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A key Trump donor could make a ton of money from Trump's housing policy

Presidential Candidate Donald Trump Speaks At The Economic Club Of New York
Donald Trump and one of his key economic advisors, billionaire John Paulson, at a September event in New York City.
Photo by Spencer Platt/Getty Images,

Ben Carson’s appointment as head of the Department of Housing and Urban Development has put housing policy in the news. “We have talked at length about my urban renewal agenda and our message of economic revival, very much including our inner cities,” Donald Trump said.

But one of the most important housing-related issues facing the incoming Trump administration has nothing to do with the inner cities. Rather, it’s what to do with Freddie Mac and Fannie Mae, the massive financial institutions that underwrite the nation’s mortgages.

These nominally private but government-sponsored companies have been under federal control since they got a taxpayer-funded bailout in the wake of the 2008 financial crisis. In the past couple of years, they’ve started to turn a profit after years of losses. And there’s a big legal battle underway to determine whether those billions of dollars in profits will go to the federal government — which rescued the companies from bankruptcy — or to the companies’ private shareholders.

The Obama administration sided with taxpayers in a 2012 decision, but a group of hedge funds has sued to get the money for themselves. And one of those hedge funds is run by one of Donald Trump’s closest advisers, billionaire John Paulson.

Trump adviser John Paulson is heavily invested in Fannie and Freddie

Wall Street investor John Paulson became a billionaire by betting against the housing bubble that burst in 2008. He has also emerged as a major Trump fundraiser. Paulson was listed as one of Trump’s economic advisers during the 2016 campaign. And as the Intercept has noted, Trump’s July 2015 financial disclosure form showed him with more than $1 million invested in each of three Paulson funds: Paulson Partners LP, Paulson Advantage Plus LP, and Paulson Credit Opportunities LP.

That’s significant because Paulson hedge funds appear to have a significant stake in Fannie and Freddie. Paulson and Company, the company that manages all three of the funds Trump was invested in last year, has been lobbying the federal government to change how it manages the two companies, which are still under federal stewardship.

Paulson and several other hedge fund moguls are objecting to a 2012 decision to redirect Fannie and Freddie’s profits into the federal treasury — instead of paying them out as dividends to shareholders like Paulson.

At the time, this didn’t matter very much, since Fannie and Freddie were deeply in debt to the federal government and weren’t generating a lot of profits. But in the past few years, the two companies have started to generate big profits.

The federal government argues that taxpayers spent tens of billions of dollars bailing out Freddie and Fannie — and that the companies would have gone bankrupt if not for federal assistance — so it’s perfectly reasonable for taxpayers to capture the upside now that the companies are doing well. The shareholders, naturally, view this as an illegal taking of their property, arguing — not unreasonably — that taking 100 percent of the companies’ profits effectively makes their shares worthless.

What happens next

The case is still being actively litigated, and we don’t know how it will turn out. But if Trump administration officials wanted to, they could decide to simply reverse the Obama administration’s policy and give the hedge fund moguls what they want: start paying out profits as dividends to shareholders instead of the federal treasury.

Steven Mnuchin, Trump’s pick for Treasury secretary, has signaled that the Trump administration is looking to change its policy. “We’ve got to get Fannie and Freddie out of government ownership,” he said last week. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.”

But Mnuchin didn’t provide a lot of details on how the privatization would work — and these details are what will determine whether shareholders get a windfall in the process.

Yet Wall Street is optimistic that the Trump administration will be more favorable to shareholders than the Obama administration has been. Shares in Freddie Mac have already more than doubled since Donald Trump’s election last month.

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