Idiot Investors?
Congress protects people from making money on the stock market.
Two things happened on Thursday: 1) A Newsweek poll was released, showing that approval ratings for Congress have fallen to Bushian levels, with only 25 percent of Americans giving Congress their favor. 2) The Blackstone Group, an enormous private equity firm, got the OK to go public, bringing its market value to $40 billion. Like all private equity firms, Blackstone's income is taxed as capital gains at 15 percent, instead of the standard corporate tax rate of 35 percent.
It doesn't take a public relations consultant to figure out what happened next. (Actually, it probably took at least a dozen, but who's counting?) With a whiff of desperation in the air, Congress took a flying leap onto the Blackstone-bashing bandwagon.
Leading the charge was the once and future presidential candidate and Ohio Democratic Rep. Dennis Kucinich. He shot off a letter to the SEC (along with Rep. Henry Waxman (D-Ca.)) asking the agency to hold up the Blackstone IPO while Congress puzzled out the best way to demagogue the issue.
Kucinich and Waxman fretted that small investors could be harmed, simultaneously worrying that trading Blackstone on the stock market was "exposing unsophisticated investors" to risk, while "depriv[ing] them of control over the management of the funds and of many of the protections provided by fiduciary duties typically owed to them by management."
To review: Investors are too stupid to know when they're getting screwed, but also deserve a chance to control the "management of the funds." In fact, the biggest hit small investors are likely to take is if they buy Blackstone and then Congress tanks the price by imposing a specifically targeted tax.
Of course, Blackstone's largest and most recently raised private equity fund raised more than $9 billion from public pension funds. The government is happy to put its money in Schwartzman's hands, but heaven forbid the rest of us do so. We might be exposed to risk.
The litany of (occasionally conflicting) reasons why Blackstone shouldn't be allowed to continue with its nefarious plan is telling. It's not about principle, it's about scapegoating.
Sen. James Webb (D-Va.) has opted for the national security angle, fretting about the $3 billion in non-voting Blackstone stock that eChina purchased in May. The Washington Post reports that "Webb said he was worried that China could get access to sensitive technology being developed by companies Blackstone owns." (I wish that all companies handed out free samples of their products to investors, national security be damned. If they did, I'd head out to pick up some Hostess and Harley-Davidson stock right now.)
Rep. Barney Frank (D-Mass.) jumped in to demonstrate his tenuous grasp on finance: "There's so much money involved that I don't believe the tax change would retard the [Blackstone] IPO," said Barney Frank, noting that the Blackstone principals stand to reap billions from the offering. "And even if it did, there's no great social loss. This is a financial transaction."
Jesse Jackson inveighed against "Wall Street apartheid," claiming that the IPO doesn't benefit enough minority-owned firms, and that big firms are "spiraling up, but not out to be more inclusive."
To be fair, Blackstone co-founder and chief executive Stephen Schwarzman has been cruising for a bruising and he knows it. He's not exactly keeping a low profile, recently throwing himself an A-list birthday party featuring Donald Trump, Patti LaBelle, Barbara Walters, two Harlem choirs, a marching band, and Rod Stewart-some as entertainment, and some as guests. Mr. Schwarzman, who made $400 million in 2006, is set to own a stake in the Blackstone Group worth about $8 billion if the company's initial public offering goes ahead as planned. He started the firm with just $400,000 in seed money.
But Gilded Age comparisons aside, it has been a long time since America passed legislation as targeted at a single business as was being entertained on the Hill this week.
As anti-Blackstone rhetoric swirled, the Securities and Exchange Commission found itself in the uncomfortable position of being the last bulwark for rule of law and equal treatment this time around. Spokesman John Nester said the SEC could only delay approval if Blackstone's filings contained "material misstatements or omissions."
On Thursday, despite increasingly high-pitched pleas from Congress, the SEC gave its OK, and issued a brief statement saying, "Congress has created the world's strongest investor protection laws, which the commission has rigorously applied."
Two weeks ago, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa) introduced a bill that would force private equity firms to pay taxes at the 35 percent corporate rate if they went public as limited partnerships. The bill would give Blackstone a five-year grace period. A similar bill without the grace period was introduced in the House on Wednesday.
Schwartzman might find solace and strategy from Wal-Mart's Lee Scott, who fought off an effort by the Maryland legislature to pass a law requiring the company to spend 8 percent of its payroll on medical benefits. The bill technically covered all companies with more than 10,000 employees, but was targeted at Wal-Mart. The legislation was eventually overturned by a judge.
Raising taxes on private equity firms as a form of populist demagoguery is slimy, but more or less within the course of normal conduct. But to go after this one company, this one man, is inexcusable.
Katherine Mangu-Ward is an associate editor of Reason.
