Donald Trump’s choice to run the Treasury Department, Steve Mnuchin, is a former banker at Goldman Sachs who later left to run his own hedge fund. And the Trump transition team announced Monday that Goldman Sachs’s current president and chief operating officer, Gary Cohn will run the National Economic Council in the Trump administration.
That means the two top economic policy jobs in the Trump administration will go to veterans of a firm the president-elect loudly and repeatedly denounced on the campaign trail, going so far as to argue that Goldman held “total control” over both Hillary Clinton and Ted Cruz.
And yet in many ways, the only surprise here should be that there is any surprise. Trump’s stated policy agenda during the 2016 campaign was and always has been a banker’s wish list, a plan to shower the financial services industry with deregulation and then help out hedge funds with a special tax cut. The divergence between the Trump show on Twitter and a hard-right governing agenda in the Cabinet was always visible in the gap between Trump’s wild rally rhetoric and his sober, conventionally conservative policy speeches.
The problem is nobody paid attention.
Trump’s greatest con
At one of the lowest points of his 2016 campaign, damaged by poor debate performances and rocked by multiple credible allegations of sexual assault, Donald Trump punched back with an audacious conspiratorial speech in which he alleged that all his misfortunes were the result of a vast and far-reaching conspiracy. Allegations against him were published by untrustworthy reporters who “collaborate and conspire directly with the Clinton campaign” as part of a larger “corrupt establishment” that has “trillions of dollars at stake in this campaign.”
This establishment — especially the global banking sector — Trump said, had “bled our country dry,” and it owned Hillary Clinton lock, stock, and barrel.
“We’ve seen this firsthand in the WikiLeaks documents in which Hillary Clinton meets in secret with international banks to plot the destruction of US sovereignty in order to enrich these global financial powers, her special interest friends, and her donors,” he said.
As stated by Trump, this was a fairly loopy, borderline anti-Semitic critique, but in some ways its very over-the-top nature — far stronger than anything Bernie Sanders or Elizabeth Warren would say — was its genius. By baiting his opponents into attacking him for excessively grotesque banker hatred, Trump essentially got them to concede that whatever else you might think of him, he was genuinely a scourge of the much-loathed financial services industry in the United States.
Months earlier, in late February, as Marco Rubio’s presidential primary campaign was imploding, the Florida senator offered what I think still stands as the definitive analysis of Trump’s career.
“What we are dealing with here, my friends, is a con artist,” Rubio said. “First of all, he runs on this idea that he is fighting for the little guy. But he has spent his entire career sticking it to the little guy.”
And indeed, Trump’s pose as an anti-finance populist may be the single greatest trick of his entire campaign. Alongside some rhetoric, after all, Trump has an actual policy agenda that he is running on — and that agenda is incredibly favorable to bankers. He wants less regulation of banks and lower taxes for hedge fund and private equity managers.
Donald Trump’s plan for financial deregulation
Were Donald Trump a more conventional candidate, more attention probably would have been paid to a speech he delivered on September 15 at the New York Economic Club.
The club is a venerable, one might say “establishment,” institution in New York City, one of a number of such economic clubs that exist in cities around the country. Each club is usually dominated by civic-minded members of the local business elite, which in New York means bankers. The club’s trustees include the chair of JPMorgan Chase International, the CEO of the Guardian Life Insurance Company, the hedge fund titan John Paulson, William Rudin of Rudin Management Company, and several other banking and hedge fund executives.
And the speech, while certainly featuring a Trumpian flourish or two, also landed many points that would be familiar as boilerplate Republican Party rhetoric. But don’t just skip over it simply because it’s not as colorful and outlandish as a typical Trump speech. Pay attention to what he’s saying:
One of the keys to unlocking growth is scaling back years of disastrous regulations unilaterally imposed by our out-of-control bureaucracy. Regulations have grown into a massive, job-killing industry — and the regulation industry is one business I will put an end to.
In 2015 alone, federal agencies issued over 3,300 final rules and regulations, up from 2,400 the prior year. Every year, overregulation costs our economy $2 trillion a year and reduces household wealth by almost $15,000. I’ve proposed a moratorium on new federal regulations that are not compelled by Congress or public safety, and I will eliminate all needless and job-killing regulations now on the books.
The idea of blocking all regulations not needed for “public safety” has a kind of vague intuitive ring to it. But note that this would imply blocking essentially any regulation of the financial sector. Whether you’re talking about predatory lending, creation of fake bank accounts, abusive mandatory arbitration rules, or world-destroying stuff like the excessive risk-taking and cooked books that led to the great crash of 2007, you’re not talking about public safety.
The financial sector is regulated to prevent companies from taking advantage of investors or bilking consumers, and to prevent reckless banking practices from tanking the global economy. In Trump’s view, all of that is fundamentally illegitimate. Neither the Consumer Financial Protection Bureau nor the Securities and Exchange Commission nor any other agency will take any new step to protect investors, consumers, or economic stability from reckless or unethical banking practices.
