Goldman Sachs

  • 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.

  • Broken Trust

    January 27th, 2017 by ewalsh


    At this year’s World Economic Forum gathering in Davos, Switzerland, PR firm Edelman shared its comprehensive annual Trust Barometer, confirming what we all know: global trust in institutions and leaders is at an all-time low.  Fully two-thirds of countries are now considered “distrusters” (under 50% trust in the mainstream institutions of business, government, media and NGOs to do what is right), compared to about half a year ago.  This is a stunning collapse in trust, even from last year’s low base.

    Trust in leadership is equally low. Only 37 percent of the general population believe CEOs are credible, even worse for government officials – 29 percent credible.  A paltry 15 percent believe the system is working.  Ironically, it was Chinese Premier Xi, in his first address at Davos, who stood in defense of globalization (quoting Abraham Lincoln, it should be said), arguing that the system is sound, but it is (Western democratic) governance that has failed.  Note China ranked second on the trust index, second only to India.

    Talk about a humbling moment (if that’s possible) at the annual gathering of the global economic and political elite.

    There was lots of talk this year at Davos about “inclusive capitalism” (Jack Ma actually puts substance behind the slogan in his must-watch interview — a great example of Alibaba’s seemingly regenerative business model in service to its network partners rather than extracting from them, and a sharp contrast to Amazon’s model, as Ma explains).  But the “inclusive capitalism” talk included little honest analysis of the root cause of this stunning collapse in trust, why it is so dangerous (the rise in extreme forms of authoritarian populism rooted in emotion more than evidence and its unpredictable path), and what if anything can be done about it at this late date.  Nobel Economist Joseph Stiglitz wrote a prescient piece on this topic in 2013, and called for strong regulation and bold regulators to enforce the laws.  Clearly, we have failed.  And without a culture that not only values trust but demands it, I am not optimistic about better regulation and stricter enforcement.

    The decline in trust pervades all four institutions studied in the Edelman survey. Unfortunately, Edelman did not single out finance and report on it separately from business.  Surely few would doubt that the finance sector (Wall Street mega banks, in particular) would rank at the bottom of the trust barometer within the business category.  In fact, research confirms that bankers are more likely to cheat than the rest of us. (As a former banker, this is upsetting to me!)

    Nothing defines banking’s breach of public trust better than the 2008 financial collapse.  Being told to move on, It is easy to forget how much of the world’s current social and economic woes can be traced to the financial bubble and subsequent 2008 systemic collapse, either directly or indirectly.

    Recall that the financial collapse destroyed $19 trillion of economic value in the U.S. alone, permanently destroying the economic security of millions of families across America.  An estimated 34 million jobs were destroyed globally in the process.

    The rise of today’s dangerous brand of authoritarian populism—manifesting first in Brexit and now Trump—is directly connected to Wall Street’s breach of trust.  It’s not just because of “globalization” or “technology” taking our jobs as if it were all inevitable.  We cannot forget that compounding and exacerbating these legitimate and complex challenges, and more (climate change-induced drought driving immigration, linked to the Syrian carnage comes to mind) was the willful act of dropping a bomb into an already vulnerable society.  The Goldman Sachs/John Paulson Abacus trade was the Hiroshima of modern financial history.

    The mortgage fiasco was a massive, reckless act of violence, perpetrated upon global society by an industry failing in its critical purpose while instead proving itself willing to do just about anything to make grotesque profits through fraud and egregious deceit.  The efficient market narrative of bringing home ownership to the masses was all a cynical cover.  And the industry’s ongoing fraudulent activities post the crisis, from the LIBOR scandal to FX price rigging, to wrongful foreclosure with robo-signers to Wells Fargo’s opening millions of fake accounts out of its “community banking” division of all places (where the do-gooders are supposed to work), sealed the fate of the industry as devoid of trust for some time to come, unfair as that may be for the many honest bankers out there.

    Blaming populism on bankers’ unparalleled breach of trust is a strong claim.  But think about it:

    Less speculative finance, less speculative real estate lending.  Less boom created from unsustainable misallocation of human, physical, and financial capital to speculative real estate. Less wasted carbon in the atmosphere and less farmland destroyed, exacerbating the drought-driven migrations.  Less unearned wealth for bankers and less resulting inequality, and less power for the sector to rig the rules, buy off and brainwash the politicians and even regulators, resulting in asymmetric risks only the opportunist bankers truly understood.  (Trump once referred to the bankers—now his advisors—as “killers” on the campaign trail, and he’s had to cross them more than once, so he knows).   Less demand on the public sector to socialize the losses to “save the system” and therefore less public debt and no need for the misguided austerity driving society further into despair.  That means more resources available to address the consequences of globalization and automation, and greater acceleration of investment into the transition to renewable energy and into rebuilding our aging yet vital infrastructure.  More assets channeled into education, perhaps even into the revival of civics classes!  We know how this narrative continues.  We know it does not end with the election of a fraud to the most powerful office in the land.

