Yesterday the US Attorney's Office of the Southern District of New York released a sentencing memorandum for Michael Cohen. We'll leave the political implications to our colleagues in the DC bureau, but one paragraph in particular jumped out at us (emphasis ours):
The largest source of undisclosed income was more than $2.4 million that Cohen received from a series of personal loans that he made to a taxi operator... for a total principal of $6 million. Each of these loans carried an interest rate in excess of 12 percent. Cohen funded the majority of these loans with a line of credit with an interest rate of less than 5 percent (such that Cohen was earning a substantial spread on the difference between the two loan rates)... In total, Cohen received more than $2.4 million in interest payments from Taxi Operator-1 between 2012 and 2016.
According to the US Attorney's Office, Mr Cohen committed a crime when he failed to declare profits from these loans. This strikes Alphaville as a completely needless grift, because for four years during the recovery, Mr Cohen had found a way to earn a 7 per cent spread.
Michael Cohen missed his calling. He is an amazing banker.
Let's reframe what Mr Cohen did as if he were just a bank officer running, say, the Cohen Amalgamated Taxi Bank of Chicago. He had two choices. He could:
Borrow at the prime rate and buy junk corporate bonds. It was actually a popular strategy during the recovery, so popular that we all agreed to call junk bonds "high yield" bonds
Build a highly specialized portfolio, borrowing at above prime to lend to high-yield risks he identified through his contacts in the taxi industry
The Cohen Amalgamated Taxi Bank of Chicago pursued strategy 2. It was the right call! Between 2012 and 2016 it beat the spread on the far more popular strategy 1.
Alphaville does not understand why Mr Cohen failed to tell his accountant about his loan portfolio. It was a pretty good business.