Archive for December, 2017

  • Tax Reform: A Real Cohn Job

    December 13th, 2017 by ewalsh

    Chief Economic Advisor to the President Gary Cohn (pictured left) alongside fellow Goldman alumn Steve Mnuchin, U.S. Secretary of the Treasury. Photo courtesy The Washington Times.

    It seems that Gary Cohn, a trader and former heir apparent at Goldman Sachs—a life-long Democrat, let’s recall—and Trump’s current chief economic advisor, is heading for an early exit. 

    After whiffing on his near-decision to resign on principle when Trump equated the neo-Nazis in Charlottesville with the demonstrators resisting the torch march, he naturally fell out of favor with Trump when he later aired his opinion on Charlottesville with The Financial Times.  Bye-bye, Fed Chairmanship.  He reportedly decided to stay on the job out of “duty to country,” which he is manifesting by pushing the charade called “tax reform” — a brazen power grab by the powerful, and a direct assault on his middle-class childhood friends from Ohio where he grew up.

    I have never met Cohn.  I’ve heard he’s a decent man, tough, and a shrewd trader with a quick mind and a short attention span.  But I do know the trader culture that can subsume “decent men” on Wall Street, where everything—a deal, a job, a house, even a marriage in some cases—gets reduced to and commodified as a “trade”.  Values and sentiments like home rather than house, purpose rather than job, meaning rather than winning, and integrity rather than success are sneered at as “weak”.  Money is the measure.  Exceptions exist, of course, but this trader culture is pervasive on Wall Street. 

    Let’s imagine Cohn reflects such a trader culture (safe bet) and analyze his decision to trade Goldman Sachs for gold man Trump.  A decade ago next year, trader Cohn was trembling in his boots, worried that his entire Goldman Sachs equity, undoubtedly the vast majority of his net worth (recall money is the measure), was at risk of going down the same rat hole that Lehman collapsed into. Tough guy Cohn played a central role in architecting the “big short,” a hedge for Goldman’s mortgage morass that many, including the SEC, would call brazen fraud.  It mirrored the infamous Abacus trade, the architecture of which I called financial evil.  With help from the Fed, the “hedge” saved Goldman at the expense of their reputation and clients.  Whatever it takes.

    Fast forward to Donald Trump’s election.  Our man Cohn senses an opportunity for a trade.  His net worth had recovered along with Goldman Sachs’ stock price (Thank you, Mr. Obama) to “between $250 and $600 million” according to his financial disclosure form.  There he was, worth let’s call it half a billion; the number two at Goldman; and locked in the shadow of his mentor CEO Lloyd Blankfein with no indication from the board he would succeed to the throne.

    If he retired, he would walk away from his unvested stock grants, likely tens of millions (handcuffs are indeed golden at Goldman).  If he then sells his Goldman stock (reported to be $285 million when he left Goldman) to prudently diversify his assets, he pays a large capital gains tax on cheap stock he and other partners helped themselves to around the time of the financial crisis in lieu of cash bonuses, likely additional tens of millions.  Feels like a loser.  So he hatches a trade. 

    He offers his services (and reputation) to the new rogue president hungry for credibility in his cabinet.  In Trump’s eyes, Cohn is a “winner” (he’s rich), and his Goldman bona fides buttress his B team administration.  Never mind that he is an active Democrat, and represents the Wall Street interests Trump ran against. 

    But here’s the key.  If Cohn leaves the private sector to take a cabinet-level job in the Administration, he is required to sell all his Goldman stock (conveniently at the high – good trade) to avoid the appearance of conflicts of interest.  In exchange for his “public service,” the IRS allows him a one-time free pass (deferral) on the liquidation of all that stock and other investments, including his private partnership investments with unrealized capital gains.  To Cohn, he’s been “paid” unknowable tens of millions (in taxes foregone) for a year of going to meetings and standing next to Trump (literally and metaphorically) when he spews narcissism, lies, mouths off his racist and bigoted rants, and disgraces our nation in the eyes of the world.  And the cherry on top: Goldman vests Cohn’s unvested prior stock bonuses as a parting bro hug, likely worth tens of millions more.  No one needs to tell Goldman the importance of having friends in high places.

    But there’s more.  Cohn doesn’t seem to do anything commensurate with his duties as chief economic advisor (he’s a trader, not an economist—big difference) during his year in Washington from what we have seen beyond defending the negligent, grotesquely irresponsible, and blue state-targeted, dynastic wealth-enhancing tax deal, a deal that flies in the face of Cohn’s prior Democratic sensibilities.  He embarrasses himself by suggesting corporate tax cuts will unleash laughable growth rates, and a round of hiring and pay raises by corporate America, an idea that the CEOs in the audience deny (and that makes no economic sense).  And what really matters to dynastic wealth (forget the 1 percent, we are talking about extreme fortunes of hundreds of millions like Cohn’s and billions like others in the administration), is the elimination of the Estate Tax, which could easily be worth another $100 million to Cohn’s family by the time he passes to that great trading desk in the sky. 

    So let’s see how our man Cohn is doing now.  As a thought experiment, let’s assume for this simple analysis that he diversified his $500mm investment portfolio (tax free) into a broadly diversified stock index fund.  The market is up 18% this year, significantly on the promise of lower corporate tax rates (ask our Treasury Secretary who said as much).  Let’s assume 10% of the rise is attributable to the corporate tax cut, and another 10% increase will accrue as the tax cut becomes more certain.  On his $500 million portfolio, that’s another $100 million in Cohn’s pocket, never to be taxed if he passes the stash on to his family without an estate tax since he can now indefinitely defer those capital gains as a gift for his “public service.”

    Several of my neighbors’ kids (and thousands of others’) risked their lives by joining the Marines following 9-11 and did several tours of duty over many prime years of their lives.  It was in response to a genuine call for duty to country.  It was not a trade; it was service. 

    In stark contrast, for a year of “public service,” our shameless Cohn makes off with well more than $100 million (after tax, thank you).  The trade does have a cost most would not afford: selling one’s soul to a corrupt, inept, and dangerous regime.  The seemingly well-intended (but integrity-dependent) tax break to attract our so-called best and brightest to public service has been exploited for personal gain under the gloss of “public service.”  It’s a con. It’s gross.

    Money is the measure.  Abuse of power by scoundrels of all stripes knows no limits (#allofustoo).  Corruption is bringing down the Republic.  And the band plays on.