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You
are here: HomeEconomySectorsFor Billionaires Only: Uncle Sam's Real Estate Fire
Sale

Thursday,
14 June 2012 14:30

For Billionaires Only: Uncle Sam's Real Estate Fire Sale

Written by  William F. Jasper

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“The largest transfer of wealth from the public to private sector is about to
begin. The federal government will be bulk-selling the massive portfolio of
foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private
investors — vulture funds.”

So warned Roger Arnold, chief economist for
ALM Advisors of Pasadena, California, in a column for RealMoney on
August 11, 2011, that first lifted the lid on this latest colossal scandal to
come out of the 2008-2009 financial crisis.

“These homes,” wrote Arnold,
“which are now the property of the U.S. government, the U.S. taxpayer, U.S.
citizens collectively, are going to be sold to private investor conglomerates at
extraordinarily large discounts to real value. You and I will not be allowed to
participate. These investors will come from the private-equity and hedge-fund
community, Goldman Sachs (GS) and its derivatives, as well as foreign sovereign
wealth funds that can bring a billion dollars or more to each
transaction.”

Warren Buffett, one of the richest men in the world,
obviously, would have no trouble qualifying for the privilege of bidding in this
fire sale for the super-rich. And the “Oracle of Omaha” appears to be more than
casually interested in getting in on the game.

The Wall Street
Journal reported on March 20, 2012: “Warren Buffett, considered a sage
investor and chief executive of Berkshire Hathaway Inc., said in an interview
with CNBC-TV last month that he would buy up ‘a couple hundred thousand’
single-family homes if he could do so easily, given the high yields on rental
investments.”

A couple hundred thousand homes for Buffett? What about the
hundreds of thousands of families who are being foreclosed on? Isn’t that what
the Fed, Treasury, the Bush White House, and members of Congress told us the
$750 billion TARP (Troubled Asset Relief Program) fund was for when they forced
it on us in 2008? What about the additional hundreds of thousands of families
who would love to be able to purchase these homes and who may be qualified to
buy under a genuine privatization program open to all? What about the hundreds
of thousands of small investors who are willing to buy, rehabilitate, and rent
out these properties? Well, the folks running Fannie, Freddie, and HUD haven’t
completely ruled out the little guys; they are continuing to sell a
portion of their mammoth inventory of foreclosed homes the traditional way,
one-by-one to individual buyers. But over the past year, they have been moving
into bulk sales and have been getting ready to unload their portfolios en
masse at huge discounts to the big buyers.

Who are some of the other
high-rollers lining up for the restricted Fannie/Freddie/HUD fire sale?
According to the Wall Street Journal, they include Lewis Ranieri,
regarded as “the godfather” of mortgage finance for developing mortgage-backed
securities (MBS) and collateralized mortgage obligations (CMOs), the financial
weapons of mass destruction that played a key role in the economic
meltdown.

Another, says the Journal, is hedge fund titan Paulson
& Co., headed by John Paulson.

Forbes magazine, which in
2012 listed Paulson as #61 among the world’s billionaires and #17 among the
“Forbes 400,” says that he “became a billionaire in 2007 by shorting subprime
securities, earning a $3.5 billion payout.” What Forbes doesn’t mention
in its flattering profile is that Paulson, like Ranieri, was a major architect
of the house of cards built on CMOs and other fraudulent debt instruments —
euphemistically called “synthetic derivatives” — that Paulson marketed through
Goldman Sachs.

And, of course, the power brokers at Goldman Sachs,
JPMorganChase, and Citigroup, who have already reaped billions of taxpayer
and investor dollars from the financial havoc they helped cause — as well as
from the bailouts that followed — are salivating at the thought of even greater
lucre to be made in the newly created homes-for-rent market.

“Economists
at Goldman Sachs estimate the annual yield on an investment on rental property
nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard
during the housing bust, including Las Vegas, Detroit and Tampa,” notes the
Journal. “By contrast, mortgage bonds have average yields of just over
3%, and investment-grade corporate bonds are yielding about 3.5%, according the
Barclays Capital U.S. Investment-Grade Index.”

