2.5 billion. © NewsMax 2008. All rights reserved.
* This doesn't seem to me to be the case. Anybody know?