You helped buy the most expensive home in America

Jan 28, 2019

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You helped buy the most expensive home in America

The most expensive home in America, a 24,000 square foot Manhattan penthouse, was purchased last week for $238 million. The record-setting residence sits atop a 79-story building, which is still under construction, that will eventually "include private dining rooms, an athletic club, a juice bar, a library, a basketball court, a golf simulator, and a children’s play area."

The home will be delivered as an empty box, which means millions more will be spent "to design, build and furnish the home."

The buyer is Ken Griffin, the billionaire owner of Citadel, a hedge fund. He's on a bit of a shopping spree. Earlier this year, he "acquired a London home for about $122 million" and "several floors of a Chicago condominium for $58.75 million."

And he couldn't have done it without you.

Although it's not mentioned in write-ups of his penthouse purchase in the Wall Street Journal, CNBC, CNN, and Bloomberg, Griffin's hedge fund was the beneficiary of a taxpayer bailout during the financial collapse of 2008. This included $200 million he received as a counterparty to insurance giant AIG and the bailout of the creditors he relied on for billions in liquidity.

Without the bailout, his entire business could have collapsed.

Griffin's swift journey from a corporate welfare recipient to a record-smashing home buyer is a stark example of the dysfunction of the American economic system. People like Griffin, who is now worth over $9 billion, are protected from economic disruption. Those who are not part of the economic elite, meanwhile, are left to fend for themselves.

Griffin (almost) goes down

2008 was a bleak year for Ken Griffin. As the economy tanked, Griffin bought up distressed assets -- a strategy that had worked for him in the past -- only to watch things get worse. His hedge fund plummeted 55%, hemorrhaging $8 billion in client assets. The performance of Citadel in 2008 was poor even compared to other hedge funds, which declined 19 percent on average.

Griffin was forced to prevent clients from withdrawing their money temporarily.

Before the crash, Citadel outperformed its competitors by using leverage -- borrowing against its assets to purchase more securities and squeeze out high returns. In 2008, it was leveraged eight to one.

There was open speculation that Citadel would not survive. At one point, CNBC was parked outside of Griffin's office, hoping to be the first with the scoop that Citadel was closing down.

Taxpayers to the rescue, Part 1

Citadel was a securities lending counterparty with AIG. Essentially, Griffin lent AIG securities so that AIG could lend them out to others to be shorted. It was a financial house of cards that all came crumbling down as the economy crashed.

If AIG went under, Griffin would be out hundreds of millions of dollars.

But that never happened. AIG received a $182 billion taxpayer bailout. As part of this, AIG was able to pay counterparties full value for their otherwise worthless contracts.

Citadel got a $200 million cash infusion financed by taxpayers. It helped the firm survive.

Initially, the government refused to disclose the list of AIG counterparties and how much they were paid. But ultimately political pressure forced them to disclose the payouts. The decision to pay counterparties like Citadel full value was controversial and was criticized in an inspector general report.

Taxpayers to the rescue, Part 2

Even more significantly, the federal government bailed out the lenders who provided Citadel with liquidity as the plunging value of its assets prompted demands for cash. In an October 2008 conference call to calm investors who believed the company might go under, Citadel said that it "had $8 billion in credit lines." But these credit lines were also with financial institutions on the verge of collapse.

In a 2017 interview about Citadel's near-death experience, Griffin recounted one Friday during the crisis when he left work and realized that if Morgan Stanley did not open on Monday, his company would go under. That didn't happen because Morgan Stanley was one of biggest beneficiaries of the bailout, borrowing over $100 billion, more than any other bank.

In 2009, the year after the bailout, Griffin paid himself a $900 million salary. By 2015, he had upped his pay to $1.7 billion. A Citadel spokesman disputed these figures, which were publicly reported by the New York Times and others, but did not provide his actual compensation.

Griffin's revisionist history

In the 2017 interview, Griffin described his company's struggles in 2008 as "incredibly humiliating."

