Going after Blackstone

Business Times - 27 Jun 2007

New financial system faces political backlash

Most recent example is the efforts by US lawmakers to squeeze more tax money from Blackstone


ECONOMISTS have been celebrating the remarkable expansion in the financial system in recent years and the way it has been revolutionising the global economy. They are tying to figure out how the explosion in and globalisation of finance and the creation of new financial assets and emergence of new financial players have been transforming the global economic landscape.

It has, for example, accelerated the liberalisation of the global financial sector, and in the way business is done by creating incentives for takeover and mergers.

Many economists agree the forces of the new global capitalism - their most revolutionary players being the managers of equity and hedge funds - have made the process of wealth creation - the main task of the market economy - more efficient and productive.

Hence the resistance among policy-makers to regulate the financial system which could amount to killing the goose that has been laying the golden eggs.

But then the nature of popular democracy is that it allows those who don't seem to see a lot of golden eggs lying around them - the economic losers in the market system - to press their political representatives to try to kill the goose.

And there is no doubt that the new financial system, which has shifted wealth from the wage-earner to the titan of capital, is starting to face a powerful political backlash.

The most recent and dramatic example of this populist response has been the efforts by US lawmakers to squeeze more tax money from one of the world's most successful investment fund managers. At the centre of this clash between the Economic Man who creates wealth and the Political Man who seizes it and hands it to those who want to benefit more from that wealth, that is 'redistribution', is Stephen Schwarzman, the CEO of the Blackstone Group, an equity and investment management firm, who was ranked 292 among the World's Richest People by Forbes magazine in 2006 (and who also happened to be George WBush's roommate at Yale).

The Blackstone Group was founded in 1985 by Mr Schwarzman and Peter Peterson and made a total of some US$370 billion in deals in the United States in 2006, making it possible for Mr Schwarzman to earn about US$500 million a year and to own over US$7.7 billion in stocks of the Blackstone Group.

After months of much media hype, Blackstone went public in the New York Stock Exchange last Friday, losing its 'private equity' status. The initial public offering (IPO) set Blackstone's market which was valued at US$33.6 billion, or US$31 a share, and made the offering one of the biggest in Wall Street history.

In another publicised and controversial move, the company has already sold a US$3 billion non-voting stake to a Chinese state-owned investment company. But much of the media frenzy surrounding Blackstone's stock offering has probably resulted from the wide coverage of Mr Schwarzman's accumulation of wealth and his insistence on showing it off.

Just recently, he threw himself a birthday party featuring Donald Trump, Patti LaBelle, Barbara Walters, a marching band, and Rod Stewart. In short, if you are a US lawmaker who is counting on a bit of 'class warfare' to gain an electoral advantage, Blackstone and Mr Schwarzman could become a great target for Congressional bashing.

Several Congressional lawmakers had tried to put pressure on the Securities and Exchange Commission (SEC) to delay the IPO. Leading the charge were presidential candidate and Ohio Democratic Representative Dennis Kucinich and Democratic Representative Henry Waxman of California who expressed concern that trading Blackstone on the stock market was 'exposing unsophisticated investors' to risk.

Another Democrat, Senator Jim Webb of Virginia, raising the national security angle and warning of the 'Chinese threat', also asked to delay the IPO, and, according to The Washington Post, writing to the SEC that 'he was worried that China could get access to sensitive technology being developed by companies Blackstone owns'.

But now that Blackstone's shares are trading on the New York Stock Exchange, Congress is looking for other ways to go after Mr Schwarzman. The problem is that the company and its managers have not violated any law in any shape or form. So the hard-working lawmakers decided that if you want to 'punish' Blackstone, you need to change the law.

Indeed, like all private equity firms, Blackstone's income is taxed as capital gains at 15 per cent, instead of the standard corporate tax rate of 35 per cent. So two weeks ago, two of the most powerful figures on Capitol Hill, Senate Finance Committee chairman Max Baucus and Senator Charles Grassley, introduced a bill that would force private equity firms to pay taxes at the 35 per cent corporate rate if they went public as limited partnerships.

The bill would give Blackstone a five-year grace period, while a similar bill without the grace period was introduced in the House of Representatives last week.

The issue is going to become a focus of intense political-legislative fights in Washington in the coming months, as lobbyists and law firms try to influence the lawmakers who would have to make the final decision. Critics of the proposed legislation argue that high-risk investment-fund profits such as the investment partnerships inside Blackstone should continue to be taxed at the 15 per cent capital gains rate and warn that that the Baucus-Grassley bill would diminish the incentives for risk taking and retard economic growth.

So what? Punishing Mr Schwarzman would still make some voters 'feel good' and get the lawmakers promoting that elected. And that is what counts in Washington.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.


Anonymous said…
So what do you think? What rate should those firms be taxed at? And why?

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