The $180 million conflict that kept Scaramucci out of the White House in January has only gotten shadier

New White House communications director Anthony Scaramucci has joined the Trump administration with a $180 million conflict of interest hanging over his head.AP

• Anthony Scaramucci is selling his fund of funds business to a Chinese conglomerate with ties to the government.
• The firm, the HNA Group, is facing an increasing number of questions at home and abroad, and the deal is subject to review by the US Treasury.
• The sale reportedly kept Scaramucci out of the White House in January because of the conflicts it raises.

Let’s not be naive. If I told you that a firm with ties to a sometimes adversarial foreign power was trying to overpay a Trump administration official for their now struggling business, you might say, “Gee, that seems like a conflict the White House doesn’t need right now.” But here we are.

New White House communications director Anthony Scaramucci has joined the Trump administration with a $180 million conflict of interest hanging over his head. It’s the same conflict that reportedly kept him out of the White House months ago, and it’s only gotten stickier since then.

Scaramucci is selling his $5.6 billion financial firm, SkyBridge Capital, to a number of investors. Chief among them is a Chinese financial firm with strong ties to ruling Communist Party, called the HNA Group. Already, Bloomberg outlined that HNA and its fellow investors seem to be paying multiples more for SkyBridge than a firm like this would normally be valued at. But the sale has also been dragging on for months, and as it has we’ve seen the questions about HNA, its ownership structure, and its financing rise out of the murky world of big Chinese business.

Now, this all sounds pretty strange as is. But it gets even stranger when you understand what SkyBridge is, what HNA is, and what’s been holding up the sale and Scaramucci’s pay day. (Hint: It’s the US government.)

When you understand that, you’ll also understand why this sale to the Chinese was the reason why White House Chief of Staff Reince Priebus didn’t want Scaramucci too close to the president, according to some close to the administration. It’s also why Priebus was cut out of the loop during Scaramucci’s lightning fast hiring last week.

Get to know some Wall Street

Scaramucci’s firm is likely best known for the massive bash it throws in Vegas.Reuters/ Steve Marcus

But first, SkyBridge. Scaramucci’s firm is likely best known for the massive bash it throws in Vegas every year, one that attracts world leaders and stars of the world of finance for four days in the desert.

But of course that’s not the only business SkyBridge has. It is a fund of funds, which is to say that it is an investment fund that connects people to other investment funds.

Over the last few years, businesses like this have been hurting on Wall Street. When you pay a fund of funds, you pay a fee to them, and a fee to the hedge fund they’re connecting you to. The problem with that, of course, is that it’s expensive, and when hedge funds aren’t performing (as they haven’t been for the past couple of years) no one wants to pay high fees.

Scaramucci told me in an interview last year that part of his job was to try to get fund managers to lower their fees so that he could lower fees for his clients. Unfortunately, though, his efforts weren’t enough to stop investors from pulling $1.6 billion from SkyBridge’s flagship fund last fiscal year.

This is part of what makes it so curious that HNA would want to overpay for SkyBridge. It is a high-fee business in a low-fee world. Scaramucci and SkyBridge have been responding to questions about the sale the same way for months — they say it’s a couple of weeks away from closing. He has also said repeatedly that he’d recuse himself from the sale of SkyBridge, and that he thinks HNA is buying it in spite of his ties to Trump, not because of them.

Get to know the ‘gray rhinos’

The other thing to know is HNA itself — and all of the massive complications it faces right now. In short, HNA is a massive enterprise that traces its roots to Hainan Airlines, but went on a $50 billion buying spree — backed by big government lenders — and now owns everything from stakes in Hilton Hotels to small aviation companies.

“HNA is looking for influence in an administration that looks like it is positioning itself to be anti-China,” Derek Scissors, a China specialist at the American Enterprise Institute, told The New York Times earlier this year.

Therein, of course, lies the conflict. And HNA brings baggage of its own — it is, for example, unclear exactly who owns and backs it. Bank of America won’t do business with the company, and the European Central Bank is investigating HNA’s stake in Germany’s Deutsche Bank.

At home, President Xi Jinping just labeled HNA and other big conglomerates that got huge off debt-fueled acquisitions, “gray rhinos” — companies that seem innocuous until they start moving fast in your direction.

You do not want a catchy label in China. It usually means the government is keeping an eye on you. In this case, the government is interested in reining financial sector debt and keeping money in the country. But SkyBridge is a tiny acquisition for HNA. Even if it overpays for the firm, the $180 million price tag is a rounding error for a firm HNA’s size. A few more things about HNA:

• The company claims to be owned by two charities, as well as its founders. Beyond that, the whole thing is murky.
• Chinese billionaire businessman Guo Wengui claims HNA is owned by Chinese government officials. He’s doing that from a self-imposed exile in New York City, and HNA is suing him for defamation.
• A bunch of Chinese banks may have just cut off credit to HNA in an attempt to stop it from growing larger. HNA’s CEO Adam Tan told Reuters this isn’t true, saying, “We’ve got nothing to hide.”
• There are reports here in the US of HNA buying businesses and then not maintaining them. This would support the thesis that the Chinese government is angry at these gray rhinos because it believes some acquisitions were just an attempt to get money out of China.

A final issue may just be that even when the deal closes, financial advisers to high-net-worth clients may have a hard time selling an HNA-owned SkyBridge to the doctors and dentists who invest in the fund of funds.

One financial adviser Business Insider spoke with said he would have trouble explaining to clients why he was doing business with a firm like HNA. Indeed, part of the hold-up in the SkyBridge deal was getting the advisers that sell SkyBridge products at firms like Morgan Stanley on board with the deal.

If Bank of America won’t do business with HNA, why should they? That, ultimately, is a question for the Treasury Department.

Get to know CFIUS

Pursuant to section 721 of the Defense Production Act of 1950, the Treasury must review any transactions that would result in control of a US business by a foreign person under the Committee on Foreign Investment in the United States (CFIUS). That means Steve Mnuchin has to sign off on this SkyBridge deal. It has been held up for months and months, according to reports, in part because the Treasury is so understaffed.

“Traditionally, there’s been a bipartisan effort to use the CIFIUS process to prevent foreign companies with an affiliation with a hostile foreign government from buying key US resources or assets that could compromise national security,” Lee Branstetter, an economist at Carnegie Mellon University and former CFIUS member, told Business Insider. The Trump administration has been especially tough when it comes to businesses that could affect national security, citing that as a reason for potentially levying a 25% tariff on foreign-steel imports.

Indeed, according to Reuters, CIFIUS has been more conservative than usual since the Trump administration took over, rejecting nine deals so far this year.

That said, this Scaramucci case is unique.

“I can’t think of another case when a significant White House official who sold their business in its entirety to a single Chinese entity that has been known in the press as one of these ‘gray rhinos,'” Branstetter said. “That does appear to be unique. We haven’t faced these kinds of circumstances before … There are questions as to whether this transaction would provide a Chinese conglomerate with influence over Mr. Scaramucci. But I’m not privy to the specifics of the deal.”

Specifics are important. Branstetter said that if this is a one-time transaction between Scaramucci and HNA (which is what Scaramucci says it is), maybe this isn’t so terrible. It just looks terrible.