Incredibly, the
malefactors who invented the toxic mortgage securities and raked in massive
wealth by marketing those fraudulent products with a “pump-and-dump” strategy
that fleeced millions of savers, investors, and homeowners are now planning to
use their ill-gotten gains to once again make a killing. And, once again, this
is only possible because the Federal Reserve has instituted a corrupt system of
cronyism that amounts to legalized theft on a titanic scale.

These
privileged mega-investors could “instantaneously become the largest improved
real estate owners and landlords in the world,” notes Roger Arnold. “The U.S.
taxpayer will get pennies on the dollar for these homes and then be allowed to
rent them back at market rates.”

The Fed’s REO
Speedwagon

The REO program to pulverize Main Street for the
benefit of Wall Street would go nowhere without approval from Chairman Ben
Bernanke and his fellow governors at the Federal Reserve. On April 5, 2012, the
Fed issued a policy statement loosening regulations so that “banking
organizations may choose to make greater use of rental activities in their
disposition strategies.” This will make it easier for banks — including those
that received billions of taxpayer dollars — to hold REOs off the market as
rentals for 10 years, or longer. This was a follow-on to the Fed’s white paper
on housing issued by Bernanke on January 4, 2012, that painted a dire picture of
the real estate market and expressed the need to look at new options.

The paper, entitled The U.S. Housing Market: Current Conditions and
Policy Considerations, declares: “Looking forward, continued weakness in
the housing market poses a significant barrier to a more vigorous economic
recovery.”

The Fed’s white paper notes:

At the same time that housing demand has weakened,
the number of homes for sale is elevated relative to historical norms, due in
large part to the swollen inventory of homes held by banks, guarantors, and
servicers after completion of foreclosure proceedings. These properties are
often called real estate owned, or REO, properties.... Perhaps one-fourth of the
2 million vacant homes for sale in the second quarter of 2011 were REO
properties. The combination of weak demand and elevated supply has put
substantial downward pressure on house prices, and the continued flow of new REO
properties — perhaps as high as 1 million properties per year in 2012 and 2013 —
will continue to weigh on house prices for some time.

Additionally, it points out that “currently, about 12 million homeowners are
underwater on their mortgages — more than one out of five homes with a
mortgage.” Presumably, many of these will also end up in foreclosure.

But
Bernanke and his Fed brethren, naturally, have a solution. They claim “a
government-facilitated REO-to-rental program has the potential to help the
housing market and improve loss recoveries on REO portfolios.”

But, to
add audacity on top of audacity, the Fedmeisters hint that besides favoring a
closed privatization scheme that turns over an REO bonanza to their cronies (who
have already benefited immensely from the Fed’s crooked largess), they may also
be setting the program up for us, the taxpayers, to help finance the deals for
the billionaire investors! The Fed white paper informs Congress that “providing
investors with debt financing will likely also affect the prices they offer on
bulk pools of REO properties.”

“Subsidized financing provided by the REO
holder may increase the sales price of properties,” the Fed advises, appearing
to suggest that it would be to the benefit of all concerned if the taxpayers
sweetened the saccharin deal even further.

President Obama, who likes to
inveigh against Wall Street (while taking record sums of Wall Street cash as
campaign contributions), is on board with the plan. “The Obama administration,
in conjunction with federal regulators and led by the overseer of Fannie Mae and
Freddie Mac, are very close to announcing a pilot program to sell
government-owned foreclosures in bulk to investors as rentals, according to
administration officials,” Diana Olick reported for CNBC on January 9, 2012, in
a piece entitled “White House wants to convert foreclosed houses to
rentals.”

“A pilot sales program will be starting in the very near
future, according to administration officials,” Olick reported. “They are
working on what the market potential is, what pricing would be, how government
can partner with private investors, and who has the operational experience to
manage so many properties.”

