We get it, Mitt Romney is loaded. Dude likely has a few hundred million in the bank. His opponents also talk of him having money hidden in the Cayman Islands and Switzerland to avoid paying extra taxes. But Romney can claim he has no knowledge of where his money is invested. Why? Because when those beautiful Ivy League eyes set their sites on public office he put his money in a blind trust.
So what is a blind trust?
As always I’ll let Investopedia give us the definition for a blind trust:
A trust in which the executors have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust.
The executor is someone that is legally allowed to make decisions on behalf of the beneficiary. In the case of a blind trust, the executor makes the decisions on what to invest in for the beneficiary. It’s still the beneficiary’s money, they just don’t know what they’re invested in.
Why would anyone want a blind trust then?
No one really wants a blind trust so much as they sort of need one. They say money is power but in the United States we also grant power through our government and elections. Those with power have the ability to influence things that can enrich themselves either directly or indirectly. There’s no denying that after their term with that power these politicians will likely still have the ability to garner wealth through new networks and influence. But while in power we expect our leaders to not use it to enrich themselves.
Blind trusts attempt to remove some conflict of interest. Most people that have millions of dollars in the bank likely have it invested. The value of the investments depends on a number of factors, the success of the underlying companies, the economy, and government activity. In the case of the president, they have the power and access to known and influence things that could make many people rich.
A simple example would be the employment numbers. Barack Obama knows what the numbers are the day before they’re published each month. The numbers are a market moving report and one can easily make millions off the report if they know what’s in it before others.
A more complex example might come in the form of a government loan. As a part of energy policy the government has been giving loans to US companies developing alternative energy solutions. One of those companies is electric car maker Tesla. Tesla has a loan from the government that contributed greatly to the success of the firm so far. If Obama owned part of Tesla and then lent them government money that is a conflict of interest. But if Obama had a blind trust and the trust owned part of Tesla he wouldn’t even know he was lending money to a company he owned.
Obama doesn’t have enough wealth to need that. When he was elected President he put all his money in index funds and government bonds. As far as I can tell he hasn’t really changed his portfolio and so the combination of full disclosure and no outright investments in specific companies has meant few people question his lack of a blind trust.
But Romney has significantly more wealth than Obama. One could argue Romney is so rich he has no interest in trying to make himself richer. But while many billionaires say money doesn’t matter, winning does and they use their wealth as a method to keep score. So a conflict could exist.
This is why Romney has his money in a blind trust. The problem for Romney is he has criticized other politicians for using blind trusts and says they aren’t truly blind. And in his case the manager of the blind trust is a longtime friend. This person likely knows his likes and dislikes and if he isn’t telling Romney what he is invested in, he can probably figure it out.
So for Romney, if he wins the election, it would make sense to switch to a new manager that knows less about him. It is unlikely that Romney would do anything to enrich himself further, but just the appearance of a president having a conflict of any kind can be enough for opponents to attack hard. Romney is likely invested in many private companies and so couldn’t liquidate his holding even if he wanted to so even he knows it would make sense to have a slightly more blind trust than he has today if he is to take the oath of office.
Blind trusts are a method for people in power to park their holdings and remove some conflict of interest. But you can never remove it all and that’s okay. That’s where full disclosure comes in.