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Thursday, June 21, 2007

Politicians Get a Black Mark over Blackstone

Its funny how supposedly populist politicians act when they are forced to make a decision that would do some good for the little guy. This thought came to mind as I was reading the coverage of the impending Blackstone IPO and the immense windfall of riches that CEO Steve Schwartzman and his colleagues will receive. They apparently have exposed a tax loophole that has garnered a lot of press recently. The main focus has been whether or not the IPO windfall should be taxed at the corporate rate of 35 percent or a special rate of 15 percent reserved for partnerships, among other tax code minutiae.

And while Wall Street sends its legions of lobbyists to the Capitol to influence a potential bill that could slice private equity profits nearly in half, other interesting underlying themes arise. Namely: the questionable tax record of Senator Charles Schumer and whether or not private equity has reached its peak.

To address the tax situation, Senate Finance Chairman Max Baucus and his Republican colleague Charles Grassley are leading the charge to close the supposed loopholes. Interesting, however, was Schumer's reaction to the bill, who also sits on the Senate Finance Committee. Though he normally favors taxing the "rich," his comments suggested that on this one, he's on the fence at best. The woman who would be president, Hillary Clinton is equally perplexed.

Schumer's office's official position according to reports is that the Senator is "taking a careful look at the legislation." Senator Clinton's office followed suit. The reason for indecision is that Steve Schwarzman is one of their richest constituents as well as major <
> donor of tens of thousands of campaign contribution dollars. Forgetting Senator Clinton for a second, on the surface there is nothing wrong were it not for Schumer's hypocritical votes to tax the investor class by lumping them into the "rich" category.

For example he opposed the 2006 tax cut package, including a two-year extension of the reduced 15 percent tax rate for capital gains and dividends, currently set to expire at the end of 2008. If you're wondering exactly how deeply this will affect individual investor's wallet, economist John Rutledge in an interview estimated that raising the dividend rate alone, "would reduce the value of the S&P 500 stocks by between 5% and 8.5%, roughly a $500 to $700 billion decline in the wealth of the 52% of American households that own stock."

Schumer has also voted against repealing the marriage penalty and against lowering all individual income tax rates. One would have thought based on his record a tax specifically targeted at billionaire private equity barons would be a no-brainer for Schumer. The fact that he is hesitating shows that Schwartzman's donations are having their desired affect.

Furthermore, this isn't the first time Schumer has changed his stripes when it comes to taxing the super rich. He was able to insert a <> special tax break into an unrelated bill for a wealthy New York developer named Robert Congel - also a donor - that funded a mega-mall in Syracuse New York with tax-exempt bonds.

Chuck Schumer's record consistently shows that when it comes to the uber-wealthy New Yorkers, tax breaks and loopholes are ok, but tax cuts that would help middle and upper class investors are not. I ask you, who needs a tax break more: the billionaire or the "thousand-aire" who has a mortgage and a portfolio just barely large enough to retire on?

And speaking of leaving ordinary investors high and dry, though I am certainly no investment guru, it seems like the Blackstone IPO is a dumb investment to begin with. It can be argued that private equity has reached its peak and returns are poised to decline. Why else would private equity barons be looking to cash out and subject themselves to new taxes and regulatory scrutiny?

Further, with cheap financing on the decline, deals are going to become more expensive and less profitable. Making matters worse, undervalued acquisition targets are dwindling so where is the growth potential?

Unfortunately the sales and marketing geniuses on Wall Street are going to rally investors big and small into buying Blackstone shares. And in five years I'm quite sure Steve Schwartzman and his cronies will still be <>
eating cracked crab that goes for $400 per claw and hiring out Rod Stewart to play private shows while ordinary investors will be stuck wondering what happed to their Blackstone stock.

Down in Washington, Senator Schumer will be wondering how to tax the poor saps.


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