RTC Déjà Vu

The
federal agency that is handling the disposition of the huge federal REO
inventory is the Federal Housing Finance Agency (FHFA), created by the Federal
Housing Finance Regulatory Reform Act of 2008 (Public Law 110-289), which was
signed on July 30, 2008 by President George W. Bush. The FHFA is “the Resolution
Trust all over again — but much bigger,” ALM economist Roger Arnold told The New
American. “And you can be sure the corruption will be commensurately
bigger.”

For those who recall the massive Savings & Loan crisis and
bailout of the 1980s, there is more than a passing resemblance to the current
financial crisis and bailouts. And the FHFA does indeed look disturbingly
similar to the Resolution Trust Corporation (RTC), created by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (which was signed
into law by President George Bush, the elder) to “resolve,” i.e., clean up, the
S&L mess.

“The RTC was expected to handle nearly 300,000 properties
(many of which had been overvalued to begin with) and $400 billion in failed
S&L assets (including loans which were taken out never intending to be paid
back),” explains Nick Adama, who has written extensively on the mortgage crisis
for the ForeclosureFish blog and website. The RTC compounded the looting that
the Fed and the FDIC had encouraged, rewarding the criminal class with a second
shot at even juicier profits. Adama elucidates:

While the RTC took over nearly half a trillion
dollars in toxic loans, bad mortgages, junk bonds, unfinished condo and
development projects, and undeveloped land, the program became another excuse
for the same people who had looted the industry to begin with to launder their
money back into these same devalued assets.

Criminals who had received
huge loans from S&Ls on overvalued properties pocketed the difference,
usually with offshore bank accounts that were never confiscated by the
government. When the RTC took over the assets of these failed S&Ls, the
government wanted to liquidate the assets for whatever it could get.

The
looters of the thrifts, then, were able to use the dirty money they had obtained
by defaulting on S&L loans to purchase insolvent S&L assets. In fact,
the Resolution Trust Corporation did not even ask questions about buyers if cash
was offered.

The RTC became, in effect, the federal laundromat for the dirty S&L
money, becoming a partner in crime with some of the century’s biggest thieves,
who had victimized millions of savers and millions more taxpayers. “Clearly, the
RTC was offering a way not only to repatriate their offshore money but to parlay
it into further gain as they bought government-owned assets at bargain basement
prices,” concluded authors Stephen Pizzo, Mary Fricker, and Paul Muolo in their
1991 book Inside Job: The Looting of America’s Savings &
Loans.

Since September 2008, Fannie and Freddie have operated under
the conservatorship of the FHFA, with, as the Fed white paper points out,
“specific mandates to minimize losses for taxpayers and to support a stable and
liquid mortgage market.”

The FHFA is now the big player in the
housing market. The FHFA’s website informs us: “The Federal Housing Finance
Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
These government-sponsored enterprises provide more than $5.7 trillion in
funding for the U.S. mortgage markets and financial institutions.”

The
California Association of Realtors is vigorously opposing the FHFA/Fannie Mae
REO bulk sales, noting that it is unnecessary, since there are plenty of buyers
willing to pay market prices, without giving steep, subsidized discounts to the
billionaire insiders.

In a letter to California’s congressional
delegation dated February 6, 2012, the Realtors’ group said: “Los Angeles and
the Southern California region have been named as a potential pilot program
location. However, these areas are experiencing an inventory shortage, and many
homes for sale, especially distressed properties, are receiving multiple bids.
Removing REO inventory through a bulk sale and rental program will hurt these
communities. In addition, the taxpayer will lose because these REOs will be sold
for less money in bulk sale than if sold as individual units.”

Other
industry sources express similar opinions of the market. “A pretty robust
cottage industry has developed and is absorbing this at an incredibly fast
pace,” Richard Smith, chief executive of Realogy Corp., which owns the Coldwell
Banker and Century 21 real-estate brands, told the Wall Street Journal.
There doesn’t seem to be any urgent need for FHFA to unload bulk inventory at a
huge discount, and doing so is not likely to benefit taxpayers. Fedgov bulk REO
sales “will end up being another huge taxpayer-subsidized gift to the vultures,
the big inside players who are politically connected,” Roger Arnold told The New
American.