    Donald Trump, whose ethics seem guided by the probability of winning lawsuits, is about as unlikely a remedy for broken societal trust as one can imagine, as his hopeful supporters are sadly about to learn.  Coal is not coming back, sorry.  So the consequences of lost trust will only amplify in dangerous and unpredictable ways that now stunningly include the Orwellian introduction of “alternative facts” into the Trump Administration’s everyday narrative.

    The so-called “activist investor” Carl Icahn is Trump’s fellow bully buddy and now Special Advisor on Regulatory Reform.  He has defended the need for Dodd-Frank banking reform in the past and held the banks responsible for the financial crisis in public statements.  That is a testament to his common sense and refreshing objectivity as a Wall Street insider.  Time will tell whether a man who has spent half a century as an opportunist (bully) stock speculator can come to see that an ideology that conflates speculation with investment and means (finance and the stock market) with ends (a healthy economy) can guide us to a more enlightened and still desperately needed financial system reform and begin the long process of rebuilding trust in Wall Street, and in the process within society.

    Not holding my breath.

  • Is There Anyone’s Money Harvard Would Not Take?

    June 16th, 2015 by ewalsh


    It’s fitting that Hedge Fund speculator John Paulson gave his $400 million donation to Harvard’s School of Engineering and Applied Sciences (SEAS). The largest in the history of the school, it was described as an act of “stunning generosity” by President Faust. That’s her name. You can’t make this up.

    Paulson of course is known for his role in engineering with Goldman Sachs the infamous Abacus trade, a financial atom bomb designed to deceive while inflicting maximum damage on the market and society. And for what end? Personal enrichment. It would later require Goldman Sachs CEO Blankfein to attempt a lame — embarrassing really — defense of his firm’s “client comes first” reputation in front of Congress. Goldman would soon settle accusations of financial fraud with the Securities and Exchange Commission for $550 million. All the attention on “love to hate” Goldman deflected it away from Paulson, the principal behind the trade.

    In fairness, Paulson wanted to make a speculative bet that the systematically fraudulent subprime market built on “liars’ loans” would soon collapse. That judgment was correct. But simply shorting mortgage bonds was expensive, and the timing of the collapse was unknown so the costs could mount. Not a “great trade.”

    This is where the twisted genius of Paulsen and his co-conspirators came into play. The (too) clever feat of “applied financial engineering” was unprecedented, even in a world of financial engineering run amok. It was also an act of sheer frontal violence on a few, such as German Bank IDK. A rescue ensued, sending ripples beyond Germany.

    Whether bond insurer ACA Financial Guarantee Corporation was a victim or a co-conspirator all to eager to gorge at the fee trough next to Goldman remains a question in my mind. The lives of millions of unsuspecting innocent citizens were harmed or wrecked — some by suicide — by the financial crisis, which was no doubt made more extreme by the fallout from this synthetic atom bomb inserted into the system. Indeed, the Abacus trade and a series of Magnetar trades executed by JPMorgan and others, created leveraged and amplified losses on the stock of bad loans, willfully, with great attention to detail.

    It is difficult to fathom the workings of a mind capable of first masterminding and then actually pulling the trigger on a deal like Abacus. Merely profiting on others’ misery pales in comparison. These are harsh words. But the complexity of modern finance has shielded the public from seeing the full truth. And the financiers who do understand (including the ones on Harvard’s Board it would appear) prefer the legend that Paulson was simply a prescient, even brilliant trader in a game played by big boys where winning is what counts and whining is not welcome.

    I’m now going to speculate, but here’s how I think it went down:

    The Set Up

    The sub-prime mortgage market was known to be a cesspool of fraud, with many homeowner’s in houses they could not afford, thanks to low-life mortgage hucksters, poor regulatory oversight, and well-intended but imprudent public policy support for housing via the mortgage agencies. As a reported $15 million donor to the Center for Responsible Lending (some suggest CRL was a contributor to the problem by pushing lax mortgage underwriting standards), Paulson knew this better than most. While hard to imagine, some even consider that $15 million a strategic donation to dramatically expand CLR’s well intended but ill-conceived efforts, a premeditated, sinister dimension of the trade set up. That’s dark.

    Paulson understood that many borrowers were exposed to and unable to cope with even the slightest rise in interest rates if and when they should come. And they came in response to the price of oil going from $20 in 2002 to $80 in 2006 (on its way to $140). And the subprime market is linked to the $10 trillion mortgage market (keep this in mind for later). The investment banks had hoodwinked the (not-so-clever) rating agencies into using their own models to assign credit ratings to structured mortgage bonds, handing much control in the hen house over to the foxes. For money of course.

