45 Trillion Reasons Why Gary Cohn Has Recused Himself From All Goldman Matters

Goldman's former President and COO, who was recently picked to be Trump's chief economic advisor as head of the National Economic Council, will recuse himself from any matters directly involving his former employer, the White House told the Financial Times.

The topic emerged when the FT learned that the former "#2" at Goldman was spearheading Goldman's lobbying at the US derivatives regulator on rules prompted by the role swaps contracts played in the 2008 financial crisis. As president of Goldman Sachs, Cohn attended four meetings in 2015 and 2016 with top officials at the CFTC to discuss the swaps rules mandated by the sweeping Dodd-Frank reforms, according to meeting records.


As the FT adds, Cohn’s most recent CFTC meeting as a Goldman representative was on February 19 2016, according to the records. On the same day Trump was campaigning in South Carolina, where he mocked Ted Cruz and Hillary Clinton by saying Goldman Sachs had “total control” over them. He ended his campaign by airing an anti-Wall Street ad that displayed an image of Goldman chief executive Lloyd Blankfein as Mr Trump talked of “a global power structure that is responsible for the economic decisions that have robbed our working class”.

The FT asked about the meetings and their implications for ethics rules for White House staff, to which a White House spokesperson said: “consistent with the stringent ethics rules established by the Trump Administration, Mr Cohn will recuse himself from participating in any matter directly involving his former employer, Goldman Sachs. He will also recuse himself from any matter or potential rulemaking before the CFTC in which Goldman Sachs has participated.”

While it is admirable that Cohn will recuse himself from Goldman-linked matters (it begs the question is Mnuchin who is a former Goldman employee will do the same), a problem emerges: since Goldman has tentacles, so to say, in every aspect of the economy, does that mean that Cohn's tenure in the White House will be one long, self-imposed recusal vacation?

One thing that is clear: Cohn may have no say on what has emerged as the most actionable acticity in Trump's early administration - rolling back Dodd Frank and Obama's Wall Street regulations.

As head of the National Economic Council, Mr Cohn is a Trump appointee shaping a rollback of financial regulation in the White House, a role that could have given him considerable sway over the derivatives rules on which he lobbied. Goldman remains unhappy with those rules today.

 

Democrats warn that Mr Trump, who derided Goldman in his campaign, is creating an administration that will consciously or otherwise pay more heed to the needs of Wall Street than the “forgotten men and women” who he said elected him.

One can safely say that they are not wrong in this regard, and Cohn's recent actions confirm it.

Cohn, who started at Goldman as a derivatives trader, was by far the most senior executive from any bank to visit the regulator in the past two years, according to the records. “He was the tip of Goldman’s spear to get the regulations rolled back,” said Dennis Kelleher, head of Better Markets, a pro-regulation campaign group that tracks Goldman’s activities in Washington.

Mr Cohn stood by Mr Trump’s side this month as he signed an executive order to start work on loosening the Dodd-Frank act, which introduced a far-reaching new regime for derivatives regulation.

This week Gregory Palm, Goldman’s general counsel, responded to Cohn-related questions from the Democratic senators Elizabeth Warren and Tammy Baldwin by telling them in a letter that the bank had “no involvement in the drafting of any executive orders, nor did we receive any advance notice of their issuance”.

Some more details about Cohn's direct involvement in swaps regulation

Two of Mr Cohn’s CFTC meetings as Goldman’s president were with Chris Giancarlo, then a CFTC commissioner and now the regulator’s acting chairman and a leading candidate to take the job permanently, the records show. The White House declined to comment on the substance of any of Mr Cohn’s four CFTC meetings, which it said happened when Mr Cohn was a “private citizen”. But a White House spokesperson said Mr Cohn and Mr Giancarlo were “old friends”.

 

The records show Mr Cohn’s CFTC meetings concerned rules on the collateral, or margin, that swaps market participants have to post as a first line of defence against the risk of default when trading over-the-counter products away from exchanges.

Not surprisingly, Cohn's "friend" Giancarlo, who worked at a brokerage active in derivatives before joining the CFTC in 2014, has been an outspoken critic of some CFTC swaps rules issued under former chairman Tim Massad, an Obama appointee who stepped down this month.

Why Goldman's interested in derivatives?

Two reasons: the simpler, more innocuous one, as the FT points out and as we have shown repeatedly over the years, is that Goldman derives a higher proportion of income from trading than its peers and the global derivatives market, with a notional value of $500tn, is a vital engine of that business. The margin rules have made OTC swaps trading more capital intensive and pushed some clients towards less lucrative standardised products on exchanges.

A Goldman spokesman said: “Our clients have concerns about changes to the rules governing the global swaps market, and we have conveyed those views to regulators so that they can create a more stable financial system that can effectively meet our client’s needs for risk management.”

Actually it may not be Goldman's "clients" - it is much more likely Goldman itself: two people familiar with Mr Cohn’s CFTC meetings said the Goldman executive was concerned about the models used to calculate margin requirements and about which cross-border trades the requirements would apply to. The CFTC’s final rules were released in two batches in December 2015 and May 2016.

As to Goldman's absolutely gargantuan exposure to derivatives, the answer is contained in the quarterly OCC report: as of September, the total notional amount of Goldman’s derivatives contracts — an indication of trading volume, according to the bank — stood at $45.8 trillion, roughly the same as Citi's $48.7 trillion and JPMorgan’s $51.5 trillion, and more than Bank of America's $35 trillion. There was one major difference: while JPM and Citi had total assets of $2.5 and $1.8 trillion respectively, Goldman had a tiny, by comparison, $880 billion: BofA? $2.2 trillion.

In light of how thinly capitalized the bank with the third largest amount of notional derivatives is, one can see why Trump's chief economic advisor has been so focused on derivative "reform."