Paulson's 700 Million Reasons to Accept the Treasury Secretary Role (GS)

| About: Goldman Sachs (GS)

Perhaps the most widespread reaction to Hank Paulson accepting the post as Treasury Secretary was why would he want to do that? Why would someone leave a job as head of one of Wall Street’s most prestigious investment banks and take a $37.816 mln pay cut?

Some have argued that Paulson figures he is walking into a job that no one thinks he can be successful at, and therefore the bar has been set low, and there is no way to disappoint. In addition, when the President calls, they say, you can’t say no.

Besides the argument that Paulson is just accepting his civic responsibility, we came across other possible reasons he may be interested in taking the Treasury position. Perhaps Paulson figures that for Goldman, now is as good as it gets. Since 1998, interest rates on a worldwide basis have been steadily falling. Goldman Sachs took advantage of this trend and made tons of money in its trading business.

While Paulson was CEO, profits at the company have increased over 130% since 1999. Now that interest rates are falling, maybe Paulson figures that profits from trading will hit a ceiling, or worse - even fall. If profits do continue to rise though, Paulson’s legacy will still improve as people will assume he laid the foundation for Goldman’s success. If profits fall or become more volatile, it is likely to be a result of losses in its trading operation which will lead the public to place blame on the new CEO Lloyd Blankfein who comes from more of a trading background.

More importantly however, Paulson’s acceptance of the Treasury Secretary position is likely to have involved money, and a lot of it. As Forbes reports, Paulson can sell his entire stake in Goldman Sachs and put off all capital gains taxes as long as he invests in government bonds or certain equity index mutual funds. With over $700 mln in Goldman shares, Mr. Paulson would face a large capital gains bill if he were to sell his shares and have to pay taxes on the gains. Furthermore, since he has to sell the stock, no eyebrows will be raised that an insider is cashing out of all his Goldman holdings.

So while the press keeps wondering why Hank Paulson is making such a bad trade in terms of compensation, perhaps he is making the trade of his life.

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