One simple phrase electrified the financial world this past week: high-frequency trading.
With the publication of his new book, Flash Boys, author Michael Lewis almost singlehandedly transformed the growing practice of high-frequency trading from an obscure form of financial wizardry cooked up in Wall Street's mad laboratories into a fledgling scandal. What's high-frequency trading? It's when lightning-quick computers running complex algorithms race ahead of ordinary human investors -- you know, those guys with the funny jackets waving and yelling on the floor of the New York Stock Exchange -- to gain the slightest advantage in the trading of stocks. For high-frequency traders, speed means getting valuable market information a few hundredths or millionths of a second early, which in turn can mean millions in profit simply by beating the regular guys to the trade. If it sounds complicated, well, that's the point. "The insiders are able to move faster than you," Lewis said on 60 Minutes. "They're able to see your order and play it against other orders in ways that you don't understand. They're able to front run your order."
Lewis's Flash Boys tells the story of a Canadian banker and do-gooder named Brad Katsuyama who, outraged over this "rigged" market, did something about it. Judging by the reaction in some corners of the financial world, you'd think Lewis had declared war on Wall Street itself. (See, for instance, this verbal slug-fest on CNBC involving Lewis, Katsuyama, and the CEO of one of the exchanges Lewis takes to task in his book.)
The opprobrium greeting Flash Boys wouldn't be quite as ridiculous if we didn't already know how dangerous high-frequency trading can be. As Nick Baumann wrote in Mother Jones magazine, high-frequency trading gone haywire can inflict huge damage, as was the case in the so-called flash crash of 2010, which wiped out almost $1 trillion in shareholder value in a few hours. If several flash crashes occur at the same time, former bank regulator Bill Black told Baumann, "financial institutions can begin to fail, even very large ones."
If Wall Street's need for speed doesn't cause the next Great Crash, TomDispatch regular Laura Gottesdiener knows what might. As she wrote in November, massive investment firms are building a "rental empire," buying up foreclosed properties by the thousands, renting them back to working people, and bundling up those properties to sell to Wall Street. It's an ingenious scheme reminiscent of the subprime mortgage machine -- and this scheme, too, has the potential to plunge us back into a crisis. Today, Gottesidener turns her sights to New York City, where the rental racket has been underway for years and the results have been instructively grim. Andy Kroll
When Predatory Equity Hit the Big Apple
How Private Equity Came to New York's Rental Market -- and What That Tells Us About the Future
By Laura Gottesdiener
Things are heating up inside Wall Street's new rental empire.
Over the last few years, giant private equity firms have bet big on the housing market, buying up more than 200,000 cheap homes across the country. Their plan is to rent the houses back to families -- sometimes the very same people who were displaced during the foreclosure crisis -- while waiting for the home values to rise. But it wouldn't be Wall Street not to have a short-term trick up its sleeve, so the private equity firms are partnering with big banks to bundle the mortgages on these rental homes into a new financial product known as "rental-backed securities." (Remember that toxic "mortgage-backed securities" are widely blamed for crashing the global economy in 2007-2008.)
All this got me thinking: Have private equity firms gambled with rental housing somewhere else before? If so, what happened?
It turns out that the real estate market in my New York City backyard has been a private equity playground for the last decade, and the result, unsurprisingly, has been a disaster for tenants and the market alike.
"They're Warm Wherever They Are"
In the Bronx, Benjamin Warren fears that he and other residents could burn to death in a fire because management has blocked both sides of the passageways between buildings designed to offer ways out of the massive apartment complex. (Warren has called the city and management multiple times to complain, but the routes remain shut.) Nearby, Liza Ash found herself intimidated by nearly a dozen hired men when she and other residents of her building, which had heat or hot water only sporadically this past winter, attempted to organize a tenants' meeting in the lobby. A little farther south, Khamoni Cooper and her neighbors receive a constant stream of fake eviction notices ordering them to vacate their apartments within five days, even though all of them have paid their rent.
These three tenants -- and nearly 1,600 more families in 42 buildings -- are living through one of the largest single foreclosures to hit New York City since the financial crisis began seven years ago. But here's the twist. The owner of these buildings is far from a traditional landlord. It's actually a conglomerate of private equity firms that bet it would be able to squeeze more money out of these buildings than it ultimately could -- and ended up unable to pay back the $133 million mortgage.
The problem is that, when things go bust, the tenants, far more than these private equity owners, end up shouldering the costs.
"They don't care if we freeze," said Khamoni Cooper, speaking of the owners, Normandy Real Estate Partners, Vantage Properties, Westbrook Partners, and Colonial Management, who have consistently failed to pay for even basic necessities, including heat and hot water, throughout the winter. Cooper had just learned from a neighbor that management cut off all the water in her building, a move she and others believed was retaliation for a protest they had helped to organize at City Hall earlier that day. "They're warm wherever they are," she added bitterly.
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