Billionaire’s Enormous Donation to Harvard Raises Eyebrows

HarvardYardAfter making billions betting against the subprime housing market, John Paulson is making headlines for his $400 million contribution to Harvard University—the largest in the school’s history. The donation has earned Paulson a spate of criticism, but surprisingly few commentators are focusing on how Paulson earned his fortune.

Prior to the bursting of the housing bubble, Paulson donated a total of $15 million to a nonprofit “watchdog” called the Center for Responsible Lending (CRL). While the Center for Responsible Lending claims it works to eliminate predatory lending practices, its track record reveals the group does the exact opposite.

CRL pushed for the sort of irresponsible lending that lead to the subprime mortgage bubble. The organization promoted policies that enabled unqualified borrowers to take out loans that they could not afford. They did so by advocating for looser lending restrictions from banks Fannie Mae and Freddie Mac.

CRL’s billionaire founder Herb Sandler invented a type of loan known as “Pick-a-Payment.” These loans, which were peddled by his bank Golden West Financial, allowed homeowners to make mortgage payments that were smaller than their interest charges. This meant that those who took out a mortgage could see their principal grow over time, rather than shrink. Housing lawyer William Purdy told the New York Times that Pick-a-Pay mortgages were “the most destructive financial weapon ever deployed against the American middle class.”

So not only did Paulson help fund CRL’s work to push for the ill-advised, loose lendingpolicies that largely caused the subprime mortgage crisis—but he then profited off the resulting crisis by shorting (or betting against) the housing market.

Instead of focusing on how Harvard doesn’t need an additional $400 million, reporters may want to zero in the real story behind John Paulson’s donation.

The LA Times reported John Paulson’s firm “made $15 billion in 2007 by betting that Americans would default on their home loans in droves.” Paulson’s bets against the subprime mortgage were even investigated by the Securities and Exchange Commission.

Betting that the housing market would fail, after funding a group that promoted irresponsible loans, is certainly a strange way to make a dollar. So is Harvard’s latest donation tainted? We’ll let you decide.

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