You Take the Risk, Billionaires Collect the Profits

  • The day the hedge funds bought cheap foreclosure properties… and you couldn’t
  • Wall Street feasts on Fannie Mae and Freddie Mac… while you get crumbs
  • Drain the swamp? Trump’s Treasury pick wants to engineer a $5 trillion giveaway
  • A Trump White House and a GOP Congress: What will they do with Medicare?
  • Stocks soar… crude craters… profits from the popping of a “big, fat, ugly bubble”… and more!

The real estate “steal of the century” is moving into its final, most rapacious and decadent phase. Team Trump wants to hand over $5 trillion in assets to billionaires — assets for which you, dear taxpayer, are shouldering the risk.
Pour yourself a tall serving of your favorite beverage and sit back for the ultimate tale of “privatized profits and socialized risk.”
Our story begins nearly five years ago. Agora Financial’s fearless leader Addison Wiggin wrote the following in the gone-but-not-forgotten Apogee Advisory
“In a dystopian America of the near future, millions of foreclosed homes sitting on the federal government’s books are flipped at fire-sale prices to hedge funds and private-equity firms with government connections.”
This was the earliest stage of a scheme hatched in Washington called “REO-to-rental.” The idea is that these big-bucks investors would buy the single-family homes at a deep discount and then manage them as rentals.
Think back to early 2012. Wouldn’t you have loved to buy the foreclosure property around the block and rent it out in hopes of generating the income you could no longer get from a CD or a money market fund in our brave new zero-interest-rate world?
Sorry, you didn’t qualify. These foreclosures were available only to investors able to drop at least $1 billion on a bulk transaction with Fannie Mae, Freddie Mac or the Federal Housing Administration.
Five years later, “big investors have spent at least $32 billion buying and fixing up homes,” says this morning’s Wall Street Journal, “and they own between 1% and 2% of all U.S. rental homes, analysts estimate.”
The biggest investor of all is Blackstone Group — which might let you collect a paltry cut of the rental income now.
Blackstone has dropped $10 billion on about 50,000 REO-to-rental properties through its Invitation Homes LP unit. Now Invitation Homes has filed plans to go public as its own company.
It wouldn’t be the first. Less than a year after the feds rolled out REO-to-rental, Silver Bay Realty Trust went public under the ticker SBY. Others have followed, including American Homes 4 Rent (AMH) and Colony Starwood Homes (SFR).
Whatever income these companies pull in from their rentals, they don’t hand over much of it to their retail shareholders. SBY and SFR have yields of just under 3% — about the same as a 30-year Treasury bond. AMH has a yield of less than 1%.
So… Wall Street feasts off Fannie and Freddie… while mom and pop get crumbs.
At this point in our story, it’s worth recalling just how Fannie and Freddie operate.
As you might already know, Fannie and Freddie are GSEs, or “government-sponsored enterprises.” They provide insurance-like guarantees on $5 trillion in mortgages. They collect money upfront in exchange for a promise to pay on any credit losses.
Well, that’s the sugarcoated description. Here’s how our own David Stockman describes it: “They stamp what amounts to a government guarantee on trillions of dollars in mortgages and then collect a fee for doing nothing except putting taxpayers in harm’s way.”
Still, for decades, it was good business. Easy money. Then came the real estate bubble, followed by the Panic of 2008. Suddenly, taxpayers were on the hook for a $188 billion bailout. Fannie and Freddie booked huge losses from 2009–2011.
But with the recovery of the housing market — if you factor out inflation, housing prices are back to the mid-2006 peak — Fannie and Freddie’s revenues are way up and losses way down.
Key point: Because Fannie and Freddie were nationalized in 2008, it’s the U.S. Treasury booking the profits — to the tune of $255.8 billion since 2012.
However… a few Wall Street sharks believe the profits really belong to them, even though you’re the one at risk. And they’ll stop at nothing to grab those profits.
Fannie and Freddie are still publicly traded companies, even after the nationalization. The government owns about 80% of the shares… while booking 100% of the profits.
The other 20% of the shares have been snapped up in recent years by hedge fund operatives like Bill Ackman. In part, it was a bet on a housing recovery… but it was mostly a bet that Congress would change the law and allow Ackman and Co. to collect the profits, instead of the Treasury.
When Congress didn’t act, Ackman and the others sued. Incredibly, they did so on Fifth Amendment grounds.
“This whole hedge fund gambit is a Wild West speculation on worthless paper and the presumed mendacity of the nation’s legislators,” says David Stockman, “yet these Wall Street larcenists have the nerve to call an attempted theft from the public a ‘taking’ of their own private property.”
