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Greed Is Good and Ugly

At his 60th-birthday party, a brass band welcomed guests into the Park Avenue Armory; Rod Stewart, Patti LaBelle, and the Abyssinian Baptist Church choir performed. A giant portrait of the birthday boy, which ordinarily hangs in his living room at 740 Park (a 34-room apartment he bought, I swear, from ruined eighties takeover troll Saul Steinberg), was trucked five blocks for the party.

Two weeks after the party, Schwarzman told his assembled private-equity peers at a conference that “the public markets are overrated,” and that for firms like theirs “to divert yourself like that and then take on that cost is really not worth it.” But only a couple of weeks after that, it turned out that he and Blackstone were, whaddaya know, about to go public. Ostentatious, churlish, megalomaniacal, tone-deaf—and a hypocritical dissembler to boot.

The duplicity was especially galling given that a central premise of private equity is that they can rescue beleaguered public companies by taking them private and forcing the tough-but-necessary business choices without the pressures of quarterly earnings reports and shareholder second-guessing.

So why have Blackstone and KKR suddenly decided to submit themselves to all that pesky public-market scrutiny? The true answer, of course, is because interest rates are rising and Democrats are taking control in Washington, and the private-equity boys know the party is probably almost over and that only by means of the dumb money of IPOs can they sweep as much cash as possible off the table before the good times end.

The interesting thing about the private-equity tax scandale, apart from the fact that it’s the result of instant wholesale public disapproval rather than indictments—who knew we still had that in us?—is that it’s not only the pointy-headed usual suspects tsk-tsking. Prominent rich guys (Warren Buffett, Robert Rubin) and pro-business stalwarts (The Economist) are agreeing that, yes, it may be legal but it’s untoward, unfair, unnecessary, and makes their beloved capitalist system look rigged and piggish.

Thus the politicians have plenty of cover to tweak the tax code without looking like commies. Which is why Max Baucus and Charles Grassley, the Democratic chairman and the ranking Republican of the Senate Finance Committee, have just introduced a bill that would tax publicly traded private-equity firms as normal corporations.

John Edwards (who was paid $480,000 in 2006 by Fortress Investment Group, the first private-equity firm to go public) declared that “building one America means getting rid of loopholes like [this]” and within 48 hours Hillary Clinton and Barack Obama leaped on the bandwagon. (Mitt Romney, whose fortune derives mainly from having co-founded the private-equity firm Bain Capital, did not.)

And Steve Schwarzman is squealing like a pig at the prospect of being allowed to keep, say, a mere $260 million of his pay after taxes this year, rather than, oh, $340 million. Last month, as he was accepting a Legend in Leadership Award from Yale, he said gravely, “There’s a crisis going on.” A crisis? Really? Like Iraq and climate change and aids in Africa?

The private-equity apologias are disingenuous in the extreme. Since they manage pension-fund money, they’re using retirees as human shields. John Snow resigned last year as Treasury secretary to become chairman of the private-equity outfit Cerberus. Firms like his, he said on CNBC this month, are “providing a means for schoolteachers, state employees, firemen, and policemen to get better retirement than they would otherwise have. If you tax it, then you’re going to be adversely affecting the ability of average Americans to have better retirements.” Yet only tiny percentages of most pension funds are run by private-equity firms.

This is all new territory. Two decades ago, the detonator of the current controversy, the tax differential between capital gains and ordinary income, didn’t even exist, since under Ronald Reagan’s Tax Reform Act of 1986, income was income, all of it taxed at the same rate.

In his 2005 book Running on Empty, the old-fashioned Republican Pete Peterson, Schwarzman’s co-founder of Blackstone, calls it a Republican partisan myth that the Bush tax cuts have been a healthy economic prod rather than a boondoggle for him and other rich people. Lowering taxes has not increased our rate of national savings—and, as Peterson writes, in the nineties, “a liberal president who had said no to capital-gains cuts and who had hiked the top marginal income-tax rate from 31 to 40 percent was presiding over the most spectacular equities boom in American history.”

The new brouhaha is not about igniting a “class war,” but about avoiding one by constraining the most grotesque unfairness. It’s a question of grace—noblesse oblige, if you will. Yes, we want to encourage businesspeople to take risks—but private-equity and hedge-fund managers have invented businesses from which real, personal financial risk has been practically eliminated. “They’re not risking anything,” says my private-equity friend. In fact, don’t we owe it to these postmodern heroes of global business to threaten to tax them fairly—off with their … pinkies!—in order to inject some real, invigorating risk into their world?