-Caveat Lector-
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From: [EMAIL PROTECTED]
Date: June 28, 2007 3:27:37 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Filthy Rich, Dirty Politics
Blackstone Sparks Lobbying `Battle Royale' Over Taxes
By Ryan J. Donmoyer and Elizabeth Hester
http://www.bloomberg.com/apps/news?
pid=20601087&sid=acZCKrFoilxA&refer=home
Schwarzman in New York, June 18
June 25 (Bloomberg) -- Stephen Schwarzman, the founder of
Blackstone Group LP, stood beaming before 600 Champagne-sipping
investors in the baroque ballroom of New York's Pierre Hotel,
transformed into a black and white palace for the occasion.
At that moment, on June 14, Schwarzman was the master of the
financial universe, fresh from a blitz of media attention and about
to launch the most anticipated initial public offering of the year.
An hour later, his victory lap was thrown off course by word of a
bill in the U.S. Senate to more than double Blackstone's tax burden
-- the first of what are likely to be a slew of proposals and
regulations aimed at hedge funds and private-equity firms.
Now Wall Street's new elite is fighting back, rapidly assembling an
army of high-powered lobbyists to block the efforts of the
Democrats who control Congress -- and some Republicans as well --
to assault their profits.
The lobbying ``will pick up like wildfire, especially with a
presidential election year in the very near future,'' says Steven
Howard, a partner at the New York law firm Thacher Proffitt & Wood
LLP who advises investment firms. ``This will be a battle royale in
Congress, where you'll have representatives and senators who view
themselves as populists against the financial industry's giants.''
Another Salvo
House Democrats fired a new salvo on June 22, when Ways and Means
Chairman Charles Rangel of New York and Financial Services Chairman
Barney Frank of Massachusetts introduced legislation that would tax
all fund managers' share of profits at the 35 percent corporate
rate, instead of the 15 percent capital-gains rate they currently pay.
``They've got their teeth into it and they'll continue to pursue
it,'' says former Texas Representative Bill Archer, who was the
Republican chairman of the House Ways and Means Committee between
1995 and 2001. ``It's a no-lose situation politically.''
Industry leaders have made themselves ready targets thanks in part
to annual payouts that sometimes reach more than $1 billion and
extravagant displays of wealth such as Schwarzman's 60th birthday
party in New York on Feb. 13, which featured a performance by Rod
Stewart and a video greeting from President George W. Bush.
``The publicity is definitely working against them,'' says John
Chapoton, a partner at Brown Investment Advisers and Trust in
Washington and a former Treasury Department official in the Reagan
administration.
Market Enthusiasm
The legislation introduced last week by the Senate Finance
Committee -- which, unlike the Rangel-Frank measure, would apply
only to private-equity firms that go public -- didn't damp investor
enthusiasm for the Blackstone IPO.
The company's shares rose $4.06, or 13 percent, on June 22 in their
first day of trading; they fell $2.62, or 7.5 percent, today, to
$32.44, at 4:01 p.m. in New York Stock Exchange composite trading.
Shares of Fortress Financial Group LLC, the first hedge fund
management firm to go public in February, fell $1 to $23.25 in
trading today.
Schwarzman planned to sell about 5.7 percent of his stake for
$449.2 million, according to a June 21 filing with the SEC. His
remaining 23 percent stake in the company is worth about $8.1 billion.
Lawmakers are searching for new revenue sources to offset the cost
of their spending plans. The government may lose $4 billion to $6
billion a year in revenue because of financial firms' favorable tax
treatment.
That figure may even be too low, congressional aides say: Billions
more may be lost because many investments are routed through
offshore tax havens such as the Cayman Islands, where 8,134 active
hedge funds are registered. That's an increase of 123 percent over
the past five years, according to the Cayman Islands Monetary
Authority.
Lobbying
To help defend their profits, Blackstone, the Carlyle Group and
Apollo Management LP helped found a Washington trade group, the
Private Equity Council, which in turn hired three powerhouse
lobbying firms to promote their interests: Capitol Tax Partners;
Brownstein Hyatt Farber Schreck and Akin Gump Strauss Hauer & Feld
LLP.
