Macaskill on markets: Wall Street and the Warren fear factor

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It took a heart of stone not to laugh at the sight of grizzled Wall Street veteran Leon Cooperman choking up on cable TV recently as he condemned Warren’s proposal to introduce a wealth tax in the US.

When asked why he was becoming so emotional, the fund manager and former Goldman Sachs partner replied: “I care, that’s it.” 

He then repeated his prediction that the election of Warren as the next president would lead to a 25% drop in equity prices, in a reminder that anyone who has worked as a Wall Street analyst – which is where Cooperman got his start at Goldman – will find it tough to shake a habit of making bizarrely specific forecasts about the impact of future events.

Lloyd Blankfein, who retired as chief executive of Goldman last year, did not want to seem as shaken up as his former colleague Cooperman, after they both featured in a Warren campaign ad in leading roles as villainous billionaires.

“I was surprised and flattered that I could play such a role in the presidential campaign,” Blankfein joked, adding that he has a thicker skin than Cooperman. 

Blankfein nevertheless sent a waspish tweet condemning Warren for vilification of billionaires as a group, including a swipe at her widely mocked release of a DNA test in 2018 that showed she had a distant Native American family connection.

Blankfein has also tangled with presidential candidate Bernie Sanders on Twitter. After Sanders released a list he billed as “anti-endorsements” from wealthy enemies in July, Blankfein responded: “Don’t know why Sen. Sanders picks on a retiree like me. I think he’s always looked down on me because he grew up in a fancier neighbourhood in Brooklyn.”

Sanders took the bait and replied: “Actually, my concern has to do with the fact that you had no problem getting bailed out by working Americans, while you’ve been picking on them by advocating for cutting Medicare, Medicaid and Social Security.”

Blankfein hit back with a reference to the relative affluence of Sanders compared with most Americans. “Didn’t know I was against all those necessary and well-established social programs. Actually, I think we have more in common than you think – two self-made millionaires from Brooklyn who lean a bit to the left!” 

Blankfein is in fact one of a relatively select group of US billionaires (along with JPMorgan chief executive Jamie Dimon) who made their money running a Wall Street bank, rather than by setting up a fund or starting a business.

Sanders has reported income of over $1 million in some years, primarily from book royalties, although he is not among the many Democratic politicians who have been willing to accommodate corporate America for some easy money. 

Sanders is a long-standing proponent of higher taxes to fund a single-payer health system, and even centrist Democratic politicians, such as former vice-president Joe Biden, would reduce discrepancies between taxation of wages and capital gains.

Hit a nerve

But the details provided by Warren in her proposals for a tax on all wealth and her advocacy of structural financial industry reform have hit a particular nerve on Wall Street as the countdown to the presidential election next November begins.

Some market veterans with hands-on political experience counsel their peers against reacting viscerally to candidates who relish the chance to tangle publicly with corporate leaders.

“People are dramatically over-reacting, because we are still almost 100 days away from the first primary,” says Robert Wolf, a former head of UBS in the Americas, who was an early financial backer of Barack Obama and later served as an economic adviser during the Obama presidency. “It seems very early to be screaming about ‘what-ifs’.

“Does it concern me that Elizabeth Warren talks about a wealth tax?” Wolf asks. “I understand that is her populist message and the way she thinks best to attack income inequality. Do I think we are going to be able to pass a wealth tax? No.” 

Warren has differentiated her campaign with the slogan ‘I have a plan for that’ and the detail she has provided on how she would fund and deliver her proposals. Wolf is not convinced. 

“I think Elizabeth Warren is incredibly smart, but I am not sure that ‘I have a plan for that’ means ‘I have a plan we can execute’,” he says.

Some Wall Street figures are so enraged by Warren that they end up seeming barely coherent when they defend themselves 

But there are logical reasons for Wall Street to be concerned at the extent to which Warren is setting the agenda for all Democratic candidates.

She was the main driver behind the establishment of the Consumer Financial Protection Bureau (CFPB) in the US after the 2008 credit crisis. Republican senators managed to block her appointment as inaugural director of the CFPB, but soon afterwards Warren was elected to the Senate for Massachusetts and she has been tormenting the financial industry ever since.

Her proposal for a 21st century Glass-Steagall Act to separate commercial and investment banking has helped to keep alive a potential market structure change that most on Wall Street thought had died a natural death when it failed to gain traction after the 2008 crisis.

And Warren’s recommendations for an overhaul of the private equity industry are specific and backed by attacks on individual firms in the sector, including Blackstone. 

Her plan to extend the liability of private equity firms for debt incurred by companies they own goes well beyond the proposal to end the industry’s carried interest exemption that is now common among politicians (and anticipated by many on Wall Street), for example.

Hearings in the House of Representatives in late November about private equity reform demonstrated the challenges that Warren would face, even if she secured first the Democratic nomination and then the presidency.

Warren as a senator was not present, but allies such as representative Alexandria Ocasio-Cortez were disappointed to find that a number of Democratic politicians aligned with Republicans in questioning the need for dramatic change.

And a wealth tax such as the levy of 2% and higher that Warren has proposed on all assets – rather than annual income and capital gains – would certainly present formidable assessment and collection challenges.

Case for change

But the objections that Wall Street and corporate leaders raise over the details of Warren’s plans may not resonate with voters. Complaints about the problems of valuing multiple properties and private investments, or predictions that wealthy individuals will shift assets into gold to evade a new tax are actually likely to be used by politicians to reinforce their case for change.

Some Wall Street figures are so enraged by Warren that they end up seeming barely coherent when they defend themselves. Once Cooperman had battled back the tears in his TV appearance he made a curious rebuttal to Warren’s wealth tax proposal, for example.

“She’s screwing around with the wrong guy, because I want to give it all away,” Cooperman said about his own fortune, which is estimated at over $3 billion, based on the value of Omega Advisors, the hedge fund he recently turned into a private office.

Warren didn’t directly address this offer by Cooperman or the underlying question of whether philanthropy can or should partly replace public spending. Her take on the dispute was made clear by an item for sale on her website, however: a $25 union-made coffee mug with the label ‘Billionaire tears’.