"The biggest mistake in my career was not appreciating just how fragile the U.S. banking system had become," Griffin told Institutional Investor. "I did not foresee a day where the government would have to intervene to bail out basically everybody."

But not everyone was bailed out. In 2008, 861,664 families lost their homes to foreclosure, and there were more than 3 million total foreclosure filings. Overall, there were "7.8 million foreclosures...during the 10 years between 2007 and 2016." Although there were some modest efforts to finance mortgage restructuring and other relief, the government did not swoop in to save consumers. A decade later, people are still grappling with the consequences.

Alan Kruger, the former chief economist at the Treasury Department, defended the decision not to help homeowners more at a 2016 event.

"It would have been extremely unfair, and created problems down the road, to bail out homeowners who were irresponsible and took on homes they couldn’t afford,” Kruger said.

Griffin and the 'free market'

Griffin hasn't let the government bailout get in the way of support of "limited government."

"I spend way too much of my time thinking about politics these days because government is way too involved in financial markets these days," Griffin said in a 2012 interview, "[T]he government being involved in picking winners and losers invariably leads to a loss of economic freedom and encourages corruption."

He's contributed millions to right-wing political causes, including Karl Rove's Super PAC, American Crossroads, and Mitt Romney's failed presidential campaign. He's close with the Koch brothers, Charles and David.

Griffin was asked if "the ultrawealthy have an inordinate or inappropriate amount of influence on the political process."

"I think they actually have an insufficient influence," he replied.

He also appears to be in denial that the bailout helped save his company in 2008.

We got through the financial crisis in '08 without a single dollar of taxpayer support. All we've done since '08 — since we saw the government pick winners and losers in our industry, which was really distasteful to watch play out — is that we've continued to stay true to our moral compass.

Still, he doesn't see any contradiction in calling for limited government while accepting taxpayer money. "If the state's willing to hand out gifts, there are many who feel compelled to go get them," Griffin said.

Meanwhile, Citadel is back to its old tricks. After nearly going out of business in 2008 due to excessive use of leverage, it's "back to its pre-crash ways." By 2015, according to filings with the SEC, it was leveraged seven-to-one -- nearly matching its pre-crash ratio.

The hedge fund manager’s special tax rate

Hedge fund managers benefits from a special tax rate. There is a provision of tax law that allows them to report their income as capital gains instead of income. Hedge fund managers are paid a percentage of the returns they generate for investors.

The top capital gains tax rate is 20%, compared to 37% for ordinary income. Hedge fund managers also pay a 3.8% investment tax.

Trump promised to end special treatment for hedge fund managers as president but did not follow through.

A spokesman for Citadel said that Griffin does not personally benefit from this provision because it is only available for capital gains on investments held for more than one year and “we turn over our portfolio faster than that.” Griffin’s compensation is taxed as normal income using “mark to market” accounting. This allows Griffin to offset capital gains with loses. The spokesman did not specify Griffin’s effective tax rate or if it is more or less than the 20% capital gains tax rate.

The revolving door

One of the chief architects of the bailout that saved people like Griffin but left ordinary Americans out in the cold was former Federal Reserve Chairman Ben Bernanke.

Where is Bernanke now?

He works for Griffin at Citadel.

In 2015, Bernanke joined the hedge fund as an advisor. Bernanke said he joined Citadel, rather than a bank, to "avoid the appearance of a conflict of interest."

"We are honored to welcome Dr. Bernanke to Citadel. He has extraordinary knowledge of the global economy and his insights on monetary policy and the capital markets will be extremely valuable to our team and to our investors," Griffin said in a statement.

Bernake's salary was not disclosed.

Correction: This post initially said that Citadel was paid through “a special vehicle, Maiden Lane” that was created by the government. It was not. Citadel received its payments directly from AIG. The post also originally stated that Griffin’s compensation is taxed as capital gains. It is taxed has regular income using “mark to market” accounting.

Thanks for reading!