Life is unfair. And we Americans prefer it that way.
But only, finally, up to a point. Sooner or later some of our shrewdest, luckiest financial hustlers push their luck and overreach, and respectable society decides that a red line has been crossed. Shame is rediscovered. And this summer, we’ve reached one of those uproar points. The freshly derided plutocrat-racketeers are the men, a plurality of them New Yorkers, who run the biggest private-equity funds. As the Blackstone Group and KKR have rushed to go public, the world at large has learned that most of the fees they charge are taxed not as ordinary income, at a rate of 35 percent, but as capital gains, at a rate of 15 percent. Thus do the staggeringly rich get staggeringly richer.
Are they being scapegoated? Is their shocking but nevertheless legal bonanza being singled out for opprobrium as a way of expressing eleventh-hour disgust at the callous excesses and inequalities of our hypercapitalist era? Yes and yes. But being a scapegoat isn’t the same as being innocent. Sometimes examples must be made. Life is unfair.
There was an almost algorithmic inevitability to this moment. In 2003, capital-gains taxes were reduced to their lowest rate since World War II, and since then stock prices have risen and risen, almost doubling as all the indexes peaked last week, while interest rates have remained low— a fairy-tale-perfect climate for the private-equity players, who buy public companies with debt and take them private, fire employees and sell off assets, borrow more money to pay themselves back in fees and dividends, and then take the companies public again in a rising stock market. But the political weathers are now, predictably, turning against them—a Washington regime in profound disrepute, a wide-open presidential-election campaign with strong Democratic candidates, and, just maybe, the beginning of the end of our present 30-year cycle of free-for-all political economics.
But if you talk to people in the private-equity business, they’re not so fatalistic about the historical trend lines. In fact, they’re even more inclined to scapegoat. For them, it’s personal. When I called a private-equity guy I know, he instantly snarled, “It’s all Steve.” In other words, he blames the current anti-private-equity spasm not on whiny anti-business liberals, but on Steve Schwarzman, the chairman, CEO, and co-founder of Blackstone. With Blackstone’s IPO a month ago, Schwarzman’s wealth ballooned to at least $10 billion, meaning he’s now one of the very richest New Yorkers, richer than Rupert Murdoch, Ron Perelman, and Michael Bloomberg—maybe the richest of all.
“If my world is pissed off at anyone,” says my friend, “it’s Steve. The fucking birthday party”—which he attended in February along with hundreds of other Schwarzman associates—“where no one gave a toast, by the way, not one.” The new head of the National Venture Capital Association went on the record last month about Schwarzmania: “We’re where we are right now because of the unbelievable egos of guys running the private-equity firms like Blackstone. They put big targets on their backs by what I consider stupid actions like throwing these big parties.”
Beyond resentment and conspicuous consumption and unfairness, some of the more thoughtful members of the high-finance fraternity also worry that the suddenly enormous scale of private-equity control of the global economy is a little scary. In 2001, all the private-equity takeovers totaled $71 billion; in just the first half of this year, the deals amount to more than $600 billion. The handful of largest firms now control a trillion dollars’ worth of companies. And the companies we’re talking about are no longer a few fringe players but a lot of big name-brand pillars of American business, like Chrysler, Hertz, GMAC, Clear Channel, Toys ’R’ Us, Neiman Marcus, and Bausch & Lomb.
Private-equity players cast themselves as white knights, nurturers of underperforming companies—yet their intent is always to get in and out of an investment in a very few years, not to stay and build. In their heart of hearts, my private-equity pal insists, his peers are users: “If this company we buy, in three years it’s trashed, but our partners make triple their money? We don’t care. And 32-year-old idiots from KKR and the rest are now on the boards of directors of major companies.” The barbarians have breached the gates and are, as never before, stewards of the empire. Which may or may not work out so well for the rest of us.
Steve Schwarzman is a perfect poster boy for this age of greed, sharklike, perpetually grinning, a tiny Gordon Gekko without the hair product. In Palm Beach (where he bought a historic landmark house for $20.5 million and tore it down), he eats his three-course lunches (including $400 stone crabs) in less than fifteen minutes and complains about the squeaky rubber soles of a servant’s shoes. Once, in the presence of a Times reporter, he buzzed a man to bring coffee, then stalked off to dress down the servant—“I called you six times.”