In terms of existing regulation, Trump has never laid out a detailed plan. But his view of forward-looking regulation gives us a sense of what he values about regulating the financial sector — nothing — and his sporadic statements indicate a preference for sweeping regulatory rollback.
"Dodd-Frank has made it impossible for bankers to function," Trump told Reuters this spring. "It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop."
He wouldn’t offer specifics, but he did say “it will be close to dismantling of Dodd-Frank," the landmark financial regulation bill passed by Congress in the wake of the financial crisis.
Paul Ryan’s plan for financial deregulation
While Trump offers vague principles that point in the direction of financial deregulation, House Republicans have a detailed proposal on hand to flesh out those bank-friendly discounts. Found in a 57-page policy paper released as part of Paul Ryan’s “A Better Way” suite of broadly consequential but totally ignored policy ideas, the basic plan is to regulate Wall Street with a much lighter touch.
The headline features of the plan are dismantling the two major institutional innovations of the Dodd-Frank law. As Mike Konczal, who analyzes financial regulation at the Roosevelt Institute, tells me, House Republicans “have put together a way of de facto repealing it by removing its stronger features.”
One of those is the Consumer Financial Protection Bureau, which was designed by Elizabeth Warren and progressives in Congress with a strong single director, an independent budget, and a clear mission to serve as an unequivocal industry watchdog even while other agencies pursue other matters. Republicans’ plan is to dilute the agency’s voice by replacing the director with a five-member board. They also plan to eliminate its independent funding so that if Congress wants to quietly open the door to anti-consumer abuses, it can simply starve the agency of the money it needs to do its job.
The other is the Financial Stability Oversight Council, a new committee of major American financial regulators whose job is to serve as a watchdog on the biggest and most significant players in the economy. The idea is to ensure that those “systematically significant” institutions do not take on risks that imperil the larger economy, and that if they do, they are broken up. As Ryan Rainey describes for Morning Consult, House Republicans want to “strip the federal government’s role in designating systemically important financial institutions and exempt those institutions from numerous regulatory requirements.”
In short, we’d be back to where we were in 2006 in terms of overseeing the overall stability of the American financial system.
The House Republican proposal also features a clever idea to help ensure that Trump’s regulatory freeze could outlast his term in office. It does this by essentially inverting the normal order of operations in the American regulatory process. Traditionally, Congress, which has a democratic mandate but limited technical expertise, issues a broad directive to the executive branch, telling it to write rules that do such-and-such. The executive branch, which employs a lot of smart bureaucrats, then writes the rules. Companies regulated by the rules that feel the executive branch has abused its discretion can sue if they like, and courts will check whether the rules constitute a reasonable implementation of congressional directives.
The House GOP’s plan calls for subjecting each new rule to an affirmative congressional vote, creating an enormous new bottleneck in the process and allowing for regulatory activity to be quietly killed by legislative majorities that simply don’t call it up for a vote. This wouldn’t freeze the Trump regulatory agenda in place for all time. But it would ensure that as long as the GOP has a majority in at least one house of Congress, it could de facto keep the freeze in place no matter what Trump’s successor wants.
Trump has not specifically committed to signing this legislation into law. But it obviously fits the broad framework of his promise to come “close to dismantling ... Dodd-Frank.” And it also fits the larger worldview expressed by his desire to block regulations that aren’t related to public safety.
Donald Trump’s financial ties
One reason to suspect that Trump will favor a light regulatory touch in the banking system is that Trump has a lot of close ties to the banking sector. He will also be better positioned than any previous presidents to enrich himself personally by doing favors for big banks.
Donald Trump made a lot of hay out of Hillary Clinton’s ties to Wall Street, but there is simply no institution of any kind, whether bank or otherwise, that Clinton was tied to more intimately than the ties that link Donald Trump to hedge fund manager Robert Mercer. As Nicholas Confessore reported for the New York Times in August:
Over more than half a decade, Ms. Mercer’s father, the New York investor Robert Mercer, has carved an idiosyncratic path through conservative politics, spending tens of millions of dollars to outflank his own party’s consultant class and unnerve its established powers. His fortune has financed think tanks and insurgent candidates, super PACs and media watchdogs, lobbying groups and grass-roots organizations.
Many of them are now connected, one way or another, to Mr. Trump’s presidential bid. Mr. Trump’s new campaign manager, Kellyanne Conway, is a veteran Republican pollster who previously oversaw a super PAC financed by the Mercers. Mr. Bannon oversaw Breitbart, an outlet that has often amplified Mr. Trump’s message and attacked his perceived enemies. Mr. Mercer reportedly invested $10 million in Breitbart several years ago, and most likely still has a stake: A company sharing an address with Renaissance Technologies, the hedge fund Mr. Mercer helps lead, remains an investor in Breitbart, according to corporate documents filed in Delaware.
