Who Benefits in Downturns

Abstract

When markets crash, the wealthy win. Billionaires buy assets at fire-sale prices while ordinary families cannot compete. Other folks' misfortune is their gain.

Imagine a large sale in which everything costs half of what it did yesterday. For most people, this sounds like a dream. But when that sale happens in the housing market, it usually means the economy is in trouble. While millions face foreclosure and families pack boxes, a select group builds fortunes in silence.

Even first-time homebuyers feel the impact. The prices drop 30-40%. But banks tighten lending and raise interest rates at the same time that bargains appear. Families with good credit and steady jobs find it hard to compete against all-cash investors who can close in days.

The question is: who benefits the most?

The honest answer is that it is not the average family. It is the wealthy, especially those with mountains of cash waiting for a crash. Many famous American billionaire families grew their wealth by buying assets when others panicked.

Consider the Mellon family. Andrew W. Mellon served as Secretary of the Treasury during the 1920s. His true talent was leveraging insider knowledge. While other wealthy families saw their fortunes battered by the Great Depression and high taxes, Mellon played a different game. He helped repeal the gift tax in 1926, then showered his family with millions in untaxed gifts before the economy collapsed. The Treasury Department issued tax rebates to the wealthy without drawing attention. Mellon himself took home $21 million, which is worth over a quarter billion today. When America’s original plutocracy crumbled, the Mellons flourished. By 1957, half of the nation’s eight wealthiest individuals owed their fortunes to Andrew Mellon. His heirs, including the famous Bunny Mellon, lived through the mid-century unscathed, while others transformed other estates into campuses.

Then there is the example many experts point to today. While not a family dynasty, Warren Buffett showed exactly how the wealthy play the game. During the 2008 financial crisis, most investors couldn’t sell fast enough, but Buffett invested $5 billion in Goldman Sachs at the peak of the panic. That single move yielded Berkshire Hathaway approximately $3 billion in profit. He followed it with $3 billion in General Electric and bought bank stocks at fire-sale prices. His famous op-ed, “Buy American." The author wrote “I Am” while smoke still smoldered from the Lehman Brothers collapse.

Why can’t regular people do this? Because billionaires keep massive cash reserves. Sometimes they hold back more than hundreds of millions of dollars, expecting downturns. While families struggle to get loans during a crash, investors pay cash. While ordinary buyers compete for a single house, firms buy thousands.

Andrew Beal showed this strategy in action. During the mid-2000s housing boom, while other banks lent without care, Beal adopted a radical approach by remaining inactive. He reduced his loan portfolio by 42% from 2004 to 2007 and stockpiled cash. When 2008 hit and banks were desperate, he bought $3.5 billion in loan portfolios for about 40 cents on the dollar. His bank’s assets reportedly doubled within months.

This pattern is consistent across generations. Richard Rainwater made billions during the Texas real estate collapse of the early 1990s, scooping up prime properties at 20 cents on the dollar. He later sold them for $6.5 billion. As one money expert put it, billionaires see market downturns as “discounts on steroids.”

History repeats itself over and over.

During the next economic crash, headlines will focus on property foreclosures and bankruptcies. But in the background, the Mellons of tomorrow will be enjoying the fire sales. Wealth doesn’t survive distressed times; it thrives. For those with cash, it multiplies.

Now, if only they could intentionally cause a crash. Hmmm .....

References:

• https://www.twn.my/title2/resurgence/2014/283-284/econ3.htm
• https://www.benzinga.com/news/large-cap/25/03/44404185/how-the-smart-money-gets-rich-when-markets-crash?tblci=GiDdVroUQ5d3Wua5FMS5QlNExn2G0T11AmVyVyNiUMMCCN1VcomMH4tqeV6bb8ATDviEo
• https://www.nasdaq.com/articles/heres-wild-thing-billionaires-do-recession-you-dont
• https://www.nasdaq.com/articles/10-years-after-lehman-brothers-what-have-we-learned-2018-09-17
• https://www.newyorkfed.org/research/staffreports/sr556
• https://www.hoover.org/research/do-large-banks-have-advantage-during-banking-crises-historical-investigation
• https://www.forbes.com/forbes/1998/1012/6208165s2.html
• https://legalclarity.org/the-revenue-acts-of-1924-and-1926-key-tax-changes/
• https://www.britannica.com/money/Andrew-Mellon
• https://www.washingtonpost.com/archive/business/2008/10/02/ge-to-raise-15-billion-3-billion-from-buffett/3a6cde9a-c553-4bec-9d0d-5662643fb0a3/
• https://en.wikipedia.org/wiki/SethKlarman
• https://en.wikipedia.org/wiki/BealBank
• https://www.cambridge.org/core/journals/journal-of-economic-history/article/bank-lending-and-deposit-crunches-during-the-great-depression/F9DA0315FD5555D25E8C774352BF0596

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