    The resulting boom in “structured finance” complex mortgage origination was mind-boggling, some of it with no economic purpose. Wall Street balance sheets were also recklessly bloated with risk, warehousing a lot of the “less risky” securities to pad their profits (and bonuses) with net interest income without disclosing the true risk to their blissfully ignorant management.

    Paulson knew these “weak hands” would be forced to sell in a panic if and when the market turned, accelerating the fall.

    The Trade Concept

    The boys at Paulson sensed an opportunity to “short” this ticking time bomb. But how to deal with the excessive cost of carry, particularly for the riskier junior tranches of sub-prime mortgages that would vaporize when the chickens came home to roost? This is where the twisted genius comes in.

    Paulson knew that Goldman would do pretty much whatever a profitable client like him wanted. He also knew that if he brought them this trade idea, they would likely front-run him on it, because that’s what they do. But he figured there was room for both of them, and Goldman’s need to get out of their own exposure to mortgages might just accelerate the anticipated avalanche itself, a beautiful self-fulfilling prophecy.

    The security selection for Paulson’s trade was based on his information advantage on pools of mortgage loans (legally/ethically attained or not I don’t know). The package was designed to create seemingly “low risk” senior securities that would in fact behave like very risky junior securities in default because of the deadly waterfall construction directing the priority of cash flows (this is the feature making it a financial atom bomb).

    Normally a bond rated say AA is not expected to drop in price more than 5% due to a credit problem. Worst case might be 20%. These bonds were purposely designed to go to zero (which they did), but because Goldman and Paulson colluded to fool the rating agencies, they still had the AA label. And the AA label made them very cheap to short (via purchasing insurance on them in the credit default swap market – another victim, probably AIG). Ingenious. Never mind that if and when these AA-rated securities went to zero (unheard of), it would trigger a panic first in the entire subprime market, which would then bleed into the $10 trillion mortgage market.

    Lost confidence coupled with massive scale and absurd complexity is a deadly mix, as Paulson knew devilishly well. This was the nuclear fallout feature of Paulson’s trade. Not only would his direct bet pay off, but the structural leverage in the sinister engineering of the deal itself would perhaps trigger or at least accelerate and accentuate a market panic, doubling or more Paulson’s profits. It would also lead, at least in part, directly to the collapse of Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, RBS, Iceland, and Greece, and the worst financial crisis since the Great Depression, with all of the real world consequences still playing out to this day.

    Any concern Paulson may have had for the millions foreclosed out of their houses, some while serving in Iraq defending his freedom, and the many lives ruined in the process (the nuclear fallout) faded into the sweetness of a billion dollar pay-day for himself. That takes a level of callousness that caused even my hardened high-yield trader friend to grimace at the time, “I don’t know how that guy can live with himself.”

    Well live with himself (and his art collection, he likes Calder) he is doing. And his plan to restore his reputation has worked well. Wait eight years until the memories fade a bit. Propose the largest gift (by the smallest increment that is respectable) in the history of Harvard, ensuring a hero’s embrace from the one institution with the best reputation cred on offer (no one ever said he was not shrewd with his money). For Harvard President Faust, it was quite a bargain!

    “Nature magically suits a man to his fortunes, by making them the fruit of his character.” –Ralph Waldo Emerson

    CORRECTION: In response to my blog post above, I received a thoughtful and edifying note from David Beck at Self-Help Credit Union. David referred to the negative reference to their policy affiliate, Center for Responsible Lending, in my post. Here is the relevant paragraph in its entirety:

    The sub-prime mortgage market was known to be a cesspool of fraud, with many homeowner’s in houses they could not afford, thanks to low-life mortgage hucksters, poor regulatory oversight, and well-intended but imprudent public policy support for housing via the mortgage agencies. As a reported $15 million donor to the Center for Responsible Lending (some suggest CRL was a contributor to the problem by pushing lax mortgage underwriting standards), Paulson knew this better than most. While hard to imagine, some even consider that $15 million a strategic donation to dramatically expand CLR’s well intended but ill-conceived efforts, a premeditated, sinister dimension of the trade set up. That’s dark.

    David set me straight on the facts with respect to Paulson’s $15M donation to CRL. It occurred after the crash, so could not have been the “premeditated, sinister dimension of the trade set up” as suggested by the Center for Consumer Freedom (CCF), whose article I cited. In fact, David explained that “CCF is a front-group set up by PR strategist Rick Berman to represent payday lenders and other corporate interests opposing public advocacy groups. See here.

    After reading David’s note, I actually remembered reading back at the time that Paulson had indeed made a donation to a housing advocacy group after he made his killing. I now recall thinking at the time, “he blows up all these unsuspecting people whose lives will never be the same, puts $1B in his pocket, and drops a $15M tax deductible donation on the table to assuage his guilt?”

    Sure wish he had given the $400M to support those hurt by the housing bust and for policy advocacy to ensure it doesn’t happen again, rather than giving it to Harvard! Thanks David for clarifying the facts and refreshing my memory!