[Note for TomDispatch Readers: Our next piece will be posted on Sunday evening, December 1st. Happy Thanksgiving! Tom]
"One shitty deal." "Shitty deal." "Shitty." The date was April 27, 2010, and Senator Carl Levin (D-Mich.) was pissed as he launched into a rant with those pungent quotes in it. As part of a Senate subcommittee investigation into the causes of the financial meltdown, Levin was grilling Goldman Sachs CEO Lloyd Blankfein and several other current and former Goldman higher-ups about their roles in that crisis and in particular the exotic, opaque investment deals they had created and peddled.
What had Levin steaming mad were internal emails revealing that, on the cusp of the financial crisis, Goldman staffers knew that they were selling crummy investments. Levin's tirade was inspired by an email in which a Goldman staffer describes a product he's selling as "one shitty deal." That, of course, did not stop Goldman from selling such products. Not only that, but the firm's traders later bet against those deals to make even more money! Contempt, thy name is Goldman.
At the heart of that April 2010 hearing, and at the heart of the financial crisis itself, were countless "shitty deals" in the form of so-called mortgage-backed securities. Remember those? It's been a few years, so here's a quick refresher. Wall Street firms like Goldman cooked up an idea to bundle together thousands of home mortgages -- loans made to people from Fresno to Lubbock to Kalamazoo to Baltimore -- and sell them to investors. Goldman profited off their sale and, as long as those homeowners made their mortgage payments, investors enjoyed a constant income stream.
But as we now know, many of those home loans were filled with tricks and trap-doors and, in some cases, were made to people who simply couldn't afford them. First gradually, and later in cascades, millions of people stopped paying their mortgages, which meant that those mortgage-backed securities went sour. The losses were historic, plunging the U.S. economy into what we now call the Great Recession.
Five years later, the fallout from that mortgage-fueled meltdown and the bailing out of many of the financial institutions that profited from them is far from over. However belatedly, the feds continue to investigate the nation's biggest banks for having sold shoddy mortgage-backed securities. On November 15th, JP Morgan Chase, one of the nation's largest banks, agreed to a $4.5 billion settlement with 21 institutional investors who claimed they were wrongly sold bad mortgage-backed securities. Days later, the Justice Department announced a $13 billion settlement with JP Morgan -- "the largest settlement with a single entity in American history" -- for wrongdoing related to the packaging, marketing, and selling of those securities.
But as Laura Gottesdiener writes today, you can't keep a bailed-out industry down. Wall Street and its masters of the universe are at it again. They've devised a new way to profit off the housing market -- and this time it has nothing to do with risky mortgages. Now, Wall Street is securitizing something else: your rent check. Andy Kroll
The Empire Strikes Back
How Wall Street Has Turned Housing Into a Dangerous Get-Rich-Quick Scheme -- Again
By Laura Gottesdiener
You can hardly turn on the television or open a newspaper without hearing about the nation's impressive, much celebrated housing recovery. Home prices are rising! New construction has started! The crisis is over! Yet beneath the fanfare, a whole new get-rich-quick scheme is brewing.
Over the last year and a half, Wall Street hedge funds and private equity firms have quietly amassed an unprecedented rental empire, snapping up Queen Anne Victorians in Atlanta, brick-faced bungalows in Chicago, Spanish revivals in Phoenix. In total, these deep-pocketed investors have bought more than 200,000 cheap, mostly foreclosed houses in cities hardest hit by the economic meltdown.
Wall Street's foreclosure crisis, which began in late 2007 and forced more than 10 million people from their homes, has created a paradoxical problem. Millions of evicted Americans need a safe place to live, even as millions of vacant, bank-owned houses are blighting neighborhoods and spurring a rise in crime. Lucky for us, Wall Street has devised a solution: It's going to rent these foreclosed houses back to us. In the process, it's devised a new form of securitization that could cause this whole plan to blow up -- again.- Advertisement -
Since the buying frenzy began, no company has picked up more houses than the Blackstone Group, the largest private equity firm in the world. Using a subsidiary company, Invitation Homes, Blackstone has grabbed houses at foreclosure auctions, through local brokers, and in bulk purchases directly from banks the same way a regular person might stock up on toilet paper from Costco.
In one move, it bought 1,400 houses in Atlanta in a single day. As of November, Blackstone had spent $7.5 billion to buy 40,000 mostly foreclosed houses across the country. That's a spending rate of $100 million a week since October 2012. It recently announced plans to take the business international, beginning in foreclosure-ravaged Spain.
Few outside the finance industry have heard of Blackstone. Yet today, it's the largest owner of single-family rental homes in the nation -- and of a whole lot of other things, too. It owns part or all of the Hilton Hotel chain, Southern Cross Healthcare, Houghton Mifflin publishing house, the Weather Channel, Sea World, the arts and crafts chain Michael's, Orangina, and dozens of other companies.
Blackstone manages more than $210 billion in assets, according to its 2012 Securities and Exchange Commission annual filing. It's also a public company with a list of institutional owners that reads like a who's who of companies recently implicated in lawsuits over the mortgage crisis, including Morgan Stanley, Citigroup, Deutsche Bank, UBS, Bank of America, Goldman Sachs, and of course JP Morgan Chase, which just settled a lawsuit with the Department of Justice over its risky and often illegal mortgage practices, agreeing to pay an unprecedented $13 billion fine.