I ran the Pratt family’s story and the evidence of the purge of the impoverished on European television. But I wasn’t done with the story in Detroit, of homes and votes lost. Something bothered me. So many houses empty with that whoosh of running water—pipes stripped out before the city can turn the water off. Why so many?
The Republican windfall, “foreclosing” on voter registrations, that’s just the endgame to make sure the victims of the con don’t have the political power to seek revenge.
But revenge for what?
The working class of Detroit was losing billions of dollars in wages and pensions. And one thing I know about a billion dollars—if someone loses it, someone else has found it.
And all I could think of was this: someone wants these houses to die. Someone wants Detroit to fall to its knees, wants Robert Pratt to stay awake at night hoping against hope to keep his bungalow in the warzone of 8 Mile.
Who would be so sick, so devious and cruel and brilliant, as to want the housing market in Michigan to die— the entire US market to?
Here’s who:
In August 2007, one year before I walked into Robert Pratt’s home, John Paulson walked into Goldman Sachs, the investment bank, with a billion-dollar idea. Paulson’s brainstorm had all the elements that Goldman found enchanting: a bit of fraud, a bit of flimflam, and lots and lots of the ultimate drug: OPM—Other Peoples’ Money.
Paulson’s scheme was simple. Paulson, a much followed hotshot hedge-fund manager, would announce that he was betting big on the recovery of the US housing market. He was willing to personally insure that billions of shaky subprime mortgages, like the one dumped on the Pratts, would never go into default.
Now, all Goldman had to do was line up some suckers with more money than sense, some big European banks that handled public pension funds, and get them to put up several billion dollars to join with Paulson to insure these shaky mortgages. Paulson, to lure the “marks” into betting the billions, would pretend to put $200 million into the investment himself.
But, in fact, Paulson would be betting against those very mortgages. Paulson himself was the secret beneficiary of the “insurance” on the mortgages. When the housing market goes bust, Paulson would collect from the duped banks and they’d never even know it.
And Goldman would get a $15 million fee, or more, for lining up the sheep for the fleecing.
Goldman provided Paulson with a twenty-nine-year-old kid, a French neophyte, to play the shill, making presentations to the European buyers with a fancy, twenty-eight-page “flip-book” about the wonderful, secure set of home mortgages the “clients” would be buying.
The carefully selected bag of sick mortgages was packaged up into bundles totaling several billion dollars. To paint this turd gold, Paulson and Goldman brought in the well-respected risk-management firm of ACA Capital. Paulson personally met with ACA and gave them jive that he himself was investing in the insurance (as opposed to investing against the insurance).
The young punk that Goldman put on the case texted a friend (in French—mais oui!—about the inscrutable “monstruosités”) while he was in the meeting with Paulson and ACA, right while Paulson was laying on the bullshit.
Secretly, Paulson personally designed the package of mortgages to load it up heavily with losers, concentrating on adjustable rate mortgages, like Pratt’s, given to those with low credit scores, while culling out high-quality loans given by West Coast banker Wells Fargo. ACA, thinking Paulson was helping them pick the good stuff, put their valuable seal of approval on the mortgage packages, though they were quite nervous about their “reputation.” (But that’s what happens when you go out with bad boys.)
The mortgages in each package were dripping dreck— but with the ACA/Goldman stamp, Moody’s and Standard & Poors gave the insurance policies a AAA rating. European banks that hold government pension investments snapped up the AAA-rated junk.
Around August 7, 2008, the week I met with Pratt, his foreclosure and over a million others resulted in the Goldman mortgage securities losing 99 percent of their value. The Royal Bank of Scotland, left holding the bag, wrote a check to Goldman Sachs for just short of one billion ($840,909,090). Goldman did the honorable thing . . . and turned over the money to Paulson (after taking their slice).
Don’t worry about the Royal Bank of Scotland. The British taxpayers and Bank of England covered its loss, taking over the bleeding bank.
