June 25, 2007
Last Monday, in South Carolina's Charleston, nine firefighters died in an horrific blaze at a local furniture store, but not before saving the life of a store employee trapped inside.
Some among us, this terrible tragedy evidences once again, risk their lives every day they wake up and go into work. Others among us, meanwhile, never actually risk life or limb but talk and obsess about risk all the time.
Take, for instance, our Wall Street financiers, the wheelers and dealers who spend their workdays “risking” capital. For taking this “risk,” the argument incessantly goes, these movers and shakers richly deserve whatever mega million rewards may come their way.
At tax time, the argument continues, these Wall Streeters also deserve “preferential treatment because of the risk involved.”
Last week, several key figures in Congress moved to end some of this preferential treatment for plutocrats. We have more — on what some might call a declaration of private equity class war — in this week’s Too Much.
James Packer, Australia’s richest man, learns from his mistakes. Back in 1999, the media and gaming king figured that a lavish wedding celebration would get his married life off to a suitable start. Packer would end up spending, on his Sydney wedding, $8.5 million in U.S. dollars. The featured entertainer: Elton John. Alas, Elton did not ensure marital bliss. In 2002, the newly weds divorced. Last week, a wiser Packer tried matrimony again, with a wedding celebration he vowed would be “low-key” and “nothing lavish.” The total tab this time: only $5 million U.S. The three days of festivities, held on the French Riviera, drew close to 150 guests, including the singer Prince. Bride Erica Baxter, a 29-year-old model, wore a $100,000 Christian Dior gown and walked down a 150-meter white carpet lined with “hundreds of thousands of flowers” flown in from Holland. The wedding’s ultimate “low-key” touch. The orchestra for the nuptials had only three pieces . . .
Irish eyes were smiling last week — at the marketing launch of the world’s most exclusive “ultra-luxury” cruise ship. The new boat, the Four Seasons Ocean Residences, will rise 12 decks high over the ocean and feature 112 condos now on sale for between $3.8 and $39 million each. The boat’s owner, the Four Seasons luxury hotel chain, says this new king-sized houseboat will take to the seas in 2010 and spend the bulk of every year circumnavigating the globe. The ship’s promoters are now doing their own circumnavigating, hopping from one Four Seasons luxury hotel to another, delivering condo ship sales pitches to invited groups of local deep pockets. At last Tuesday’s Dublin stopover, potential buyers learned that their new Four Seasons boat will feature a casino, boutiques, restaurants, a golf driving range, and a 220-person crew . . .
The Ford Motor Company is clamping down on executive perks. That means the carmaker will no longer let executive vice president Mark Fields use company private jets for the personal trips home he takes every weekend. Ford last year shelled out $517,560 for these private jet trips. But Ford still plans to show Fields a bit of corporate love. The company will “pick up the tab for him to fly commercial,” first class, from Detroit to his home in South Florida. Fields, in all, pocketed $5.6 million from Ford last year . .
Who suffers when CEOs take home outrageously excessive pay? Add a new category to the victim list: retired corporate execs who see 
greed at the top warping the values of fair play they spent their entire careers defending. Charles M. Denny, one of these retired CEOs, first emerged as a top corporate leader in 1971 at ADC, a Minnesota telecom that would go on to grow into a billion-dollar company with 8,500 professional employees. Denny retired his top slot in 1991 and has watched ever since, in embarrassment and shame, as soaring CEO pay has turned average Americans sour on business and business leaders. How ashamed has Denny become? Noted the retired chief exec in an op-ed published earlier this month in the Minneapolis Star Tribune: “As a former CEO, I feel the sting of public disdain. When my grandchildren ask me what I did at work, I tell them I was the company librarian.”
High-end retailers in the United States have a problem. No, not the cash flow. Sales couldn’t be better. Shopkeepers who stock $330,000 Mikimoto golden pearl chokers and other popular luxury goods are now “generating at least $8,000 in revenue per square foot — about 10 times what a middlebrow retailer takes,” reports a new Associated Press survey. In New York this spring, a Montblanc store needed only three days to sell a $700,000 pen. Cartier boutiques in North America, says the company, now ring up a $1 million to $2 million sale to an individual customer “a couple times a month.” That hardly ever used to happen. So what’s the problem? Luxury retailers can’t keep the riff-raff out. Why not? Too many ultra-affluent customers, they tell the AP, come dressed to shop in the same sweatsuits the hoi polloi wear.
Quote of the Week
“There's a new emerging class of wealthy people, and they find great pride and status in the acquisition of art. They're looking for status-enhancing tools. A car is one example, a big house is another, and art is another.”
