Saudi Inc: The US’s Controversial Ally Is Buying Up America

Capital from the Saudi Kingdom is making big moves in U.S. tech, infrastructure, and NYC real estate. What they own might surprise you.

Rico Cleffi Nov 11, 2018

Developers are getting ready to break ground on a massive retail/entertainment complex that could be one of the most significant transformations of Times Square since Mayor Rudolph Giuliani’s Disneyfication crusade purged the porn shops and theaters.

TSX Broadway, touted by its backers as “the most compelling consumer destination on earth,” promises a “state-of-the-art, experiential, global branding platform” with a hotel and a “smart” retail environment that will track visitors’ consumer data. The builders plan to elevate the landmarked Palace Theater 30 feet in the air and promise an 18,000-square-foot LED screen, potentially the largest in Times Square, on the mall’s exterior, presumably for beaming selfies and advertisements. The project has tech and real-estate reporters salivating.

Little scrutiny, though, has been paid to one of the project’s main financial backers, Fortress Investment Group, a shadow bank owned by a Japanese investment bank largely reliant on Saudi Arabian money.

After journalist Jamal Khashoggi was apparently killed and dismembered at the Saudi consulate in Istanbul, President Trump mused to reporters about the importance of the kingdom’s “$450 billion” investment in the United States. Trump wasn’t just placing an exaggerated price tag on a murdered journalist. He was also offering a rare bit of honesty: Billions of dollars in Saudi capital are tied up in the U.S. economy.

The Japan-based SoftBank, which owns both Sprint and Yahoo! Japan, has used its $93-billion Vision Fund to acquire majority stakes in Uber (and many of its global competitors), as well as WeWork and companies like Mapbox (which makes the navigation platform for Lyft). The Vision Fund, called “the largest private pool of money ever raised” by the Financial Times, is also a major investor in Slack, DoorDash, the Virgin Galactic private space operation, and GM’s self-driving car unit, Cruise.

Last year, Andrew Ross Sorkin of the New York Times wrote that the “Vision Fund could reasonably be described as a front for Saudi Arabia and perhaps other countries in the Middle East.” (The United Arab Emirates, a close ally of the Saudi crown, is also an investor.)

While the Vision Fund isn’t SoftBank’s only cash pool, it represents a major chunk of investment power for a company with total revenues in the $80 billion range. Other Vision Fund investors include Apple, which famously kicked in $1 billion, Foxconn and Qualcomm. But Saudi Crown Prince Mohammed bin Salman — the country’s de facto ruler, architect of its famine-inducing war in Yemen and the man widely suspected of having ordered Khashoggi’s assassination — recently bragged to Bloomberg, “We are the creators of SoftBank Vision Fund… without the PIF [the kingdom’s Public Investment Fund], there will be no SoftBank Vision Fund.”

SoftBank CEO Masayoshi Son visited Trump Tower in December 2016, where he told the President-elect he would commit $50 billion to the U.S. economy. Son, who later reportedly helped broker a $4.1 billion subsidy for Foxconn to build a factory in the key swing state of Wisconsin, told reporters at the time: “This is great. The U.S. will become great again.” Trump declared the Japanese CEO “one of the great men of industry.”

SoftBank also happens to be the largest venture-capital investor in New York City real estate. Using data from research site Pitchbook, the Real Deal recently put the figure at $4.5 billion in direct investments.

‘You can hardly buy a cup of coffee without lining the pockets of one of these firms.’

Late last year, SoftBank bought Fortress Investment Group with the explicit intent of using the private-equity firm to complement the Vision Fund.

Fortress management has been known to refer to themselves affectionately as “garbage collectors,” owing to their strategy of gobbling up “distressed” assets. This practice garnered the firm negative press coverage after its mass foreclosures on New Orleans homeowners following Hurricane Katrina. Fortress’s holdings have been wide and varied: hundreds of regional newspapers across the country (through its Gatehouse Media subsidiary); until recently, thousands of senior-living facilities; billions of dollars in student loan debt; and, at one point, a portion of the debt accrued by Michael Jackson’s Neverland Ranch. Its portfolio also includes one of the country’s largest mortgage lenders, New Residential Investment. It holds the debt for the scandal-sunk biotech company Theranos, and it owns multiple freight lines, a fleet of airplanes, an oil-refining terminal and the United State’s only private light-rail system, in Florida — a recent source of scandal for outgoing Florida governor, Rick Scott, who killed a federally-funded rail project only to invest in Fortress’s.

