Context for people who don't read Dealbreaker every day:A ‘Fat Cat’ Strikes Back
President Obama and the business community have been at odds for months. But in July the chairman and cofounder of the Blackstone Group, one of the world’s largest private-equity firms, amped up the rhetoric. Stephen Schwarzman—the leading John McCain supporter in a firm that, in 2008, gave more money to Obama—was addressing board members of a nonprofit organization when he let loose. “It’s a war,” Schwarzman said of the struggle with the administration over increasing taxes on private-equity firms. “It’s like when Hitler invaded Poland in 1939.”
Attendees at the board meeting (who provided details on condition that they and the organization not be identified) were shocked. “War? Hitler? Poland? A little over the top for a proposal to make hedge-fund managers pay their fair share in taxes,” one attendee says about the comments. Neither Blackstone nor the White House would discuss Schwarzman’s statement, which came in the wake of strong, but less stinging, criticism this summer of the administration from the U.S. Chamber of Commerce and the Business Roundtable.
Schwarzman’s original beef with Obama grew out of a 2008 campaign promise that “carried interest”—the compensation structure of private-equity-fund managers—would be taxed as ordinary income (35 percent) instead of capital gains (15 percent). Obama and many Democrats have argued that it’s unfair for people like Schwarzman, with a net worth of about $8 billion, to pay taxes at a lower rate than their secretaries and chauffeurs. More substantively, the commissions and fees that hedge-fund managers reap (20 percent of their clients’ profits) are not, strictly speaking, capital gains because the managers themselves never held the stocks.
The issue grew more complicated this year when Congress made noises about taxing the sale of private partnerships as ordinary income, not capital gains. This aroused the opposition of thousands of real-estate ventures and other businesses far afield from the hedge-fund world. The government’s aim was to prevent tax lawyers for the partnerships from using more than a dozen loopholes to keep taxes low, but it had the effect of slowing efforts to confront the carried-interest discrepancy.
Schwarzman is also angry at the president for some of his rhetoric (Obama has talked of “fat-cat bankers”) and for not having a prominent former CEO in his cabinet or inner circle—concerns shared widely throughout the business community, including among Democrats. “Steve thinks the president lacks an intuitive feeling for the role of capital markets,” says a Wall Street executive who knows Schwarzman. “Obama is from Mars and Steve is from Venus.”
Pools of private capital such as hedge funds and private equity funds have what is commonly called a "2/20" fee structure. The "2" refers to the 2% management fee upon total Assets under management (yes Virginia, that means if you've somehow suckered $2B out of people, you get $40M/yr by default to spend however you want). The "20" refers to the carried interest, or "carry", which the management of the private capital pool claims as their share of the profits generated by their investment genius (continuing the $2B fund theme, if you generate 10% returns, i.e. make $200M, you get $40M, 20% of the $200M you made as a fee). Under current law, carry is taxed at capital gains rates (15%), instead of the max corporate rate (35%) (final parenthesis: 15% tax on $200M is $30M, a $40M savings over the $70M tax a 35% rate would bring). Obama made a campaign promise to hike the tax on carry up to corporate rates, there's a bill out to do exactly that, but it's probably not going to pass.
The greatest article ever on Steve Schwarzman was of course written by the New Yorker. I recommend you read it in its entirety.
