What It Do: The Payoff

—by , January 1, 2014

The Facebook debate was annoying, but not entirely unexpected. After I posted the Mother Jones article referenced in last week’s column (detailing the aggressive rental property acquisition strategy currently being enacted by private equity firms), an acquaintance employed by the finance industry took offense to the article’s assertions.

His basic argument was that, while the mortgage-based securities from the 2008 financial crisis were admittedly riskier than consumers were led to believe, these new rent-based securities are a completely different animal, based on actual cash flow, instead of tricky trails of shoddy paperwork.

Except the mortgage-based securities were also supposedly based on cash flow (the mortgage payments), and, as has been reported in several media outlets, the Wall Street-brand rental property managers have already developed a notorious reputation for missing and/or incorrect documentation (not to mention lousy maintenance practices), sometimes leading to expensive and erroneous fees levied on the renter.

My finance-industry acquaintance’s second argument—that it is easier to replace a tenant after eviction than it is to sell a house after foreclosure—may hold some weight; however, it should be noted that the basis for this logic is a disappointing callousness to the idea of throwing people out on the street for profit. And given the general property management incompetence on the part of private equity firms, it can be assumed that more than a few of those people will be made homeless through no fault of their own.

But take it a step further. Even if you accept that it’s tots cool to kick people out of their home because of clerical error, and even if you accept that solid tenants are easy to find (they aren’t), consider the motivation on the part of people, such as my aforementioned acquaintance, who are defending the rent-based investment securities.

People who work in the financial industry—even those who aren’t directly involved in the trade of the questionable securities under discussion—have a vested interest in convincing the public that the sector in which they make their living is healthy for the nation overall (especially after the 2008 debacle). Thus, the whole “wealth creation” rap.

Unfortunately, the reality is that the methods used to create financial instruments (whether mortgage or rent based) are generally so complex that firms must hire people with advanced degrees in theoretical mathematics just to engineer them. This goes back to the idea that introducing such an extreme level of complexity makes it less likely the general public will get wise to the hustle, while also making it an easier sell to gullible investors.

The end result is that even the people directly involved in hawking rent-based securities to pension funds and 401k managers often don’t really understand how they work, yet find themselves talking them up as a safe bet, simply because their livelihood depends on closing the deal. And, while the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 did introduce certain measures designed to prevent a repeat of 2008 (limiting banks’ exposure to hedge fund investments and increasing regulation on the mortgage market, for instance), Wall Street is largely still able to find ways around most regulatory obstacles.

That is where we find ourselves with this new rent-based securities bonanza. Congress was forced by the political backlash generated in 2008 to tighten down on the mortgage sector, so Wall Street took the profit generators designed for that market and adapted them to the rental property business. And, while credit default swaps, as they existed in 2008, are allegedly a thing of the past, one can only wonder what new methods our financial overlords have cooked up to guarantee their profits when the bubble bursts.

And it will burst, you can believe that. As private equity firms buy up more properties, artificially inflating the market prices, rents will begin to rise even faster than they are now. Combine that with heartless (and potentially fraudulent) application of draconian fee structures, and it’s only a matter of time before people can’t keep up; similar to what happened when their adjustable-rate mortgage payments metastasized in the lead-up to 2008.

There will be mass evictions. The fallout—aside from leading to more homelessness, crime, and general suffering—will almost certainly include robust wealth destruction among those with the misfortune to have bought into Wall Street’s this-time-will-be-different spiel. The politicians will be trotted out in front of the cameras to furrow their brows and explain to the public why Wall Street needs billions—again—and the talking heads will blame it on poor and working-class people—again.

Meanwhile, the vultures behind the entire scheme walk away with more money than most of us could ever imagine (that’s not a euphemism) after having driven the global economy into a ditch—again. Nice work, if you can get it.

For the rest of us … I suppose living in shantytowns won’t be so bad.


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