But the court case might soon become moot: Trump’s pick for Treasury secretary, Steve Mnuchin, says he wants to hand the entire $5 trillion Fannie-Freddie candy store to Wall Street.
Hours after he was named a week ago today, he was telling CNBC that Fannie and Freddie are one of his Top 10 priorities: “We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again. But we’ve got to get them out of government control.”
Allow Mr. Stockman to once again translate: “That’s code for showering his hedge fund buddies with billions of windfall gains on the otherwise worthless stock of these two government housing finance zombies.
“These misbegotten operations can’t be ‘restructured’ and can’t be made ‘absolutely safe’ as spinoffs to the private sector. That’s because without some form of backstop from the U.S. Treasury, their whole business model would collapse.”
Note the choice of words by Mnuchin, the ex-Goldman Sachs man: “We’ve got to get them out of government control.” He said nothing about ending the taxpayer backstop.
Concludes Mr. Stockman: “We have been rooting all along for the Donald and his fulminations against the Wall Street/Washington ruling elites. But we have also insisted that he has no clue about how to actually ‘drain the swamp.’”
If that wasn’t clear before, Mnuchin’s priorities make it clear now.
[Ed. note: David is less than 36 hours away from unveiling a trading strategy that could enable you to profit big from the popping of the “big, fat, ugly bubble” Trump spoke of during the first debate.
David expects that popping process to begin when the Federal Reserve raises interest rates one week from today. That’s why he’s urging you to watch his live training event, laying out this strategy in detail, tomorrow night at 7:00 p.m. EST.
If you already have plans, we encourage you to change them. It’s going to be abnormally cold across most of the nation; you might as well stay inside and learn how to parlay the coming market turmoil into 300% or better gains over the next year. It’s FREE to watch; just sign up for access here.]
After a breather last week, the “Trump bump” is back in play. As we check our screens, all the major U.S. stock indexes are in the green, the Dow reaching further into record territory at 19,357.
But at least today, the stock rally isn’t translating into sell-offs for bonds and gold. The 10-year Treasury yield is back to 2.36%. Gold is hanging in there at $1,175.
Crude has shed another 1.5% today. Only 17 more cents and a barrel of West Texas Intermediate will be back below $50.
“I received my first invoice for Medicare due Jan. 1, 2017, and one month’s coverage is now $380,” a reader writes, continuing our Medicare thread.
“Last year, my quarterly payment was $326, or $108.66 a month. That’s a 250% increase, and my income for 2015 was very close to what my income was for 2014. My wife’s payments are the same as mine. So instead of paying $217.32 for the two of us, we are now paying $760 a month.
“All of this is on top of the 3.8% Medicare tax I pay on my income and the 3.8% Medicare tax paid on dividends and capital gains, thank you, Obamacare, for that one. As most probably understand, when you are over 65, paying into Medicare is not optional; it is mandatory, even when they change the rules in the middle of the game.
“I can’t wait to see what they do in the coming years, as Medicare will not survive as it is now structured. For those out there that do not see an increase this year, rest assured, you will one day.”
The 5: Yep.
The story goes that during the thick of the Obamacare donnybrook in 2009, Rep. Bob Inglis (R-South Carolina) was holding a town hall with his constituents. A man stood up and told him to “keep your government hands off my Medicare.”
“I had to politely explain that ‘Actually, sir, your health care is being provided by the government,’ ” Inglis recalled to The Washington Post. “But he wasn’t having any of it.”
Rhetorically, we know Trump is committed to leaving Medicare as is. But as we’ve said more than once, the economics of America’s crony-capitalist health care system are such that it’s doomed to collapse.
As we move into 2017, we’ll be keeping a close eye on the horse-trading between the Trump White House and congressional Republicans. If the system stays as is, expect Medicare premiums to rise and services to become more and more limited. If House Speaker Paul Ryan gets his way — Medicare enrollees get vouchers to buy insurance on the individual market — expect costs to soar far higher while services will still become more and more limited.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As we go to virtual press, the market in fed funds futures points to a 94.9% probability the Federal Reserve will raise interest rates next week.
David Stockman says that one move will mean a 100% probability of a stock market bubble popping — the “big, fat, ugly bubble” Donald Trump talked about during the first debate with Hillary Clinton.
Do you know how to protect yourself?
And do you know how you can parlay the market carnage into substantial gains while your neighbors are wondering what hit them?
Don’t miss David’s live training session tomorrow night at 7:00 p.m. EST — where he’ll reveal his strategy going into 2017. It won’t cost you a thing to watch, but we have only a limited number of available slots for interested readers. Click here to see if room is still available.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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