Dark pools in charge of economic policy: Mnuchin and Ross
According to conventional political analysis, Donald Trump owes his election to some combination of white, less educated, lower middle class voters and will therefore pursue programs and policies to benefit this group. Another theory holds that Donald Trump will alter some of his views, disappointing his so-called base, and make his policies appeal to a broader swath of the middle class. Both theories are wrong.
Donald Trump’s agenda is clear, and it has nothing to do with helping white, black, or brown Americans. His core loyalists are the financial managers of dark pools. What are dark pools? They are unregulated or lightly regulated pools of capital known as hedge funds and private equity. Dark pools have grown enormously in the last eight years as capital fled from the regulated banking sector. In past administrations, Presidents drew talent from and rewarded banks and investment banks. Don Regan, Nicholas Brady Robert Rubin and Henry Paulsen served Ronald Reagan, George H. W. Bush, Bill Clinton, and George W. Bush respectively. These men led financial institutions and came to Washington to pursue tax and regulatory policies that served Wall Street.
The President-elect is ushering in a new era. Rather than hiring managers from financial institutions, Mr. Trump is hiring dealmakers who operate at the edges of the regulatory system. Wilbur Ross, Commerce Secretary-designate, and Steve Mnuchin, Treasury Secretary-designate, are fine examples. When you look at their resumes, ignore their stints at Rothschild and Goldman Sachs. Their fortunes were made doing deals and running hedge funds and private equity firms.
Mr. Mnuchin put together an investor group that included George Soros and John Paulsen to buy the assets of Indymac (a mortgage lender) from the US Treasury in 2009. His group sold the asset to C.I.T. During his tenure, the bank known as One West had a number of regulatory run-ins due to its mortgage servicing practices. In the end all that mattered was that Mr. Mnuchin made lots of money.
Mr. Ross is known as a “turn around specialist” because he has bought steel, coal, automotive, and textile assets out of bankruptcy. If there’s been a turn around, it’s because the bankruptcy proceeding did the ugly work of stripping out the pension, health care, and union obligations weighing on the businesses. Undoubtedly Mr. Ross’s investment made money in the short-run, but there’s scant evidence that he reversed the course of these businesses. His major success came over ten years ago when he assembled a collection of bankrupt steel assets and quickly sold them to Mittal. He parlayed that success into a series of private equity funds that generated huge fees. Being a shrewd investor, he sold his fund business to Invesco but stayed on to run the investment business. His subsequent funds and investments haven’t measured up to his early success, and the SEC has sanctioned his firm for improperly collecting fees from his investors.
In other words, Mnuchin and Ross didn’t build or manage businesses; they flipped assets as quickly as possible, hiring other people to operate the businesses. Moreover, Ross and Mnuchin took every possible advantage of the tax code and bankruptcy law to enrich themselves. While their rhetoric will often extol the broader economic or social values of their deals, the public interest has never had a place in their hearts.
Despite his opposition to Mr. Trump during the campaign, Mitt Romney would fit in easily in the new administration. His fortune was built the same way as those of Ross and Mnuchin. In the world of dark pools, real loyalty and disloyalty are measured in money, not rhetoric.
Won’t Mr. Trump’s core supporters rebel when they discover that the government’s policies are aimed at protecting and enhancing vast dark pools of capital? Mr. Trump is far too savvy to leave them disappointed. He won’t improve their lives or prospects. Instead he’ll keep them satisfied with a steady stream of tweets about flag burning, images of undocumented immigrants being rounded up, and the occasional deal that keeps a plant or mine open.
By the time his core supporters realize that their prospects have not improved, Mr. Trump and his hedge fund colleagues will have remade the tax code and government regulation so that they can reap even larger fortunes. Just like a hedge fund manager, the President-elect only needs to keep his investors happy for four years. Promises and distractions are more than sufficient to keep sophisticated investors happy long enough for hedge fund managers to reap large rewards for themselves. The same tactic should work on Mr. Trump’s core supporters. By the time his supporters catch wind of Mr. Trump’s game, the President-elect and his cabinet will be back on the dark side making even more money. This is a deeply cynical view, but the people joining the new administration are deeply cynical people.