Among those registered to lobby for the council are former
Democratic Representative Vic Fazio of California and former
Assistant Treasury Secretary Jonathan Talisman. Blackstone is also
represented by Washington-based Ogilvy Government Relations, whose
lobbyists include Wayne Berman, a top fundraiser for Bush.
The Private Equity Council also has retained Johnston Madigan Peck
Boland & Stewart Inc., where the lobbyists include Michael Boland
and Leonard Swinehart, a top aide to former House Speaker Newt
Gingrich.
Republican Aides
Ken Mehlman, former Republican National Committee chairman and
White House political director, is also working on the issue at
Akin Gump, the third-biggest lobbying firm by revenue in 2006.
Fortress is represented by Washington Council Ernst & Young. The
firm's partners include Nick Giordano, a former top tax aide to
Senate Finance Committee Chairman Max Baucus of Montana and the
late Daniel Patrick Moynihan, a former committee chairman from New
York. Other partners working on the issue include Gary Gasper, a
former Treasury Department official, and LaBrenda Garrett-Nelson, a
former senior staff member with Joint Committee on Taxation.
Blackstone spokesman John Ford declines to comment. Robert Stewart,
a spokesman for the Private Equity Council, says the current tax
system is appropriate because it recognizes that ``private-equity
investments are in fact investments that can produce a profit or a
loss, and there's no guarantee about them.''
Campaign Donations
The industry also has poured millions of dollars into lawmakers'
campaign coffers. Employees and spouses at the top 10 firms ranked
by fund size, including Blackstone and Carlyle, donated at least
$461,050 to federal candidates, parties, and political action
committees in the first three months of this year.
Excluding the 2008 presidential donations, giving almost doubled to
$207,700, compared with $111,348 in donations by the same 10 funds
in the first three months of 2005, according to Federal Election
Commission figures. Democrats have received most of the money,
bringing in $259,800, or 56 percent of the total from the top 10
firms, according to FEC figures.
Private-equity firms or hedge funds were among the top donors to at
least four presidential candidates in the first quarter of 2007,
according to the Center for Responsive Politics, a Washington-based
group that tracks money in politics. Former North Carolina Senator
John Edwards received $182,250 from the employees of New York-based
Fortress Investment Group LLC, making the hedge fund where he once
worked his biggest backer.
Fortress's taxes would also increase under the Senate legislation
proposed last week. Democratic Senator Christopher Dodd of
Connecticut's biggest backers are employees of Stamford,
Connecticut-based SAC Capital Advisors LLC, who gave $207,300.
Giuliani, Romney
Among Republicans, the biggest donors to former New York Mayor Rudy
Giuliani -- with $195,800 -- are the employees of the New York-
based hedge fund Elliott Management Corp. Former Massachusetts
Governor Mitt Romney received $99,800 from Boston- based Bain
Capital LLC, making the company he founded his third- largest donor.
The industry has already found some support in Congress. Last week,
Dodd, who is chairman of the Banking Committee and whose state is
home to thousands of hedge funds, asked the Securities and Exchange
Commission to review the Senate's Blackstone legislation, saying it
raised questions ``about its impact on the capital markets.''
Still, the increased lobbying is unlikely to quiet the growing
clamor in Congress for a revision of the carried-interest benefit,
which saves fund managers as much as 20 percentage points on their
income taxes and also exempts them from the 2.9 percent payroll tax
for Medicare.
Congressional aides say the huge wealth generated by the firms is
an attractive source of revenue as Congress struggles to stave off
a $30 billion increase in the alternative minimum tax on 30 million
middle-income families that is scheduled to take effect this year.
Howard says the success of Blackstone's IPO may embolden lawmakers
to pursue the industry by making it easier for them to counter
arguments that Congress is interfering with the financial markets
by raising taxes. ``The greater the IPO, the greater their
temerity,'' he says.
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