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Apr 36 min read
Is Government Corruption Today's Sub-Prime Mortgage Mess?
- Jim Denholm
- 34 minutes ago
- 8 min read
Government corruption is nothing new.
But there is now enough real evidence that it is likely much bigger than anyone thought was possible.
First, some disclosures:
This report (and future reports on corruption) is not meant to be political. My apologies if and when it does.
When I discuss corruption, I don't view it as a republican versus democrat issue. Both sides are involved. I strongly recommend you try to stay objective, and prioritize facts over emotions.
Any political comments are mine alone. Please don't blame other team members if I say something blunt, direct or rude about a politician or policy you may hold dear. There is an excellent chance it will happen, regardless of which side you're on.
Discussions on curruption are meant to be informative. Just because something is uncomfortable doesn't mean we shouldn't discuss it.
It is my strong view that what happens over the coming months can greatly affect your financial future. Our goal is to discuss concerns and opportunities that exposure of corruption could raise.
The financial aspect of curruption is my focus. There are election accusations flying around and have been for years. Those are mostly isolated to the political realm, and I don't see value in spending time on that aspect of the curruption. Election-related crimes could affect global currencies, but the flow of trillions of dollars around the US and global economies has a huge impact on many areas of the markets and economy. So the financial fraud has by far the larger and more direct economic impact, thus more important to markets and your portfolio.
I recognize that there is a chance corruption is not as widespread as it appears. I hope that is the case.
But to ignore the potential for it to be very large is foolish in my opinion.
It is better to have prepared for scenarios which we don't need than to be surprised by something simply because we didn't want to put in the effort to understand it.
Corruption exposure could easily be the elephant in the room in 2026 and 2027.
The best comparison I can think of is that corruption is beginning to feel like the sub-prime mortgage mess in 2007 or early 2008.
Let's start with a brief overview of sub-prime mortgages and why we are making the comparison right now.
A Brief History of Sub-Prime Mortgages
Leading up to the 2008 financial crisis, there started to be rumblings about excesses in the US housing market.
Most people place the blame for the crisis on banks.
This is true to some degree, but they did not create the problem. The government did.
Banking regulators started loosening lending standards in the late 1990's, as a push from politicians in Washington, DC hoping to increase votes by offering easy loans. That same time, the Glass-Steagall Act was repealed, removing a key separation between securities firms and traditional banks.
This allowed banks to go down two paths simultaneously:
Reduced lending standards allowed banks to offer mortgages to people who had never been able to qualify before. Not only were banks allowed, they were incentivized by the government to do so by guaranteeing certain loans via Freddie Mac and Fannie Mae, two government mortgage programs.
Elimination of the Glass-Steagall Act allowed banks to offload those risky mortgages from their books by securitizing these mortgages into products they could sell as "investments" to schmucks who didn't know any better.
Like most things the government does, they want it to appear compassionate.
But also like most government things, they completely screwed it up.
Their mortgage guarantees spurred massive lending to unqualified buyers. Lending volumes exploded higher.
The unqualified buyers overextended themselves by purchasing more than they could afford.
Banks knew the risks.
That's why they offloaded most of it.
But then defaults started to happen, and the house of cards came tumbling down.
What's the Comparison to Today?
People having access to loans is not a bad thing by itself.
But access to capital that causes damages in society on a major scale is bad.
When we first started to hear about problems in the mortgage market, it came first as anecdotes.
A memorable example for me was hearing stories from the housing markets most impacted by subprime mortgages.
One stands out.
An "adult dancer" in Vegas owned 10 rental homes.
No income verification, no documents to sign, and only a very small down payment was required for each house.
At first, the thought was, "Surely this is an isolated event, this seems crazy."
But then we started to get more information from other areas of the country.
The same thing was happening in California, not just Las Vegas.
Then, turns out, it was happening in Miami also.
And New York.
Then it was clear that it was a widespread problem.
By the time everything settled, it brought down large investment firms, caused a 55% decline in stocks over the next two years, and has effects lingering to this day.
Fast forward to 2026, and we're hearing the anecdotal evidence of corruption right now.
Minnesota has had problems with daycare centers.
Los Angeles was rumored to have problems with hospice care facilities.
But just like how the subprime mess unfolded, we are now moving from anecdotes to actual facts.
It seems to play out like this....
ANECDOTAL EVIDENCE --> ACTUAL EVIDENCE --> DISBELIEF --> PANIC --> OPPORTUNITY
We're entering the actual evidence phase.
What Evidence is There Now?
The anecdotal evidence about corruption has been around a long time. I remember hearing of $100 hammers in the 1980's.
But how widespread it may or may not be is still somewhat uncertain at this point, depending on how much you've been paying attention.
But now we are finding out that these anecdotes are in fact TRUE.
Rumors of theft in Minnesota and Los Angeles are no longer rumors.
There have been people charged and arrested.
A few weeks ago, five individuals in Los Angeles were charged with stealing over $270 million. You probably didn't hear about it, did you?
Here's the report:
In this one announcement, the following happened in California:
Actions by the Centers for Medicare and Medicaid Services (CMS) to suspend 1,079 providers and revoke billing privileges for 1,403 providers.