In order to play in this game, the investors must agree to hold
the REO properties as rental units for a specified period. This will require
building or acquiring a management structure to care for the properties.
According to investment insiders contacted by The New American, some of the big
investors are already partnering up with the HUD Management and Marketing
(M&M) contractors that manage the huge Fedgov REO inventory.

In his
original August 2011 RealMoney article, Roger Arnold wrote:

These M&M companies are principally owned by
and employ former high-ranking government officials from the various germane
agencies — the Treasury, HUD, FHA and others. And they will provide the
necessary access to the current government employees who are tasked with
bringing this program to fruition. Once the privatization is complete, those
government employees will move from their positions, and many will take up new
employment at one of the M&Ms or the new vulture funds.

The FHFA’s plan for bulk REO sales will open up vast
new vistas for federal officials and bureaucrats to strike special sweetheart
deals with Wall Street partners, with lucrative payoffs as they transition from
“public service” to private-sector management.

Oligarchs and
Princelings

Closed “privatization” programs like the REO selloff
being pursued by the Fed and FHFA serve to widen the wealth gap by further
enriching the already wealthy, while reducing advancement opportunities for the
poor and the middle class. They also serve to fuel the fires of resentment
toward what is obviously unfair advantage enjoyed by the privileged
few.

Unfortunately, all too often the politicians, analysts, and
commentators misdiagnose the problem and misdirect popular resentment and
outrage toward the wrong target: “capitalism,” “deregulation,” or “free market
economics.” However, the culprit here isn’t free markets, it’s corporatist
socialism, which is politicized crony capitalism. With the ongoing series of
federal bailouts since the financial crisis of 2007-2008, the U.S. Treasury, the
Federal Reserve, and the federal regulatory leviathan have taken control of
virtually our entire national economy. As a result, we are more and more coming
to resemble the centrally planned, centrally controlled political-economic
systems in place in Russia and China. Our ruling classes are also looking more
and more like the Politburto plutocrats in Moscow and Beijing.

The big
news in Forbes magazine’s 2011 annual survey of “The World’s
Billionaires” was the striking increase in billionaires in Russia and China. The
magazine reported that Moscow had become the city with the most billionaires,
79, followed by New York, with 58. It also reported that China had nearly
doubled its number of mega-rich citizens over the previous year, now claiming
115 slots in the billionaire category. The number of super-wealthy Russians had
jumped two-thirds during the same period, to 101 billionaires.

Although
these recently minted billionaires are usually called capitalists, they have not
earned their sudden wealth through entrepreneurial skill and free enterprise;
they have amassed their enormous riches thanks to their Communist Party
connections (in China) or “former” Communist Party connections (in Russia),
which gave them special privileges in the “privatization” of previously
nationalized resources. Russia’s super-wealthy oligarchs profiled by
Forbes — Alisher Usmanov (steel, telecom, investments), Vladimir Lisin
(steel and transport), Alexei Mordashov (steel), Vladimir Potanin (metals,
media), Vagit Alekperov (oil), Mikhail Fridman (banking, oil, telecom), Mikhail
Prokhorov (metals, energy, investments), Roman Abramovich (steel, investments),
et al. — are all tied in to Vladimir Putin’s KGB-run Kremlin power
structure.

Likewise, China’s economic emperors and princelings — Li Ka
Shing (shipping, ports, real estate, technology), Robin Li (technology), Liang
Wengen (manufacturing), Zong Qinghou (beverages), He Xiangjian (manufacturing),
Hui Ka Yan (real estate), Liu Yongxing (agribusiness) — have been hugely
enriched not through the power of the market, but through the power of the
state. The economic systems in Moscow and Beijing are frequently (and absurdly)
referred to as capitalist or “market-oriented,” but they are “capitalist” only
if understood as being state capitalist or gangster capitalist, where rewards
are dispensed through political power rather than through consumer
choice.

