Tax Law & Order

Ah, summer, when screenplay-ready drama emerges from the investment banking industry. Last summer, it was CNBC’s Mike Huckman, who, in a scrappy burst of journalistic energy not often seen during the analyst-stroking bubble years, chased Salomon’s Jack Grubman into the street (Fifth Avenue) seeking comments on the breaking MCI Worldcom fiasco. And we all know how that turned out (hint: his kids are now at P.S. 6).
This year, it’s not street theater, but courtroom drama. At stake is a $56 million tax bill, not an eyebrow-raising amount by i-banking standards. But it’s everything, if market reversals leave your entire net worth sitting well within the $112 million spread of the court’s decision. And it’s even more everything if the star is not a mere Master of the Universe, but An Architect of the Universe itself, Dr Myron Scholes.
MBA’s have the Black-Scholes model for pricing options burned into our heads. In hyperbolic shorthand (this is for a screenplay, remember?), Black-Scholes made modern capital markets possible, creating the common language of risk and return. Grubman’s a cog in the machine. Scholes helped define. For all the good that‘ll do him. In a NYTimes article that’d make Dick Wolf proud, David Cay Johnston tells of The Architect’s encounter on the stand with a crack federal prosecutor.