Bad Omen: The Paulson Conspiracy Theory

Did Hank Paulson Tank the Markets to Profit from Obscure Tax Provision for Executive Branch Appointees?

"The Omen Theory" Way Out There on the Twilight Zone Curve But Provocative Nonetheless.

How the hell did this one slip under the radar? With a little help from an anonymous researcher-- let's just call he Stickgirl-- we have confirmed from an article from 2006 at Forbes.com that Hank Paulson may have pulled the wool over everyone's eyes and destroyed civilization for personal gain. In what looked like a ridiculously bad trade swapping his mid-eight figure compensation package at Goldman Sachs for $187,500 a year a federal pay package more suited for a first year associate and destroying his reputation in acting like a complete bumblehead at DOT, did Paulson do the unthinkable?

Blago: eery resemblnce to Damian??

No "sign of the sixes" visible

Remember Damian, the devil-child from the movie the Omen (the kid with the sign of the sixes underneath his Blago-shag do)? So here's how the conspiracy theory goes: Like Damian who kills his terrorified mom and ascends to become President of the United States, Paulson utilized exquisite timing and a little known provision where Executive branch appointees who, to avoid conflicts (think Dick Cheney and Halliburton-not), can sell their personal investment portfolios tax free and re-invest in treasuries and similar instruments; tax is due at the time they leave office but only if and when they decide to sell their permitted investments- like maybe never.

So Paulson swaps out of Goldman into treasuries mid-2006 when according to the Federal Reserve H15 report the monthly average on the long bond (30 year treauries) was 5.15%. Goldman shares were hovering around $150 a share. So theory goes as (we are making it up as we go along), Paulson sells $484 million or so of Goldman stock tax free and reinvests in treasuries. Fast forward, the world starts to collapse and Paulson starts acting more like Soupy Sales than a masterful calmer of markets-- say like Bob Rubin (who also benefited form this little "pearl of tax-planng." Rubin? Nah!!!! Too much integrity, too much consistency and leadership. So as the markets crater, there is a flight to quality and low and behold the yield on the long bond drops to roughly 3%. The $484 million portfolio of Paulson long bonds zooms to say $677 million give take a few bucks. So Paulson saves $100 million in taxes on the way into public service. Meanwhile Goldman's stock is in the tank dropping nearly 40-50% from his date of departure ranging from $75-95 a share recently. So had he stayed at Godman and not sold his holding would be worth say $300 million. Today under this thought experiment/conspiracy Paulson's holding would be worth $677. Close to a $400 million swing in net worth. And we thought he was dumb!

Now the point is not that Paulson actually perpetrated such a callous act to tank the markets on purpose so he could personally but rather what was supposed to eliminate a conflict of interest created one hell of plotline for the next installment of "The Omen". The reason this is not plausible is that the "666" would be visible at all times on Paulson's bald pate. However, Blago was recently seen at Endeavor and was presumably lobbying for the leading role.

Thanks for the tip Stickgirl--keep those leads coming to EPD. 

Love Sticky

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FORBES.com
A Loophole For Poor Mr. Paulson
Jessica Holzer, 06.02.06, 6:00 AM ET

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 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.

Paulson need only obtain a "certificate of divestiture" from the Office of Government Ethics to sell off his 3.23 million Goldman shares, worth about $484 million, tax-free.

But he may not escape paying taxes on the sale of the rest of his Goldman holdings, which are made up of restricted stock and options, depending on whether he received them as part of his pay package. Proceeds from the sale of assets received as compensation would be treated as ordinary income rather than a capital gain and thus would not qualify for the tax break.

Plenty of wealthy public servants, including Defense Secretary Donald Rumsfeld and former Secretary of State Colin Powell, have taken advantage of the tax break since it was introduced in 1989 under the administration of President George H.W. Bush. Deputy Chief of Staff Karl Rove has obtained a certificate of divestiture for stock sales in 23 companies since he joined the administration.

To get the tax relief, it must be deemed "reasonably necessary" for a public official to divest his shares, or a congressional committee must require the asset sale, according to section 1043 of the tax code.

Paulson should have no trouble passing this test: A large stake in a global financial firm would seem a clear conflict of interest with the duties of Treasury secretary, which include ensuring the smooth financing of the current account deficit and helping to manage financial crises.

Even a stake in an industrial company is enough to raise eyebrows nowadays. Outgoing Treasury Secretary John Snow, the former chairman of CSX Corporation, dumped more than $20 million worth of his former company's stock to avoid the appearance of a conflict of interest. And Snow's predecessor, Paul O'Neill, the former chairman of Alcoa, was dogged by criticism of his $100 million stake in the aluminum giant until he finally unloaded it. That's still small potatoes compared with Paulson's nest egg.

It is always possible that Paulson could follow in the footsteps of fellow Goldman alumnus Robert Rubin and avoid divesting his Goldman stake by placing it in a blind trust. But even the former Treasury secretary, who was the richest member of the Clinton administration, made ample use of the tax break, diversifying other portions of his fortune.

Poor Gov. Jon Corzine of New Jersey, who launched a successful bid for the U.S. Senate after Paulson shoved him aside to become the top dog at Goldman, wasn't so lucky. While serving on the Senate banking committee, he was pressured to sell off his $300 million stake in the investment bank. But alas, the tax perk is only available to members of the executive branch.