By the same token, we know that both Bill and Hillary Clinton received speaking fees from Wall Street banks. But the reason we know that is because both Clintons practiced the kind of routine financial disclosure that we have expected of presidential candidates since the 1970s. Trump has done nothing of the sort, so we have no idea who is paying him or how much or for what reason.
We do know, however, based on investigations by Susanne Craig and others, that Trump has massive, intimate financial relationships with a range of global banks:
[A]n investigation by The New York Times into the financial maze of Mr. Trump’s real estate holdings in the United States reveals that companies he owns have at least $650 million in debt — twice the amount than can be gleaned from public filings he has made as part of his bid for the White House. The Times’s inquiry also found that Mr. Trump’s fortunes depend deeply on a wide array of financial backers, including one he has cited in attacks during his campaign.
For example, an office building on Avenue of the Americas in Manhattan, of which Mr. Trump is part owner, carries a $950 million loan. Among the lenders: the Bank of China, one of the largest banks in a country that Mr. Trump has railed against as an economic foe of the United States, and Goldman Sachs, a financial institution he has said controls Hillary Clinton, the Democratic nominee, after it paid her $675,000 in speaking fees.
Since Trump has not done routine financial disclosure, it is difficult to say exactly how much he owes to whom and exactly who his business partners are on various projects. But it is normal for real estate endeavors to be heavily debt-financed, and the profitability of a given real estate venture often hinges more on the cost of servicing the debt than the cash flow directly related to operating the building. In other words, Trump’s creditors, from Goldman Sachs to the Bank of China and whoever else, are in a position to drastically enrich Trump if they are so inclined by offering him loans on unusually favorable terms.
Past presidents have avoided this kind of conflict of interest by liquidating their assets and putting the money into a blind trust — an investment vehicle managed by professionals without its owner knowing exactly what the money is invested in.
Trump, by contrast, has simply said that his businesses will be managed by his adult children. Those children are, as we have seen throughout the campaign, also among his closest political confidants. So if the Mercers or Deutsche Bank or anyone else wants to do a favor for the Trump Organization in exchange for favorable regulatory treatment, they just have to work it out with Eric or Ivanka.
Donald Trump’s tax cut for hedge fund managers
Back during the Republican primaries, Donald Trump (like Hillary Clinton) vowed to end the so-called “carried interest loophole” — an odd interpretation of the tax code that lets some financial managers pay taxes at the preferential capital gains rate rather than the normal income tax rate the rest of us pay.
This loophole is heavily associated with hedge fund managers, though financial journalists will be quick to tell you that most hedge funds don’t actually benefit from it these days — it’s private equity and venture capital investors who reap the real windfall.
Meanwhile, however, Trump proposed to replace it with an even bigger tax loophole — one that a much larger set of hedge fund managers would benefit from.
Here’s how it works. Right now the tax code features both C corporations, which are basically broadly owned businesses that pay corporate income tax, and S corporations, which do not pay corporate income tax. The way an S corporation works is that the company’s profits automatically flow through to its owners, who then pay taxes on the income at their personal income tax rate.
S corporations can’t be sprawling enterprises with publicly traded stock, so they are sometimes characterized as “small businesses.” But an S corporation can actually be pretty big as long as it has only a small number of owners. The Trump Organization, for example, is a sprawling network of partnerships, most organized as S corporations. So are most hedge funds, private equity shops, and venture capital firms.
Trump is proposing to cut the corporate income tax — the one that C corporations pay — down to 15 percent from the current 35 percent rate. But a C corporation’s profits would still be subjected to another round of taxation when they are paid out as dividends or CEO salaries.
He’s also proposing to allow S corporation profits to be taxed at the same 15 percent rate. Trump wants to cut the top individual income tax rate down to 33 percent, too. But rich people whose income comes from partnerships — people like Trump and Robert Mercer — would be able to pay the much lower 15 percent rate as their only income tax.
Effectively, if you make most of your income from a partnership, you’d pay an effective personal income tax rate of 15 percent, while everyone else would pay a 33 percent rate. It’s an unfathomable tax bonanza for hedge fund and private equity managers.
Donald Trump’s long con is working
Rubio, of course, ended up endorsing Trump’s election even while pointedly not retracting the accusation that the president-elect is a con artist. Perhaps nothing better exemplifies that con than Trump’s success at portraying himself as a populist scourge of international finance — a line he sold to the media and to many voters, but which Wall Street itself swiftly debunked by sending shares of major banking conglomerates soaring on the news that he had won the election.
The stock market rally that has continued since Election Day has been overwhelmingly bank-led, with Goldman Sachs taking the lead. The one megabank has been single-handedly responsible for fully one-third of the Dow’s gains since the election.