Given the drilling he’s taken over the last few weeks, Hank Paulson may come to regret his decision to leave Goldman Sachs for the Treasury. But his erstwhile employer may also soon regret sending so many of its top executives to Washington. Grumblings about “Government Sachs” have been echoing ever since Paulson took office. But the latest and potentially most significant backlash came late last week, when Sen. Charles Grassley asked the Treasury’s inspector general to investigate a tax change implemented by Treasury in late September, just in time for Wells Fargo to reap up to $20 billion in its Wachovia takeover. As Grassley explains in a Nov. 14 letter to IG Eric Thorson:
Without the issuance of the Notice, Wells Fargo would have only been able to shelter a limited amount of income. Under the Notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits. It also potentially enabled Wachovia's senior executives to qualify for parachute payments that may not have been available under the Citibank deal.
As Grassley explains, Wachovia’s CEO is Bob Steel, until this summer the undersecretary for domestic finance at Treasury—and before that a vice chairman at Goldman Sachs. Grassley uses this fact to open speculation about the bevy of Goldman figures occupying high positions in Washington:
As you know, Treasury Secretary Henry M. Paulson, Jr. was formerly the Chairman and CEO of Goldman Sachs. Former Goldman Sachs board member Edward M. Liddy was selected to lead AIG when the Treasury loaned AIG the first $85 billion of $150 billion of taxpayer funds. Neel Kashkari is the head of Treasury’s new Office of Financial Stability, created to oversee the $700 billion of funds authorized by Congress for the bailout, and was a former vice-president at Goldman Sachs. Secretary Paulson’s team at Treasury also includes senior advisors formerly at Goldman Sachs, such as Dan Jester and Steve Shafran. Given these relationships, there is reason for concern about the appearance of preferential treatment created by the Treasury Department's decision to issue [the tax change].
Obviously there’s something fishy about Treasury unilaterally rewriting the tax code, just in time to reap huge benefits for a major bank. And there may be some conflict of interest in Steel’s convenient move to Wachovia a few months ago. But to use that as the basis for suspicion about the whole Goldman contingent writ large is dangerously idle speculation. The real criticism against “Government Sachs” isn’t that they’re colluding to rob taxpayers, but rather that they (and all the other ex-bankers in D.C.) reinforce a narrow worldview that sees economic health as beginning and ending with Wall Street balance sheets, in the process disregarding homeowners, manufacturing, and the rest of the “real” economy. Still, ire over the continuing crisis and the Paulson plan’s failure will begin looking for scapegoats, and “Government Sachs” will be a convenient option.