The House Committee on Oversight and Government Reform is investigating Paulson & Co.’s relationship with the Center for Responsible Lending, to which the firm donated $15 million in 2007 to help homeowners fight off foreclosure, but which may have helped the organization expand activities that could have enhanced the profits of Paulson's subprime bets.
The committee is investigating Paulson’s ties to the CRL, as it believes that the organization helped escalate the subprime mortgage debacle. In a May 26 letter to John Paulson (PDF of letter here), Darrell Issa (R –CA), the Congressional committee’s ranking member, requested that the firm deliver various documents relating to CRL by June 9.
“While Paulson & Co. has not been named in the SEC’s suit [against Goldman Sachs & Co.], it donated $15 million to the Center for Responsible Lending, an organization that was pushing for risky ‘affordable’ mortgage lending while Paulson & Co. was simultaneously betting on a collapse in the housing market,” said Issa in the letter. Issa said Paulson’s ties to the CRL “raises questions about the connections between organizations advocating for policies that caused the housing bubble and companies that were positioned to benefit from the bubble’s collapse.”
The firm has denounced Issa’s letter and its allegations. “Paulson & Co’s’ donation was used exclusively to provide legal assistance to people facing foreclosure to help them stay in their homes,” said a spokesman for the firm. Additionally, he said the program has provided legal aid to thousands of people facing foreclosure; that it has distributed $10 million to 34 legal services organizations in 30 states through multi-year grants; and that the CRL estimates more than 1,300 homes have been saved by its program.
“I don’t think the backlash will be significant, and I believe they’re perfectly innocent, but that means nothing in this day and age,” said one institutional investor in Paulson. “They will be vilified—simply because they were winners.”
The donation made Paulson the CRL’s largest single donor. At that time, Michael Waldorf, a senior vice president at Paulson & Co, said that the donation to CRL’s legal aid fund was intended to help homeowners who were being forced of out their homes and couldn’t afford lawyers. John Paulson addressed the donation in a late-2007 letter to investors, noting that he believed it was “important to help those who have suffered the most as a result of predatory subprime lending practices.”
Issa believes the donations were not so straightforward. He specifically takes issue with the fact that Paulson’s donation helped bolster the CRL’s revenues by nearly 250% in 2007. “According to reports, CRL was involved in a strategy to ‘shake down and harass banks into making bad loans to unqualified buyers,’” Issa said in the letter, noting that many of the loans made by CRL affiliate Self Help Credit Union wound up on the books of Fannie Mae and Freddie Mac, which cost taxpayers billions of dollars when those organizations ultimately collapsed.
According to Issa, Paulson’s donation also enabled CRL to step up its lobbying for Congress to approve legislation that would have enabled bankruptcy judges to write down the principal of mortgages facing foreclosure, thereby feeding the payout on Paulson’s short position on the housing market. “The American people have the right to know the true impact of Paulson & Co.’s donation to CRL on CRL’s ability to push for the kind of mortgages that precipitated the financial crisis,” said Issa.