Fortress’s post-financial crash investment strategy was best described in a 2011 profile in Institutional Investor:

The unhappy crosscurrents that are igniting protests against capitalism and causing political dysfunction in Washington are creating the best investment opportunities that [Fortress co-chair Peter] Briger and the credit team at Fortress have ever seen. The credit crisis in Europe, populist uprisings in the Middle East and the debt downgrade of the U.S. are among the economic and geopolitical factors that have set the stage for a global fire sale. Debt-laden nations like Greece and Portugal have to sell assets to raise capital. Banks and other lenders have begun the process of getting illiquid assets off their balance sheets to meet heightened capital requirements. Among the few providers of financing in the risky sectors of a capital-constrained world, Briger and his team stand to make billions of dollars for themselves and for their investors.

Fortress’s top leadership became billionaires, despite the company’s poor performance, including a disastrous run as the first publicly traded private-equity firm, during which its stock fell to $1 per share.

How did firms like Fortress and Softbank become ascendant in New York and the world at large? Financial journalist Rana Foroohar, author of Makers and Takers: How Wall Street Destroyed Main Street, describes a process of “financialization,” where “financial markets have become the tail that wags the dog.”

“What I mean by that is the traditional role of financial markets in our economy is to be a kind of facilitator or a helpmeet to real businesses,” she told The Indypendent, “to allocate capital to help owners of capital make investments into the economy. We now have a system that has changed radically in the last four or five decades. If you look at the capital flows coming out of the largest financial institutions, only about 15% of them actually go onto Main Street. The rest of it exists in a kind of a closed loop of buying and selling existing assets, stocks, bonds, mortgages, etc.”

“You can hardly buy a cup of coffee without lining the pockets of one of these firms,” says Eileen Applebaum, an economist and co-director of the Center for Economic and Policy Research, who co-authored a comprehensive treatise on financialization, Private Equity at Work: When Wall Street Manages Main Street. “When these firms first emerged, we called them leveraged-buyout [companies], barbarians at the gate.” Now, she explains, they “spruced up their image, they call themselves private-equity firms as opposed to leveraged-buyout companies, although their main activity is still buying up Main Street companies using tons of debt, and [those same companies’] equity.”

For the most part, these equity firms generally don’t produce anything.

“In a particular industry, they might be a very big player,” says Applebaum, “but as a part of the economy, they’re not that big. It’s easy to exaggerate them. In the greater scheme of things, in a country with an economy as large as ours, they are not that large.” Yet alternative lenders like Fortress have parlayed their financial capital into political capital. “The 1 percent is populated by hedge-fund and private-equity fund owners. They have a lot of money, they’re using it for lobbying in their own interests. They are a big force in politics.”

Fortress and companies of their ilk, such as the Blackstone Group, have gained increasing clout in the New York region by their willingness to fund development projects deemed too risky by bigger banks.

“The financialization of New York City rental housing really took hold in the mid-2000s real-estate boom, though we could arguably say this process began much earlier, when real-estate investment trusts became more popular after the early 1990s recession,” Desiree Fields, a lecturer at the University of Sheffield in England who specializes in the relationship between finance and real estate in New York, told The Indy via email. “In the mid-2000s, investors were pursuing all kinds of opportunities in real estate, and as the boom got closer to the bust, they got into riskier strategies. Asset-management firms like Blackstone and Fortress play a crucial role in directing surplus capital.”

Fields notes that these firms profited from “a broader context where it is acceptable to treat housing in financial terms, where these financial logics come to outweigh social ones, and a decade of record-low interest rates and stock-market volatility [that] pushed investors to seek out profit in property and via riskier strategies.”

In this context of risk and volatility, Fortress gave Kushner Partners, the real-estate company owned by the president’s son-in-law, a $57 million loan when Jersey City balked on giving tens of millions in tax abatements and financing bonds to its faltering One Journal Square project. Fortress’s CWCapital subsidiary also sold off Manhattan’s Stuyvesant Town/Peter Cooper Village complex in 2015. Fortress was also an early lender behind both of the proposed series of towers adjacent to the Brooklyn Botanic Garden that critics fear could block the garden’s sunlight.