And here’s the brilliance of it: when it came out that Goldman and other mortgage-backed securities were simply hot steaming piles of manure, their value plummeted further and the mortgage market, already wounded, now collapsed—and mortgage defaults accelerated nationwide. The result was that as the market plummeted, Paulson’s profits skyrocketed: his hedge fund pulled in $3.5 billion and Paulson put over a billion of it in his own pocket.
With Paulson skinning some of Europe’s leading banks for billions, there was a bit of a diplomatic and legal dustup. The SEC investigated, confirmed in detail Paulson’s scam . . . and sued the kid at Goldman who acted as Paulson’s assistant, the one who couldn’t even follow the complex deal. Goldman paid a fine, admitted no wrongdoing.
And Paulson received . . . a tax break.
Pratt and several million others lost their homes, including a Saudi prince who, in the recession, had to sell his Vail, Colorado, home to Paulson for just $45 million.
But Detroit could not have died if its auto industry were not in a coma.
In 2008 and 2009, both Presidents Bush and Obama opened Treasury checkbooks to save the Great American Industry, with $80 billion in cash and loans for GM and Chrysler.
But the wheels were about to come off the bail-out.
Two men had quietly bought up GM’s former auto-parts unit, Delphi Corporation, for sixteen cents a share. In 2009, when the bailout was ready to go, including a plan to save Delphi and its twenty-five thousand union jobs, the two hedge-fund speculators said, Gotcha! Unless they were paid ransom—about $12 billion—they would shut down crucial parts factories and bring every US auto assembly line to a deadly halt.
They had Obama, GM, and Chrysler by the ball bearings.
The two speculators, Singer the Vulture and John Paulson, got every dime they demanded. GM agreed to pay off $1.1 billion of Delphi’s debts; forgave $2.15 billion owed Delphi by GM; pumped $1.75 billion into Delphi operations; and GM took over four money-losing parts plants, all the cash ultimately supplied from US taxpayer bailout funds.
Then there was the big one: the US Treasury would pay $6.2 billion in pensions owed to Delphi workers.
Paulson made $1.5 billion and Singer $900 million, thirty-two times their investment, when the stock went from sixteen cents to twenty-two dollars with the government cash.
The Vulture duo took the money—and ran. Only four out of forty-five Delphi parts plants remain in the US. Most of the rest shuttered, but some were moved to China. Every one of Delphi’s twenty-one thousand UAW employees lost their job. All salaried workers at Delphi in Detroit had their pension money confiscated and eliminated.
And Robert Pratt lost his home and his vote.
Singer shared a piece of his big payday with the coinvestors of Elliott Management, the invitation-only fund that the Vulture used to take down Delphi.
Governor Mitt Romney was dead opposed to this “free pass” for Wall Street, standing with a square jaw against the Treasury forking over billions to bail out Detroit and the auto industry. “Let Detroit Go Bankrupt,” the governor wrote in the New York Times.
Romney’s position was principled—and surprising, given that the Romney family made its fortune in Detroit when Mitt’s daddy became president of American Motors (now part of Chrysler).
Romney wrote, “Detroit needs a turnaround, not a check.”
Then I looked at the auto scion’s tax returns. Apparently, Mitt had dumped his interests in Chrysler. If Chrysler went down, well, that was the Pratt family’s problem. Romney’s trust had moved a few million to Elliott Management and got a slice of the 3,200 percent return from the bailout bonanza.
Romney took the check—and cashed it.
And he got another tax break, as did Singer and Paulson. It’s called “carried interest.” It allows the trio to pay a lesser tax rate on their $2.4 billion payoff than Pratt pays on his salary.
President Obama thinks that the “carried interest” tax loophole ought to be closed. And Paulson and Singer are not happy about that. They each ponied up a million dollars for Restore Our Future to pay for ads to attack Obama for letting America lose jobs.
So, what are you going to do about it?