Halloween scary... Rahm's favorite hedge fund, Magnetar, is back... and back trying to loot tax money from public schools

It was only a coincidence that Bloomberg Business Week decided to update its readers on the saga of Magnetar in its Halloween (October 28 - November 3, 2013) edition, but the story should serve as a warning to every city that wants to unload its foreclosed properties at a discount to wealthy investors. And given Magnetar's sleazy history with Chicago Mayor Rahm Emanuel, the warning should echo from Ohio, where Magnetar is about to force cuts on a small school district, all the way to Chicago, where Mayor One Percent is a prime enabler of Magnetar's reincarnation.

Chicago Mayor Rahm Emanuel. Before the 2008 financial crisis, Magnetar poured money into Rahm Emanuel's favorite funds. After the crisis began and the original dust settled, the public discovered that Magnetar's bedge fund operations had helped create the crisis by creating the "instruments" -- such as collateralized debt obligations (CDOs) -- that pushed financial institutions over the cliff by defrauding investors. Since then, numerous financial institutions have paid fines (most recently, the largest in history by J.P. Morgan Chase) because of the frauds involved.

Magnetar didn't suffer from the crisis, like millions of working class and middle class people did. But it did lay low for awhile.

Now Magnetar is back, buying foreclosed properties in large numbers, then turning around and using its considerable legal power to try and reduce the property taxes on those properties. Like the CDOs that Magnetar used to make money and defraud the rest of us before 2008, this version of capitalism is completely legal. Magnetar recently purchased 1,500 homes in one Ohio town, Huber Heights, as a "rental investment." But the real reason seems to be that when Magnetar declares that it is going to rent what were once homes, it can flip its property taxes, reducing them by as much as 50 percent.

And, as usual, it's based on promises and marketing schemes that are speculative, at best. When Magnetar bought a large number of foreclosed homes in one Ohio city recently, the first move they made was to try and reduce the taxes they paid for an already troubled town. "One of its first moves as landlord was to ask for a tax break," Bloomberg report. "On April 1, VineBrook Partners , the company Magnetar hired to manage the properties, filed to have the assessed value on 1,218 of the homes cut by 49 percent, to $50 million from $98.6 million,..."

If this scheme pays off for Magnetar as lucratively as the CDO and other investments did when the hedge fun was helping crash the economy six and seven years ago, Chicago can expect to see Magnetar back in the news locally here. Whether the Tribune, or the Rahm Emanuel Sun-Times will note the hedge fund's shady history and ties to Rahm remains to be seen.


Thousands of brick houses line the streets of Huber Heights, a leafy suburb of Dayton named for Charles Huber, the builder who developed it in the 1950s. Until this year, his family was the Ohio towns biggest landlord, owning one-third of all rental housing. Now the tenants payments are being routed to a $9 billion hedge fund.

In February, Magnetar Capital, a hedge fund known for its controversial housing bets leading up to the property crash, acquired a company that owns about 1,900 rental propertiesabout 1,500 of them in Huber Heightsfrom Hubers widow, Teresa. The purchase makes Magnetar the owner of one in every 11 homes in the town. according to Karl Keith, the Montgomery County auditor.

Assessments are based on a combination of comparable sales and, for rental properties, estimates of cash flow to the owners. Keith, whose office is holding hearings on the tax appeal, says granting the request would reduce property tax collections by $1.39 million. About $800,000 of that supports Huber Heights City Schoolsequivalent to about 16 teaching positions. Reassessments also could influence surrounding property values. Other property owners might look at those and see those as evidence their properties are worth less, Keith says. If Magnetar is turned down, it can appeal all the way to Ohios Supreme Court.

VIDEO: Rental Homes in Ohio Suburb Sold to Hedge Fund

Last year U.S. home prices dropped to a low of 35 percent below their 2006 peak, triggering a shopping spree by large money managers. Blackstone Group (BX) has led the stampede, spending more than $7.5 billion on almost 40,000 properties, followed by American Homes 4 Rent (AMH), which has bought more than 20,000. Investors have largely targeted Phoenix, Atlanta, Dallas, Tampa, and Charlotte, where growth in jobs and population is expected to drive up rents and home values.

Magnetar picked Huber Heights because it found an existing rental company that could deliver the kind of steady returns its investors expect, says Tony Fratto, a Magnetar spokesman who works for communications firm Hamilton Place Strategies. In buying the company, they werent altering the housing mix in a community, he says. They werent disruptive. This was a business that was already profitable, and theyre making it more profitable with good management and good technology and investments in the properties. Fratto and Teresa Huber declined to comment on the purchase price.

City Council member Mark Campbell says residents are wary. Everyone is very concerned about being a thumbtack on a map somewhere in a big high-rise office building, he says. Were not bothered by out-of-town neighbors coming in and investing in our community, but were not going to be naive.

STORY: Hedge Fund Chart Guru Tom DeMark Sees Dark Days Ahead

Started in 2005 by Alec Litowitz and Ross Laser, Magnetar, based in Evanston, Ill., is best known for betting against the housing market, not on it. In 2006 and 2007, Magnetar helped create more than 20 collateralized-debt obligations that pooled at least $32 billion of mortgage bonds and sliced them into securities of varying risk. Magnetars strategy involved buying the riskiest pieces of the CDOs and simultaneously making larger bets that less risky ones would fail. The hedge fund wagered correctly that if subprime borrowers defaulted and housing declined, then the value of even the safest CDO pieces would suffer.

JPMorgan Chase (JPM), which marketed some of the securities allegedly without disclosing Magnetars role in structuring them, agreed to pay $153.6 million in June 2011 to settle a Securities and Exchange Commission investigation without admitting wrongdoing. The SEC hasnt filed a complaint against Magnetar. On Oct. 18 the agency accused Wing Chau, president of Harding Advisory, the manager of another CDO deal, of misleading investors about Magnetars participation. Steven Molo, a lawyer for Chau, didnt return phone calls seeking comment. Magnetar told its investors in 2010 that it offered limited input on the creation of CDOs and made bets as part of a market-neutral portfolio designed to profit no matter what happened in the housing market.

Knowing that a property tax cut would affect Huber Heights, VineBrook co-founder Daniel Bathon says he spoke in advance with the mayor, vice mayor, and the school board. We said, Look, we know this will be a hit. We want you to be able to plan for it, but if we do this, it will help add to the investment we can make in the properties to improve them,? he says. That, Bathon adds, would lead to higher values in the long run. And of course thats great for the town and the schools and for us as well, he says.


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