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Blog Post | December 6, 2016

Obama and Senate Can Act Against Trump's Conflicts of Interest

Ethics in Government

Jeff Hauser runs the Revolving Door Project, an effort to increase scrutiny on executive branch appointments and ensure that political appointees are focused on serving the public interest, rather than personal professional advancement.

As I’ve noted previously, Donald Trump’s relationship with billionaire hedge funder John Paulson seems likely to be very, very good for Paulson.  

Paulson, who came to fame making $4  billion personally by betting against the housing bubble, also seems about to win big on having bet against pre-election favorite Hillary Clinton.

Interestingly, it now seems clear that the relationship between Paulson and Trump is mutually profitable.

First, per the Wall Street Journal, “Hours after being announced as President-elect Donald Trump’s nominee for Treasury secretary on Wednesday, Steven Mnuchin sent shares of Fannie Mae and Freddie Mac way up after he said government control of the companies should end.”

Second, “One beneficiary of the rally: John Paulson, who has been a Trump donor and adviser, as well as a business partner of Mr. Mnuchin. His hedge-fund firm, Paulson & Co., is invested in the two mortgage firms’ [“Fannie” and “Freddie,” aka government-sponsored enterprises, “the GSEs”] preferred shares, according to a person familiar with Mr. Paulson’s firm.”

Third, “The president-elect himself may benefit if the firms’ stocks move. According to a financial disclosure form filed in May, Mr. Trump has invested between $3 million and $15 million in three funds run by Mr. Paulson.”

Basically, after “the Paulson firm has lobbied for the government to end the arrangement by which the Treasury Department collects [Fannie and Freddie’s] profits as dividends to compensate the U.S. for its 2008 backstop of the companies” for years, now Paulson has one of his investors en route to the Presidency. Convenient!

How much does Trump have currently invested in Paulson funds? We do not know, because “Donald Trump isn’t legally obligated to tell Americans anything more about his finances until well into his presidency.” Yes, as various tax, trade, healthcare, energy policies and the like wind their way through Congress and the executive branch, the public will have no idea how those policies would impact the Trump clan’s finances. As McClatchy notes, “he won’t have to publicly file a new financial disclosure form until May 2018, according to the U.S. Office of Government Ethics.”

And given how easy (flawed) U.S. law will make it for Trump to create opaque shell companies that hide assets behind vanilla names, it is not clear we’ll ever know with confidence the full breadth of Trump family holdings invested with John Paulson.

That’s worrisome. Is Mnuchin’s advocacy for policies beneficial to GSE shareholders related to Trump family holdings in Paulson funds? Is Mnuchin’s affinity for former business partner John Paulson, and its benefit for Trump’s investments, the reason why the inexperienced Mnuchin’s first job in government is set to be head of the Treasury Department?

It is impossible to know.

Maybe Trump is wealthy enough that $3-15 million of assets is of little consequence. Maybe Trump no longer invests with Paulson — or any other hedge fund that owns GSE shares. But we do not actually know Trump’s wealth with any accuracy. We also do not know if Trump has invested vastly more with Paulson or other GSE owning hedge funds since his spring financial disclosure.

This uncertainty will recur unless serious action is undertaken. We do not know which Trump nominees have preferences that would be beneficial for Trump holdings. We cannot know which Trump administration policies are efforts to further enrich the Trump family until we understand the Trump family’s financial interests.

Ultimately, we cannot disentangle potentially legitimate policy motives from venal interests until the Trump holdings are liquidated and put into plain instruments like broadly held stock and bond funds.

Unless the Senate understands what financial entanglements and conflicts of interest are embedded in an appointment, they lack sufficient information to properly question nominees, let alone provide consent to their ascension to high public office.

That’s why the Senate can and must require that Trump liquidate his assets via an appraisal and insurance process outlined here.

And until such liquidation, the Senate should say no to all Trump appointees.

Would such a blockade – even after Republican inaction on Obama nominees, including Merrick Garland – be disproportionate?

No.

Donald Trump’s entanglement with John Paulson exemplifies the inherent unworkability with having a family actively investing while controlling the presidency. Trump’s victory raises clear and unprecedented threats to the Constitution, as illustrated by increased discussion of the Constitution’s two Emoluments Clauses.

(For more on the Emoluments clause, read this from Paul Blumenthal or this from Matt Shuham, and consider following @EmolumentClause on Twitter.)

Trump appears exceedingly unlikely to cure the severe violations of the Constitution his Inauguration will produce. And while we should not assume Trump’s conflicts can’t be challenged in court (indeed, it’s possible they could be), nor should we rely solely on civil litigation or Congressional leadership acting of its own accord.

This dilemma is somewhat ironic, given that even some conservatives have noted that the outgoing Obama administration has been remarkably scandal-free.

Obama knows how serious these issues are.  Before the election he warned the country:

[…] in an MSNBC interview just days before the election that Trump’s intention to avoid a blind trust while letting his family run the company raised too many questions because “he’s got all kinds of business interests that nobody knows what’s what and where money is coming from and where it might be going. “That is the kind of unprecedented attitude with respect to the highest office in the land that would make me concerned about the country as a whole,” Obama said.

But President Obama need not stand by silently and see his presidential ethics legacy bespoiled. Instead, President Obama can and should elevate these previously esoteric Constitutional issues and unvetted ethical concerns by calling for a special session of Congress.

President Obama has clear Constitutional authority to convene a special session of Congress. He should exercise that authority and charge Congress with addressing the pressing Constitutional threat represented by Trump self-dealing.  Such an action by President Obama may be unprecedented, but so too are the many and varied conflicts of interests and threats to our Constitution posed by the Trump presidency.  These threats merit such an extraordinary action.

Ethics in Government

More articles by Jeff Hauser

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