John Paulson made his fortune by taking a massive short position against the US housing bubble. Today the hedge fund billionaire is betting that the US political system will fail. This time he has company. Other billionaires have launched a lawsuit to force the US Treasury to pay shareholders vast sums from the government-sponsored housing enterprises that it bailed out in 2008. Betting on Washington’s largesse has become a routine investment strategy. Whether this one works, aspiring billionaires should take note: if you want to strike it lucky, try shorting American democracy. The risk is small and the rewards are spectacular.
In 2008, the US government did “whatever it takes” to save the world economy from a rerun of the 1930s. Bailing out the people who had caused the crisis was an ugly spectacle that helped embitter politics in the US and elsewhere. But it was a necessary evil. The alternative was too dire to contemplate.
As it usually does, the US system got its act together in an emergency. The real problem is how it functions in normal times. Two of the largest beneficiaries of Washington’s firefighting were Fannie Mae and Freddie Mac, the mortgage underwriters, which took $187.5bn in taxpayers’ money to keep them alive. Without that infusion, the entire US housing finance system would have seized up – and with it the global economy. And Fannie and Freddie would have ceased to exist.