As we study the root causes of the "financial crisis" my theory is that the people in charge of regulating the system are always going to be one step behind those who work in the system to make money. When the system gets so complicated what we find is that "rich" people will always find ways around well intentioned government policy. So, government should stop with social engineering and develop systems that are simple and fair. What follows won't get much attension and a few are pointing out this conflict with the former Treasury Secretary and his former company Goldman. All I can say is that the guy is pretty smart, here is why:
Quote:
WASHINGTON, D.C. -
For Henry Paulson Jr., a Goldman-sized tax loophole awaits his pleasure.
High-flying business executives almost always endure financial sacrifice when they make a detour into public service. Paulson is no different: The Goldman Sachs (nyse: GS - news - people ) boss will see his annual paycheck shrink from last year's $38 million to a paltry $183,500 once he takes over the job of Treasury secretary.
But don't shed too many tears for Paulson. He has amassed quite a fortune--a roughly $700 million equity stake in Wall Street's premier investment banking house. And soon, he will have the chance to diversify a good chunk of those holdings without paying a dime to the Internal Revenue Service.
By accepting the Treasury post, Paulson is poised to take advantage of a tax loophole that allows government officials to defer capital gains taxes on assets they have to sell to avoid a conflict of interest, as long as the proceeds are reinvested in government securities or a broad array of mutual funds approved by the government within 60 days.
Technically, the tax kicks in once these replacement assets are sold, using the purchase price of the original assets as the cost basis, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. But why sell when you can avoid the tax altogether?
"The idea is never to sell," says Robert Willens, the top tax and accounting analyst at Lehman Brothers. "If you're able to hold onto the replacement assets until your demise, you never have to pay it."
The tax break was designed to ensure that the wealthy are not deterred from taking posts in government because they fear a big tax hit. But it amounts to a significant perk of public office.
Paulson's huge equity stake in Goldman served him well as he flitted around the globe singing the firm's praises to potential clients and investors. It was hard evidence of his faith in Goldman's continued success. But once he is gone from the bank, such a giant concentration of assets could be somewhat of an albatross for Paulson, who, at 60, is surely considering the tax consequences of diversifying his fortune.
It is not a stretch to suppose that, at the margin, the chance to unwind his stake in Goldman Sachs tax-free may have had an influence on his decision to take the Treasury job. After all, if he were to completely divest himself without any tax relief, he would be staring at a tax bill of well over $100 million, Willens says.
|
A Loophole For Poor Mr. Paulson - Forbes.com
The guy serves two years in a lame duck administration and pockets $100 million in tax savings.
*Assume he cashes out at around the peak for Goldman, maximizing his pay or profits.
He buys treasuries, risk free, positive returns.
*Financial crisis hits.
* He drafts TARP and gets Congress to take the credit.
*TARP gives him the freedom to do what he wants with over $700 billion. Obama and other "smart" people say it meets their requirements, etc., etc. - not really having a clue, but it was good campaign rhetoric.
*TARP money goes to AIG for a bailout so AIG can pay Goldaman, not pennies on the dollar, but dollar on the dollar (plus their profit on the deals)
*Goldman's stock price drops significantly from its peak, along with every other financial company.
*Goldman's competition is lessened by some competitors going out of business.
*Goldman becomes a "commercial bank" without any commercial banking activities. Approved by regulators.
*Goldman gets bailout money.
*Goldman get access to low/no cost access to credit from the Federal Reserve.
*Goldman makes mo money, mo money, mo money.
*Somewhere in there Paulson's term expires as Treasury Secretary.
I don't know what he does, I speculate:
Let's say after his term expires he starts buying Goldman stock which is undervalued. And now of course the stock price is rebounding from its lows. The company is positioned in the market with less competitions and now Paulson can make, mo money, mo money, mo money. Like I said the guy is pretty smart.
I was against TARP from the beginning. Most people were aware of the potential conflict, and for those not aware were told about it - it was ignored. The average American got absolutely no benefit from TARP. TARP did not save us from the "brink", all it did was allow a select few "rich" people make, mo money, mo money, mo money.
McCain is now saying he was "duped", at least he is being honest. Now I am seeing "holier than thou" types make fun of him. I am amazed.