48 Civil Monetary Payment settlements amounting to over $73 million, over 1,400 provider exclusions, and 25 actions by the U.S. Department of Health and Human Services, Office of Inspector General (HHS-OIG) under the Civil Monetary Penalties Law seeking more than $10 billion in payments to the Medicare Trust Fund from payments that CMS caught and suspended before the funds were paid to the fraudulent providers.
Civil charges against 13 defendants for $14.8 million in health care fraud schemes, as well as civil settlements with 31 defendants totaling $23 million.
928 administrative cases by the Drug Enforcement Administration (DEA) seeking the revocation of authority to handle and/or prescribe controlled substances since October 1, 2025.
This is just one announcement.
In one district.
In one state.
Just because you don't know about it doesn't mean it isn't happening.
And just because it's not on Fox News or CNN doesn't mean that it's not real.
These anecdotes are turning into facts.
Just like the subprime crisis.
At first glance, our natural human response is to give the benefit of the doubt. Surely it was a one-off event.
Surely banks wouldn't let someone with limited resources get access to millions of dollars of capital to use it on questionable things, right?
We trust these politicians and banks. They can't have ulterior motives, right?
They can't be that greedy, right?
Turns out, that Vegas stripper with all the rental homes was not an isolated incident. It was EVERYWHERE.
And that everywhere brought down the global economy.
What about corruption?
Is Minnesota the only state where billions of dollars were fraudulently stolen from taxpayers by abusing societal generosity?
Is Los Angeles county the only county in the nation with hospice fraud?
Is it really accidental and just inefficiency?
Or is it organized crime?
One thing is for sure...there's never just one cockroach.
What does this have to do with investing?
It may be risky bringing this subject up.
Politics are very personal after all.
But so is money.
As fiduciaries, I firmly believe we have a responsibility to both watch for risks and opportunities, and to take steps to protect your portfolio when evidence exists that we should do so.
A part of that responsibility is sharing what we find, even if it is uncomfortable.
It is uncertain exactly what will play out and over what timeframe.
But we are watching things closely, and expect corruption to start dominating topics of conversation and start affecting financial markets, likely in the currency markets first.
Market Risks from Exposure of Corruption
We are viewing risks from corruption in a spectrum.
Both in the scale of the corruption and in the speed in which we find out about it.
Generally speaking, the higher the amount of corruption that is exposed, the higher the near-term volatility, but also the higher long-term growth by removing massive costs from the US economy.
These costs come in the form of taxes that are higher than necessary due to theft,
Status Quo | Corruption on the Fringes | Major Corruption Exposure | |
Characteristics | Minor corruption, no structural changes | Some arrests, some efficiency improvements | Chaos: arrests, street violence, shock |
Equity Market Impact | Late cycle environment could see equity markets flat to lower over the next decade | Some budgetary improvements in govt, minor effects on certain industries (healthcare for example) | True market uncertainty. Likely would cause a major selloff as exposure and arrests happen, followed by an excellent investing environment for years |
Bond Market Impact | Rising rates should continue, hurting bonds near term but setting up for a higher interest rate environment | Minor immediate impact, but should result in more stable bond market going forward | True market uncertainty. Rates would likely fall as investors seek safety first as disclosure happens. |
Commodity Impact | Financial System upgrades and robotics push from AI should help support commodities | Bullish impact initially, with a lower growth in precious metals after the initial spike. | Very bullish. The financial system upgrades would happen quickly, supporting precious metals and crypto-currencies. |
Policy Impact | Minor | Some tax reduction possible | Major changes in government, including and up to elimination of the IRS and the Federal Reserve |
One big effect of corruption is an upgrade to the financial system.
We will send a report on this in the coming weeks.
These upgrades should benefit precious metals and certain crypto-currencies. If corruption is widespread and it is being stopped, then look for these upgrades to happen quickly following the passage of the Clarity Act.
We will go into more detail on this topics in the near future.
Portfolio Positioning
Over the past few months, you've likely seen your portfolio stagnate some.
Don't be overly concerned.
We have been repositioning portfolios that has resulted in decreased equity exposure, in favor of increased cash and commodity exposure.
The commodity exposure is primarily in the form of gold, silver and copper. Along with the companies who mine these metals.
June was a difficult month, primarily due to the strength in the US Dollar, causing commodities to fall. We fully expect that to be temporary, but if it continues towards the elections, or if we get renewed bullish signals for equities in our system, we will reduce cash and commodities in favor of stocks as appropriate.
That said, the pullback in gold and silver appear to be complete or nearly so. They fell slightly further than expected, but have given us another opportunity to add exposure before possible corruption disclosure.
In my view, risks from corruption exposure are highest between now and the mid-term elections in November.
Bottom Line
Be prepared for anything.
Maybe nothing happens.
If that is the case, then great, we don't have to worry about it.
But if government theft is a large and widespread as I fear it actually is, then buckle up. It's going to be a bumpy ride with a tremendous amount of uncertainty.
The best advice for when things get chaotic is to remain calm and level-headed.
Big declines and emotional reactions are the biggest risk to your financial plan.
We are trying to help you prepare for both.
Invest wisely!