Fortress’s parent, SoftBank, isn’t the only financial services firm dealing with the Saudis. Blackstone, one of the world’s largest investors in real estate and the biggest private landlord in the United States, received a $20 billion commitment from the $2 trillion Saudi Public Investment Fund for its infrastructure investments.

Reuters reports Blackstone Chief Operating Officer John Gray sloughed off concerns over its involvement with Saudi capital on a recent earnings call, telling investors the company has “a long-term approach, both to our relationships and to building businesses.”

The Saudis also have close ties to other major U.S. investment houses, including BlackRock, Morgan Stanley, Bank of America and J.P. Morgan.

“A lot of Western investors got very excited about this [the Saudi investments] for two reasons,” says Foroohar. “One, they bought the story that the Saudis were serious about economic and political reform. But they also said, ‘Hey, here are large pools of money.’ If you’re J.P. Morgan or if you’re [Blackstone CEO] Steve Schwarzman, it’s a great deal.”

Medea Benjamin of the anti-war organization Code Pink has been an outspoken critic of the U.S.-backed Saudi bombing campaign in Yemen since it began in 2015. According to the United Nations, the war has put 14 million people at risk of starvation and is currently the world’s worst humanitarian crisis. When asked if the Khashoggi killing could shift public perception on the Saudi regime, Benjamin said it depends.

“The Trump administration is anxious to push all of this under the carpet and go on with business as usual and we also know that companies are anxious to see this all blow over,” replied Benjamin. “But now there’s been a sea change in the attitude of the American people towards Saudi Arabia. Those of us who’ve been yelling and screaming in the wilderness for years have suddenly found receptive ears among Americans who never paid attention to this.”

Benjamin isn’t sanguine about attempts by companies like SoftBank or subsidiaries like Fortress to distance themselves from the Saudis.

“They are absolutely responsible,” she says. “SoftBank has taken many billions in Saudi money and they were all too happy to do that before Khashoggi’s murder. So I think it’s great to peel away the layers [with subsidiaries like Fortress] and not let them get away with trying to separate themselves by these false distinctions that they put in the way. Saudi money is dirty money and they need to be exposed.”

The situation might be different if the United States had an economy where less power was in the hands of private-equity companies that are always on the lookout for fast cash and cheap debt, and are willing to overlook ethical concerns a repressive regime raises when it kills journalists and wages a protracted war against civilians in Yemen. By the time the Saudi kingdom finally takes its state oil company, Aramco, public in 2021, Western investors will be even more likely to overlook its flagrant human-rights abuses.

“One thing that I think is important to recognize is that the source of a large chunk of the capital being managed by these firms comes from our own pension funds — especially those of public-sector employees like teachers, firefighters, etc., and university endowments,” Fields says. “It is entirely possible that a schoolteacher could be renting in a Blackstone-controlled property that her retirement savings have been funneled into. Building more public understanding of these connections, and recognition that community politics and labor politics are one and the same is a good place to start.

“It is also crucial to support and pursue alternative models of land and housing ownership that explicitly privilege social over financial values,” she adds. “Community land trusts, mutual housing associations and limited-equity cooperatives are all strategies that work against speculation. Pursuing these alternatives curbs the influence of players like Blackstone to the extent that they pull land and housing out of the market.”

When construction on TSX Broadway starts this winter, the name of Jamal Khashoggi might just be a distant murmur in the news cycle, an unfortunate occurrence from months earlier. Now might be as good a time as any to take a sober look at our economy and ask some tough questions.

“At a deeper level and on more of a kind of existential level, I think we need to ask, ‘What is our financial system for?’” Foroohar says. “Because right now, it’s about facilitating the issuance of debt so that companies can buy back shares and give dividends to the world’s wealthiest people. This does nothing to support Main Street growth. It does not contribute to any kind of increase in productivity, in wages. We have a financial system that is supporting completely the wrong kinds of things. Let’s ask the question, ‘What do we want the financial system to do for our society?’”

Representatives from Fortress Investment Group, SoftBank and Blackstone did not respond to requests to comment for this story.

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An earlier version of this story erroneously identified Larry Fink as the president of Blackstone. While Fink is a former-Blackstone executive, he is a co-founder, Chairman and CEO of BlackRock, the world’s largest asset manager.

Illustration by Esteban Guerra.

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