Millions of average Americans lost their livelihoods and homes as the global financial crisis spiraled out of control a decade ago. But not President Donald Trump and his administration’s top financial advisers, who treated the meltdown as a chance to get richer.
Steven Mnuchin, now Treasury secretary, led a group of investors who bought a failed thrift with government help and then sold it at a profit. Commerce Secretary Wilbur Ross, then CEO of a buyout firm, also made money from U.S.-backed purchases of failed banks. Former White House economic adviser Gary Cohn, then president of Goldman Sachs, once touted that the investment bank brought in $373 million in a single day betting against the mortgage market.
And Trump himself crowed about the investment opportunities that lay ahead on the eve of Wall Street’s collapse.
“People have been talking about the end of the cycle for 12 years, and I’m excited if it is,” Trump said in a 2007 interview. “I’ve always made more money in bad markets than in good markets.”
Saturday marks the 10-year anniversary of the failure of the giant Lehman Brothers investment bank, the moment when the world realized the gravity of the financial calamity that was unfolding, precipitating the deepest economic crisis since the Great Depression.
Trump’s 2007 comments underscore how elite players, including his current circle of financial industry stars, saw the debacle through a very different lens from ordinary Americans. And while personal financial ruin may have led many disillusioned voters to sweep Trump into office years later, his administration is filled with people who profited from the crisis and whose policies are shaped by that background, focused largely on market performance instead of the economic needs of workers.
Defenders of Ross and Mnuchin argue that they bought bad banks when almost no one else would, preventing catastrophic losses at the Federal Deposit Insurance Corp. and helping to stabilize the hemorrhaging economy. Others view their actions as cashing in on adversity.
Either way, “opportunistic ‘vulture’ investors will always find a way to make money, and the crisis left a lot of carrion,” said Karen Petrou, managing partner at Federal Financial Analytics.
The cycle ended more brutally than Trump could have imagined. Economic storm clouds built throughout 2008, and on Sept. 15, Lehman Brothers’ bankruptcy spread panic. Stocks plummeted, and credit froze as lenders lost faith in financial assets. Congress authorized $700 billion in bailouts for financial institutions to grease the gears of the economy. Some $245 billion was ultimately spent.
In all, the Treasury Department has estimated that more than $19 trillion in household wealth and 8.8 million jobs were lost from late 2007 to 2009 in the depths of the recession. In 2009 alone, 2.8 million properties received foreclosure notices.
“The people who were for whatever reason insulated from the catastrophic consequences of the crash or made money off of it … have a very, at best, skewed understanding of what happened and why it happened,” said Dennis Kelleher, head of the nonprofit Better Markets, which advocates for tougher financial regulation.
“The problem with people like this is that they think that what’s good for Wall Street or high finance is good for America,” he said. “The crash proved that what could be incredibly good for Wall Street was in fact incredibly bad for America.”
On Sept. 14, 2008, a day before the Lehman meltdown, Ross, then head of WL Ross and Co., predicted that as many as 1,000 smaller banks would collapse, giving investors a big opening.
“There will be opportunities,” he told CNBC.
Ross and Mnuchin were each among rare investor groups that snapped up failed lenders during a brief period of time when the FDIC – desperate for buyers – made it easier for private equity to step in.
It worked in the case of IndyMac, one of the largest mortgage lenders in the country with over 178,000 foreclosures already in the pipeline: Mnuchin’s team agreed to pay a billion dollars more than the next highest bidder for the $32 billion thrift, whose demise was one of the largest bank failures ever in the U.S.
The FDIC agreed to help cover losses from the distressed loans, and Mnuchin renamed the bank OneWest. Fellow investors included billionaires John Paulson – a hedge fund manager who famously made billions by betting against the mortgage market – and George Soros, a top Democratic fundraiser.
“We invested $1.6 billion into a failing institution when most investors were running for the hills,” Mnuchin said in the opening statement to his nomination hearing early last year.
“The outcome for consumers could have been much bleaker,” he added. “Overall, I believe we helped many earnest and hard-working homeowners, many who were like my grandparents, stay in their homes and escape financial ruin.”
Mnuchin and his fellow investors sold OneWest to CIT Group for $3.4 billion in 2015.
OneWest’s record of foreclosures faced a fierce backlash when Mnuchin was nominated, and again when its former CEO, Joseph Otting, was tapped for comptroller of the currency.
“Mr. Mnuchin executed tens of thousands of foreclosures, which were particularly concentrated in minority communities,” 88 progressive groups said in a joint letter to senators last year. “OneWest was quick to evict families from their homes in order to increase profits.”
But Aaron Klein, a Treasury official under President Barack Obama, said Mnuchin is often unfairly depicted.
“Mnuchin bought a failed bank and invested his own time, money and reputation in trying to rebuild an institution post-crisis, which he successfully did,” said Klein, now a fellow at the Brookings Institution.
Ross, who became a steel magnate by scarfing up and merging bankrupt steel companies, was part of a similar deal to acquire Florida-based BankUnited – a move that reportedly earned him and his fellow investors over $500 million when the bank went public in 2011. Another investor in that group: Blackstone, headed up by Steve Schwarzman, who is now an outside adviser to Trump.
“They would say that’s capitalism,” Kelleher said. “It might be capitalism, but don’t go around bragging that’s qualification for high government office.”
The Commerce Department did not immediately respond to a request for comment on Ross’s behalf.
Some high-ranking Trump officials had more direct ties to financial markets heading into the crisis.
Craig Phillips, one of Mnuchin’s top deputies at the Treasury Department, headed a division at Morgan Stanley that bundled billions of dollars in mortgages and sold them to Fannie Mae and Freddie Mac, the dominant mortgage financiers that were later rescued by the U.S. government.
He left in 2006 and then in 2008 moved to asset manager BlackRock, working on its “financial SWAT” team to help financial institutions weather the economic implosion.
He was eventually charged in an investor lawsuit brought by Fannie and Freddie’s regulator, the Federal Housing Finance Agency, against Morgan Stanley, though those charges were later dismissed.
Asked by POLITICO about how he views his role in the leadup to the crisis, he declined to comment.
And under Cohn’s leadership, Goldman Sachs offloaded shaky securities as it bet against the mortgage market. That move ultimately allowed it to withstand the crisis much more successfully than its competitors.
In a July 25, 2007, email to the CEO and the CFO of Goldman, Cohn said the firm had made $373 million in profit that day betting against the mortgage market and then took a $322 million write-down of the firm’s remaining holdings of mortgage-backed securities, netting a one-day profit of $51 million. CFO David Viniar replied: “Tells you what might be happening to people who don’t have the big short.”
In contrast to his advisers, Trump found himself deeply in debt during the crisis. He had just finished construction on Trump Tower Chicago, with a significant percentage of the residences unsold at the beginning of the crash. He’d taken out a $640 million construction loan from Deutsche Bank, and he was personally on the hook for $40 million.
He sued the bank, arguing he shouldn’t have to pay the money until after the crisis. He also said it owed him $3 billion for “predatory lending practices.”
Trump didn’t get the payment, but in 2010, he got a five-year extension to pay his debt, and the residences in that tower were all sold by 2014.
“The Chicago building is one of the most spectacular anywhere in the country,” Trump told POLITICO in October 2016.
There’s one other underappreciated player who made off with a tidy profit following the crisis: the U.S. government. The Congress-backed bank bailouts, loathed nationwide, netted the Treasury $30 billion.