The Fortress Investment Group is one of the world’s largest alternative asset management firms. Founded in 1998, Fortress quickly grew to manage over $40 billion in assets by 2007. However, the company soon became embroiled in controversy regarding their business practices and investments.
Subprime mortgage crisis
One of the main sources of controversy for Fortress was its involvement in the subprime mortgage crisis that began in 2007. Fortress had purchased a subsidiary of American Home Mortgage called AHM Asset Management in 2006. This company specialized in subprime home loans to borrowers with poor credit histories. When the housing bubble burst and subprime mortgages began defaulting en masse, Fortress was left holding billions in soon-to-be-worthless subprime mortgage securities.
Many critics accused Fortress and other large investment companies of irresponsible practices that contributed to the crisis. By pushing lenders to offer more subprime mortgages, critics argue these investments inflated the housing bubble. Fortress ultimately had to sell AHM Asset Management at a significant loss once the crisis hit.
Investment losses
The subprime mortgage crisis also led to major losses in other Fortress investments. For example, Fortress had invested heavily in Florida real estate. As the housing bubble collapsed, Fortress lost billions on Florida condos and development projects.
Fortress also had major investments in casinos and senior living facilities that declined during the Great Recession of 2008-2009. While all investment firms suffered losses during the recession, Fortress’s exposure to particularly high-risk sectors led to above average losses for the company.
Management fees
Another source of controversy was Fortress’s management fees it charged to investors. Typically, alternative asset management firms charge 1-2% of assets under management and also take a share of investment profits. However, Fortress was charging management fees as high as 4.5% on some funds.
As investment returns declined, many investors balked at paying such high fees. Lawsuits were filed alleging Fortress was overcharging clients by taking unnecessary management fees from struggling funds.
Executive compensation
Year | CEO | Compensation |
---|---|---|
2007 | Wesley Edens | $200 million |
2008 | Wesley Edens | $55 million |
2009 | Daniel Mudd | $46 million |
Fortress executives also faced outrage over their lavish compensation packages. From 2005 to 2009, Fortress founders Wesley Edens and Peter Briger each made over $200 million. Meanwhile, CEO Daniel Mudd earned $46 million in 2009 – his first full year with the company. These enormous executive compensations were seen as excessive given Fortress’s lackluster returns for investors following the financial crisis.
Public investment
Fortress raised further controversy when it became the first large private equity firm to go public in 2007. It used an “alternative investment” structure to become publicly traded as the first U.S. private equity firm on the NYSE.
Some argued this public listing was inappropriate given private equity’s typically low transparency and lack of regulatory oversight compared to public companies. Critics charged that public investors were buying into a firm with limited disclosure and high risks.
Political connections
Lastly, Fortress’s political connections have stirred controversy as well. Fortress hired former Bush administration Treasury Secretary John Snow as Chairman in 2007. This raised conflict of interest concerns, as Snow could potentially use his Treasury connections to benefit Fortress investments.
Other senior Fortress executives also had close ties to Washington D.C. Wesley Edens helped raise major donations for both Democrat and Republican politicians. Founder Robert Kauffman was a major Republican donor. These political links raised questions about potential cronyism and influence between Fortress and policymakers.
Conclusion
In sum, Fortress Investment Group attracted controversy on multiple fronts during the 2000s. Its involvement in the subprime crisis, lavish executive pay, high management fees, and political connections all drew criticism. While Fortress escaped the level of outrage directed at other investment firms like Lehman Brothers, its practices nevertheless became emblematic of some of the investment world’s perceived excesses in the lead up to the financial crisis.
Fortress aimed to position itself as a leading alternative asset manager. However, its push into risky and exotic investments left it exposed when markets declined. Combined with a public listing and close government ties, Fortress became a focal point for broader concerns about transparency, compensation, and ethics in private equity following the 2008 financial crisis.