Robbert van Batenburg, research director, Louis Capital Markets, after last week's Sotheby's art auction saw a Matisse sell for $21.9 million and a Monet for $36.8 million, Smart Money, June 21, 2007
New Wisdom
on Wealth
John Seery, Invasion of the Killer RVs, June 22, 2007. A Pomona College political scientist examines how America's public campgrounds “are visibly showcasing our huge disparities in wealth.”
The week before last, two United States senators set Wall Street a twitter when they introduced legislation that would, if enacted, deny tax breaks to private equity industry partnerships that start hawking the public shares of their stock.
Last week, some top House Democrats went a big step further.
Rep. Sander Levin from Michigan, joined by Ways and Means Committee chair Charlie Rangel, Financial Services chair Barney Frank, and 11 other lawmakers, proposed legislation that would, if enacted, end the tax break that has turned private equity partnerships into billionaire-making machines.
These machines have been churning out fortunes for years — in the private equity shadows. But this spring the shadows faded when the Blackstone Group, the biggest private equity partnership, filed the executive pay and other financial disclosures required before a privately held company can sell shares to the public.
These disclosures helped spotlight the tax secret to private equity success: Partners at private equity firms pay taxes at the 15 percent capital gains rate, not the 35 percent rate that would apply if private equity earnings were treated as ordinary income.
In 2006, Blackstone’s top five executives together pocketed over three-quarters of a billion dollars. Their capital gains tax preference saved the the five over $150 million on their 2006 taxes.
The new House legislation denies this capital gains treatment to the vast bulk of private equity partner income. The legislation would actually deny capital gains treatment to all investment management partnerships, whether those partnerships speculate on companies, as private equity companies do, or on oil or real estate.
To stop this reform, private equity’s biggest players — and their fellow wheeler-dealers in the hedge fund industry — have already begun to call in the chits. And those chits abound.
One sign of our political times: The wealthy Connecticut suburb of Greenwich, a capital of hedge fund America, “has joined New York, Los Angeles, and Silicon Valley,” the New York Times reports, “as must stops on the presidential fund-raising tour.”
Among the recent Greenwich hosts of Presidential campaign fundraisers: Paul Tudor Jones II, a hedge fund billionaire whose $25-million estate features a 25-car underground garage.
Hedge and private equity funds have also launched a congressional lobbying offensive, with a bipartisan all-star team of influence-peddlers that includes a former high-ranking Clinton Treasury official and a former Republican National Committee chairman.
All this mobilizing has so far kept most lawmakers and Presidential candidates from lining up behind reform legislation. Among GOP Presidential hopefuls, three have already turned thumbs down on reform.
“I don’t like raising taxes at all,” Rudy Giuliani told CNBC last week.
Democratic Presidential front-runners are largely taking a wait-and-see approach. Hillary Clinton is “evaluating” the pending Senate bill, says her campaign staff. John Edwards, his staff relates, “is closely examining the tax treatment of hedge funds and private equity firms,” but hasn't yet taken a position.
Only Barack Obama seemed willing last week to stake out a stance, with a spokesperson noting that he’s “inclined” to support reform, “based on what we've seen so far.”
Any move to up taxes on private equity partnerships, industry apologists in the United States are arguing, will leave the industry less competitive in global financial markets. Funny. Private equity industry apologists in the UK are making the same exact case.
Private equity powerhouses in the UK have actually enjoyed, since 1999, bigger tax breaks than their U.S. counterparts. British private equity managers pay taxes on their profits at a mere 10 percent rate, not the 15 percent going rate in the United States.
But UK deep pockets get even more tax breaks than that. Of the estimated 400 UK residents who took home at least $20 million year before last, official figures released last week revealed, only 65 filled out a tax return and paid any British income taxes.
Last week also saw a British parliamentary hearing where MPs aggressively grilled some of Britain’s biggest names in private equity — too aggressively for one top Conservative Party leader.
“Whatever the arguments for or against the structure of taxation for private equity,” charged Alan Duncan, “successful risk-takers who have worked properly within the law should not ever be subjected to a sarcastic inquisition by MPs.”
Jack Dromey, an official with the British Unite trade union, gave the private equity hearing a distinctly different perspective. He noted that unions, after private equity takeovers, often have a hard time finding out who really owns the companies where their members work.
“The public knows more about the Cosa Nostra,” he testified, “than private equity.”
Stat of the Week
How awesomely has the share of America's income going to the nation's richest 1 percent grown? If the share of national income going to top 1 percent households in 1979 had remained constant over the next 25 years, top 1 percent households would have each pulled in, on average, nearly $600,000 less income than they actually did collect in 2004 — and bottom 80 percent households would have each pulled in $7,000 more, says a new Brookings Institution paper co-authored by former Treasury secretary Lawrence Summers.
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