The Billion-Dollar Easter Egg Hunt

Imagine spending $840 million dollars in one month. Believe it or not, that’s what a man called Ellis Short has just done. Today’s Daily Reckoning will explain what he’s up to — and what it means for your investment strategy.

He made his name and personal fortune in private equity group Lone Star’s Asian operations, buying up distressed real estate and loans after the Asian banking crisis.’

Financial Times

That made Ellis Short a seriously rich man. In the UK, he owns Premier League football club Sunderland and a 19th century castle that once belong to industrialist Andrew Carnegie.

While everyone else is dithering over whether Greece is in or out of the Eurozone, Ellis is doing what he so successfully did almost twenty years ago — buying up quality assets in the former economic blast zone that is Europe.

About a year ago, Short raised $2 billion dollars to establish Kildare Partners, a European real estate investment fund. He wanted to buy up distressed debt from European lenders.

$2 billion is a fair whack in anyone’s language. You need a certain amount of pull to get at that kind of figure. Short managed to do it, and do it in about five months.

Here’s why. The FT reported at the time: ‘Mr Short now believes the opportunity for distressed debt investors in Europe is greater than it was in the Asia in the late 1990s.’

Here’s how things shaped up last year…

As of now, Short’s already spent the $2 billion in equity — and bit more with some debt too. The FT reported this week that the fund signed off on its last deal, spending £70 millionto buy the remaining assests of a UK property income trust.

Also this month it paid £200 million for UK shops and industrial properties plus another £260 million for a 27-property portfolio of UK assets from a different seller.

Short is moving this aggressively because he has seen how all this plays out — more than once. He gets assets on the cheap and, in a few years or more, he’ll be cashing out for rich premiums and looking for another castle to buy.

His career goes as far back as the US savings and loans crisis of the 1980s and early 1990s. He was buying distressed bank debt portfolios back then too. Mostly forgotten now, in the aftermath of its catastrophic collapse was the biggest bank bailout of the time in the US.

It came about after banking ‘thrifts’ were set up to help Americans finance their home buying. Eventually these thrifts were systemically looted with billions and billions of insider and worthless loans. Sound familiar?

Eventually shrewd operators like Short move in after the downturn and take the assets off the stricken banks or investment trusts for cents on the dollar.

Today’s environment must look like free money sitting all over the place for him. Imagine something like an Easter egg hunt. It’s a wonder we can’t hear him giggling from here.

The end game after the savings and loans crisis was the same as it was in 2008 — the US Congress bailed out the industry at taxpayer expense. It is always the taxpayer and John Citizen that is made to eat the losses. It’s a different story for the banks. We can see it playing out right now.

The Wall Street Journal reported this week that 15% of homes in the US worth under $200,000 are still underwater. This is despite many parts of the country seeing recovering property values. That’s leaving lower income Americans mired with property they can’t sell for more than their outstanding debt. One of America’s best strengths, their labour mobility, is gone.

Not only that, with stagnant wages, they don’t spend on upkeep for their properties or leave them to decay — which depresses property prices and chokes economic activity further. No credit and no equity — that mostly equals squalor.

But here’s where it gets interesting. The Wall Street Journal reported this week: ‘Such woes are putting pressure on the Obama administration and federal agencies to do something to break the cycle. One, albeit controversial possibility: cut the mortgage balances of some underwater homeowners.’

This will never be permitted to happen on a significant scale. Nothing can bring this debt contract into question. Refinance yes — but never a write off of debts for the average citizen.

For our purposes today, it’s enough to note that the US Fed is prepared to spend $45 billion a month buying mortgaged-backed securities from the US banking system with money created out of nothing. This gets banks out of the bind they got themselves into. But the average American is left to rot in homes they can’t sell and told to live with it.

Those that understand this system get castles. Those that don’t get hovels. Make sure you know which side to be on. Get educated here.


Callum Newman+,
Editor, Markets and Money

Join Markets and Money on Google+

Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money