Paulson’s Big Long: A Bet on Trump Yields Power and Profit

Updated on
  • Hedge-fund billionaire gains influence in Washington
  • He’s lobbied to revive Fannie Mae, Freddie Mac; shares surge

Will Trump Go Easier on Hedge Funds?

John Paulson went long Donald Trump when much of Wall Street went short.

Now, he’s reaping the rewards.

Trump and Paulson at the Economic Club of New York on Sept. 15.

Photographer: John Taggart/Bloomberg

Since making a fortune on the U.S. housing collapse a decade ago, the hedge-fund billionaire’s company has played a key role in lobbying in Washington. Much of it is directed at Fannie Mae and Freddie Mac, the giants at the heart of the nation’s mortgage market.

With Trump’s victory, Paulson -- a political donor and economic adviser to the president-elect -- is already seeing a payoff. His funds have a stake in Fannie Mae and Freddie Mac, once virtually worthless, whose common-class shares have roughly doubled since Election Day.

Trump hasn’t said what he’ll do with Fannie and Freddie, but investors are betting that his arrival at the White House will mean some of the profits that are being sent to the U.S. Treasury go to shareholders instead.

Read More: Fannie and Freddie reborn

That’s what Paulson and several other prominent hedge fund managers have been pushing for. They’ve spent years building a presence in Congress and the surrounding ecosystem of advocacy and influence. 

Even after Trump’s pledge to “drain the swamp” of Washington, political donors and lobbyists for some of the nation’s wealthiest industries were linked to the transition team early on, though Vice-President-elect Mike Pence has since promised to remove them.

“My hunch is that every hedge fund has somebody in Washington by now, or will soon,” said Tim LaPira, an associate professor who researches lobbying at James Madison University.

Fannie Mae and Freddie Mac were taken over by the government in 2008, at an eventual cost of $187.5 billion. The Obama administration later changed the terms of the bailout, so that the government received most of the companies’ profits, and it’s more than recouped the bailout costs. Shareholders have been seeking redress in court ever since -- and also working furiously to change the policy and allow the companies to keep more of their earnings.

‘Should Be Reversed’

The move to sweep all profits “violated the rights of thousands of shareholders across America,” Paulson & Co. said in an e-mailed statement. It said the government’s action also violated the law enabling the takeover of Fannie and Freddie. “This action should be reversed, and we look forward to an outcome that restores the rights of shareholders in these companies.”

For someone with Paulson’s resources, there are lots of ways to encourage that outcome.

One is the direct track to influential politicians.

Through the third quarter of this year, Paulson & Co. has spent $270,000 lobbying Congress, according to the Center for Responsive Politics, more than triple its 2007 outlay. Much of the money went to American Continental Group. An ACG lobbyist helped run the 2016 Republican convention.

According to public filings, Paulson is also part of a group calling itself the “Informal Coalition on Housing Finance Reform,” along with three other money managers. That group has spent $180,000 lobbying through the third quarter, compared with $10,000 in 2015. Late last year, DCI Group Inc., a public relations firm that has helped organize Fannie and Freddie shareholders, was also added to the coalition.

Trump Team

Paulson, who was named as an economic adviser to the Trump campaign, this year gave more than $330,000 combined to Trump’s presidential effort, the Republican National Committee and the National Republican Congressional Committee, according to the Center for Responsive Politics. The financier’s connection with Trump predates the latter’s bid for the White House: In 2012, for example, Trump bought the Doral Golf Resort & Spa from Paulson and other investors.

Formally disclosed lobby spending or campaign finance is often just the tip of the iceberg. There’s also a well-oiled machine of academics, nonprofits and think-tanks that have lined up behind Fannie and Freddie shareholder positions. They rarely disclose who, if anyone, they’re getting funding from or collaborating with, meaning that any particular investor’s involvement is uncertain.

In September, both Yale University lecturer Logan Beirne and National Consumers League executive director Sally Greenberg made the case for saving the companies by invoking the not obviously related scandal at Wells Fargo & Co. Their op-eds -- published on successive days in American Banker and The Hill, and using sometimes identical language -- argued that it would be risky to leave America’s mortgage system in the hands of untrustworthy banks. The Hill took down Greenberg’s op-ed after she was contacted by Bloomberg.

‘Grassroots’ Movements

Greenberg said the text came from talking points circulated by a progressive advocacy group. Raben Group, a lobbying firm, said it helped place her article in The Hill; its spokesman, Jamal Simmons, said that there’s nothing unusual in “the same messaging documents” being shared among diverse groups working toward a common goal. Beirne said he’d worked with a Tea Party-affiliated think-tank and had no contact either with the progressive group Greenberg referred to, or with Raben.

Then there are “grassroots” movements of small investors pushing for outcomes that favor them -- and also benefit those with a larger stake. DCI, the PR firm, has been active in organizing such an effort in the case of Fannie and Freddie, as it did over the Puerto Rican debt crisis and Argentina’s bond restructuring.

Sometimes, big-investor money can create DC advocacy groups from scratch; sometimes, it supports existing ones. Nonprofits have made the case for Fannie and Freddie on the grounds that the agencies help provide affordable housing for ethnic minorities or low-income groups.

‘Outrageous’ Suggestion

The Leadership Conference on Civil and Human Rights, which has built a coalition of outfits to back recapitalization of the two companies, said it’s received more than $300,000 in donations from DCI, which is a regular donor to a range of nonprofits. Paulson’s charitable foundation gave $25,000 to an affiliated group, the Leadership Conference Education Fund.

Paulson made an earlier foray to Washington during the Great Recession. Legislation under review in Congress (which didn’t eventually get through) would have allowed homeowners to reduce loan payments through bankruptcy. That would potentially have lowered the value of mortgage-backed securities -- and brought a payday for Paulson, who bet against them.

In 2007 he donated $15 million to the Center for Responsible Lending, a nonprofit that had pushed for similar bankruptcy reform for years. The money was used to help pay for legal services for homeowners trying to avoid foreclosure, and none of it was spent on lobbying, according to the Center. In 2007, Paulson & Co.’s Michael Waldorf told BusinessWeek that the suggestion that the donation was a quid pro quo was “outrageous.”