Rifts are opening up among the financial elite.
Michael Moritz, a partner from Sequoia Capital, penned a New York Times op-ed that blasts fellow private equity big dog Steve Schwarzman of Blackstone for cottoning up to Trump and for making his living from squeezing American workers and benefiting from the carried interest tax loophole, which allows investment titans to get what would ordinarily labor income taxed at more favorable capital gains tax rates.
Even among private equity overlords, Schwarzman is an unattractive character. I met him in 1985, after he had just started Blackstone with Pete Peterson. While Schwarzman had been a top mergers & acquisitions pro, he and Peterson had no private equity experience but were nevertheless raising a leveraged buyout fund. McKinsey had approached the pair about handling a particularly sensitive and high profile transaction. I’ve never seen such an open display of greed in a formal business meeting. It was even more surprising given the era and that Peterson and Schwarzman seemed completely lacking in awareness or concern about the message they were conveying. In that respect, he and Trump are well matched.
Schwarzman has continued to make unseemly displays, the most famous when he declared that getting rid of the tax carried interest tax break on which his wealth depended would be like the Nazis invading Poland. He later tried walking that back. He also had a $6 million 60th birthday party, which raise a few eyebrows.
Let us not forget that leveraged buyout funds, which crashed in the 1990-1991 downturn, succeeded in wrapping themselves in the more virtuous mantle of venture capital by rebranding themselves as “private equity” in the mid 1990s. But the strategies do have meaningful differences. Venture capital over time has rarely beaten the stock market net of fees, save when you are doing the measurement in the right part of the tech cycle. But aside from their recent questionable habits of getting young entrepreneur wannabes to work in near-sweathshop conditions, they can fancy themselves to be on the right side of the Hippocratic Oath, “Do no harm” by virtue of not using leverage, or firing people to earn their returns. Of course, we need to turn our eyes from precariat-increasing disruptions like Uber and other “gig economy” plays.
Nevertheless, Moritz, who has given over $150 million to universities to support lower-income students1, is on the money when he blasts Schwarzman, who has started talking up the problem of stagnant and low incomes in America, but blames it post-crisis regulatory overreach (no, I am not making that up). From Stephen Schwarzman’s Bad Business Advice in the New York Times:
Mr. Schwarzman has flourished during the four decades that the people Mr. Trump purports to represent have languished. In the pursuit once known as leveraged buyouts — before some marketing genius fastened on “private equity” as a way to disguise the fact that the business still rests on a mountain of debt — Mr. Schwarzman and his brethren have become symbols for the economic inequality that Mr. Trump deplored during his campaign. They are able to borrow billions and deduct interest payments from their corporate tax bills while $75,000-a-year wage earners in Ohio, Michigan or Pennsylvania are unable to secure a mortgage and get no tax break on their monthly rent.
Just like Mr. Trump’s real-estate business, groups like Blackstone rely on enormous debt to prop up their business. The playbook for any of their acquisitions is to gain 100 percent control by financing the purchase of a company with a small down payment and a heap of debt secured not (heaven forbid) by their own savings or houses, but by the business they are looking to acquire. They then cut costs — which almost always means making sizable layoffs at the company they’re taking over — and figure out a way to reward themselves financially…
Perhaps, after Friday’s meeting, traveling together aboard Air Force One to Mr. Trump’s club in Florida, Mr. Schwarzman explained to Mr. Trump that he could make America great again by employing the same tactics Blackstone used after its $4.1 billion acquisition in 2006 of Travelport, a travel-reservations business that within a year of the purchase had laid off 841 workers, or 10 percent of its work force.
The story of this fiasco is enough to make anyone weep: Laid-off workers were forced to sell their homes; others lost their health insurance and postponed plans to start a family; some were stuck on unemployment lines. Even more brazenly, Blackstone, seven months after its investment, layered more debt on Travelport, which it used to pay itself back for the original purchase. Travelport subsequently underwent two restructurings of its debt.
Moritz also points out that getting rid of the carried interest loophole is nowhere to be found on Schwarzman’s list of “deregulation”, when Trump had promised to abolish it during his campaign. Moritz called for making private equity principals personally liable for the debt they pile on investee companies.
The lower- and middle-income Americans who voted for Mr. Trump in droves would do well to listen hard to what Mr. Schwarzman is advising. They’ll hear the sound of dollars being sucked out of their pockets and slipped into the wallets of the 1 percent.
Sadly, it’s a given that the doings of Steve Schwarzman, and the significance of his role as the head of Trump’s business council, is unlikely to be well reported in the heartlands, or even outside financial centers. And that isn’t just the fault of the press. Private equity has never done a lot of media spending, so it is one of the few large corporate interests that newspapers, particularly back in the 1990s and early 2000s, before newsrooms were starved of revenues, could have taken on.
But as we and others have stressed, the left stopped being interested in economics long ago, and the Democrats became the party of Big Finance around the time when the rebranded private equity was getting its mojo back. So the Democrats have played a large role in helping keep the role of private equity in crushing American workers, and in particular breaking unions, less visible than it should have been. So it should not be surprised that it is reaping the whirlwind.
1 Moritz, who comes from a poor background, hasn’t always been on the side of the angels. He gave nearly $50,000 to support a San Francisco ballot measure to clear homeless encampments.