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Unintended consequences
...the financial benefit to Paulson of accepting the call of duty is surely greater than that enjoyed by any other public servant in U.S. history. Goldman Sachs has long had a policy that all deferred compensation becomes payable promptly to any partner who accepts a senior position in the federal government. Congress passed a law a quarter-century ago that people taking senior appointed federal position who convert their investments into either an index fund or a blidn trust can do so upon assuming office with zero taxable capital gain until such investments are later sold. If Paulson took advantage of these provisions, they enabled him to sell his shares in Goldman Sachs without raising any public questions without tax and to diversity his large personal invetments in a single stroke. For just over two years' service, the saings in Paulson's personal income taxes could have been as large as $200 million. Paulson had no interest in diversifying his investments and had never sold a share of Goldman Sachs stock.
I wonder what the total benefits for Paulson have turned out to be. Indeed, it is rare that taking a job in government is such a good business decision (please note: I am not suggesting any conspiracy or evil intentions here).
That passage is from Charles Ellis's The Partnership: The Making of Goldman Sachs. This book gets better and better, as you keep on reading it. Definitely recommended.
Posted by Tyler Cowen on October 11, 2008 at 08:38 AM in Current Affairs | Permalink
Comments
$200 million makes me think this guy has money. I am worried about the corruption opportunity Paulson and whomever he employs to help him spend $700 billion. If one bank who needs to get rid of $20 billion offers Paulson or an employee an extra $100 million, how can they say no given that they make about $50,000 a year? Investment banks employed people who traded up to something like $10 billion WITH OVERSIGHT, but paid them a million dollars a year. Then only way I see Paulson not being corrupted WITHOUT OVERSIGHT is if his net worth is already over a billion dollars. Also, it would help me trust that he is buying the right securities.
Posted by: Brainwarped at Oct 11, 2008 9:05:44 AM
Ha, Nice spelling/gramatical mistakes...:
$200 million makes me think this guy has money. I am worried about the corruption opportunity for Paulson and whomever he employs to help him spend $700 billion. If one bank that needs to get rid of $20 billion offers Paulson or an employee an extra $100 million, how can they say no, given that they make about $50,000 a year? Investment banks employed people who traded up to something like $10 billion WITH OVERSIGHT, but paid them a million dollars a year. Then the only way I see Paulson not being corrupted WITHOUT OVERSIGHT is if his net worth is already over a billion dollars. Also, it would help me trust that he is buying the right securities, given that he probably made this money in the stock market.
Posted by: Brainwarped at Oct 11, 2008 9:09:45 AM
bush's first secretary of the army (i think his name was white) was an enron exec that sold his shares upon taking the job. that one gets my vote for best ever
Posted by: at Oct 11, 2008 9:35:19 AM
please note: I am not suggesting any conspiracy or evil intentions here
Why not? Alex (and plenty of other economists) demonstrated on this very blog that the "credit crunch" was very hyped. Tons of economists, including you and Alex, agree that there plenty of better options than the plan Paulson recommended. He made ridiculous requests, like asking for no court oversight. A bunch of Goldman's competitors have all fallen, yet Goldman coincidentally remains standing.
Tyler, if you were in charge of a $700 billion fund for helping PhD-granting universities, and then a crisis in higher education caused 80% of GMU's competitors to close their doors, would you tap Alex to be in charge of the distribution? Or wouldn't you think that might raise a few eyebrows?
I don't know what else Paulson needs to do before people stop rolling their eyes at "conspiracy theories." If this were happening in a different country, where the main players had funny names, it would be rather obvious that (a) nationalizing an industry is not good policy and (b) the people running the operation were crooks.
But since it's here in America, where at least I know I'm free, that can't possibly be what's going on.
Last point: I understand that this is a very high-traffic blog, and Tyler (and Alex) have more obligations to not sound like nutjobs, compared to people like me or other malcontents who post here. (I'm not being sarcastic.) So I don't expect Tyler to rant like a madman about the oligarch Paulson. But I don't see why he has to go out of his way to pooh-pooh the idea that Paulson might be a crook. He could have just omitted that sentence I quoted above.
Posted by: Bob Murphy at Oct 11, 2008 2:27:25 PM
Brainwarped,
sorry, but Paulson only has 700M.
Posted by: Douglas Knight at Oct 11, 2008 4:26:23 PM
Corruption? In the Bush Administration? That's unpossible.
Posted by: ogmb at Oct 11, 2008 4:45:43 PM
brainwarped,
you opened with this line; "$200 million makes me think this guy has money", then went on to suggest a high possibility of corruptability. The argument, seems to run backwards. the marginal propensity for corruptability should decline at these lofty levels, as the considerable survival margin, with 200 million is quite substantial. As with most things possesed in great abundance, that marginal 100 million would seem to have much less appeal than the self-actualization factors that come from being the guy generations to come will read about in history books, as the guy who "saved/destroyed america". "The paulsian model, or thereom, or solution" will become an phrase that enters the lexicon, good or bad. legacy retention would strike me as more pressing than huistling a couple more bucks out of taxpayers of all people.
Also with that kind of cash in the bank already, he might be more focused on saving what he, and his social set, has amassed already, rather than skimming more.
By the way from Douglas knights math, paulsons personal wealth is only 1000 times less than what he is to manage. Why is it implausable that he can do it without personal corruption, when thousands of professionals in organizations of all stripes, earning 100,000 per year, oversee budgets of 100,000,000, without succumbing to personal corruption.
Posted by: nyongesa at Oct 11, 2008 6:57:23 PM
Q: What's the difference between corruption and incompetence?
A: About $150 Billion
Posted by: Andrew at Oct 12, 2008 11:22:46 AM
What a right wing blog, this blog is part of the conspiracy - the conspiracy to make you believe in speculation and arbitrage. Get a job that actually does something or become a socialist protester then you will actually be doing something for humanity.
Posted by: at Oct 13, 2008 7:51:45 AM
Congress passed a law a quarter-century ago that people taking senior appointed federal position who convert their investments into either an index fund or a blidn trust can do so upon assuming office with zero taxable capital gain until such investments are later sold.
Not quite right. The law is that people who take senior appointed federal positions, are required to sell their investments due to conflict of interest laws, and get a certificate so stating can then take advantage of the tax deferral.
Posted by: washerdreyer at Oct 14, 2008 2:55:15 PM