The Federal Reserve System is one of the principal political
instruments being used to transform the American system into a replica of the
regimes in Russia and China. This is not surprising when one considers that the
Fed comes close to fulfilling the requirement for a central bank demanded by
Karl Marx and Frederick Engels in the Manifesto of the Communist Party.
The fifth plank of their 10-plank program called for “centralization of credit
in the hands of the state, by means of a national bank with State capital and an
exclusive monopoly.”

And what has the Fed’s “centralization of credit in
the hands of the state” accomplished? We catch a glimpse of the devastation in
the partial audit of the Fed last year by the Government Accountability Office
(GAO). “As a result of this audit, we now know that the Federal Reserve provided
more than $16 trillion in total financial assistance to some of the largest
financial institutions and corporations in the United States and throughout the
world,” said Senator Bernie Sanders (I-Vt.) when the first part of the audit
came out in July.

The number one recipient of the Fed’s bailouts and
loans was Citigroup, which received more than $2.5 trillion! Second was Morgan
Stanley, which sucked down more than $2.04 trillion. Third was Merrill Lynch,
which took in more than $1.9 trillion. Then Bank of America at $1.3+ trillion,
Barclays at $868 billion, Bear Stearns with $853 billion, Goldman Sachs at $814
billion, JPMorgan Chase at $391 billion — and on and on. There are many
important details about these transactions that we still don’t know because the
Fed has refused to reveal them, and Congress has thus far failed to demand the
kind of genuine audit that Rep. Ron Paul has been pushing for. Keep in mind
we’re talking about multiple trillions that the Fed is creating out of
thin air and handing out to its friends — with no checks or accountability. As
mind-numbing as the $16 trillion figure is, that may be only a fraction of the
abuse, corruption, and thievery that is occurring.

The GAO audit turned
up a number of examples of prima facie evidence of conflict of interest in the
Fed’s activities vis-à-vis Wall Street insiders, among which were:

•
JPMorgan Chase CEO Jamie Dimon served on the board of the Federal Reserve Bank
of New York at the same time that his bank received over $390 billion in total
emergency loans from the Fed;

• General Electric CEO Jeffrey Immelt
served as a director on the board of the Federal Reserve Bank of New York while
the Fed provided $16 billion in financing for GE under its emergency lending
program;

• New York Fed chairman Stephen Friedman sat on the board of
directors of Goldman Sachs and owned Goldman stock while the Fed was shoveling
hundreds of billions of dollars into the Wall Street behemoth’s
coffers;

• New York Fed president William Dudley was allowed to keep AIG
and General Electric stock at the same time that the Fed was showering AIG and
GE with hundreds of billions in bailouts.

In a July 2011 press release
denouncing the Fed’s corrupt favoritism, Sen. Bernie Sanders declared: “This is
a clear case of socialism for the rich, and rugged, you’re-on-your-own
individualism for everyone else.” Sanders, the only member of Congress who
openly identifies himself as a socialist, was right; the Fed’s program has
always been socialism for the rich. However, Sanders, like most other socialists
and “progressives,” gets the solution totally wrong: more socialism, more
centralization, more government control.

The Federal Reserve needs to be
stripped of its power, not handed more power and control. However, the REO bulk
privatization that Bernanke and company are now promoting would increase the
Fed’s clout while effecting one of the most radical redistributions of wealth in
history. Millions of erstwhile homeowners would be reduced to the status of
perpetual renters to the Wall Street cronies whom the Fed has already lavished
with untold billions and would have become our new landlord class.

* * *

This being an election year, members of Congress are
more sensitive and responsive to constituent pushback and feedback. They need to
hear loudly and clearly from voters that the FHFA REO “socialism for the rich”
program won’t fly. They need to know that the voters are holding them to account
to Audit the Fed and End the Fed.

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