Barbarians Strike Back

Blackstone Sparks Lobbying `Battle Royale' in Congress on Taxes
By Ryan J. Donmoyer and Elizabeth Hester

June 25 (Bloomberg) -- Stephen Schwarzman, the founder of Blackstone Group LP, stood beaming before 600 Champagne-sipping investors in the baroque ballroom of New York's Pierre Hotel, transformed into a black and white palace for the occasion.

At that moment, on June 14, Schwarzman was the master of the financial universe, fresh from a blitz of media attention and about to launch the most anticipated initial public offering of the year. An hour later, his victory lap was thrown off course by word of a bill in the U.S. Senate to more than double Blackstone's tax burden -- the first of what are likely to be a slew of proposals and regulations aimed at hedge funds and private-equity firms.

Now Wall Street's new elite is fighting back, rapidly assembling an army of high-powered lobbyists to block the efforts of the Democrats who control Congress -- and some Republicans as well -- to assault their profits.

The lobbying ``will pick up like wildfire, especially with a presidential election year in the very near future,'' says Steven Howard, a partner at the New York law firm Thacher Proffitt & Wood LLP who advises investment firms. ``This will be a battle royale in Congress, where you'll have representatives and senators who view themselves as populists against the financial industry's giants.''
Another Salvo

House Democrats fired a new salvo on June 22, when Ways and Means Chairman Charles Rangel of New York and Financial Services Chairman Barney Frank of Massachusetts introduced legislation that would tax all fund managers' share of profits at the 35 percent corporate rate, instead of the 15 percent capital-gains rate they currently pay.

``They've got their teeth into it and they'll continue to pursue it,'' says former Texas Representative Bill Archer, who was the Republican chairman of the House Ways and Means Committee between 1995 and 2001. ``It's a no-lose situation politically.''

Industry leaders have made themselves ready targets thanks in part to annual payouts that sometimes reach more than $1 billion and extravagant displays of wealth such as Schwarzman's 60th birthday party in New York on Feb. 13, which featured a performance by Rod Stewart and a video greeting from President George W. Bush.

``The publicity is definitely working against them,'' says John Chapoton, a partner at Brown Investment Advisers and Trust in Washington and a former Treasury Department official in the Reagan administration.

Market Enthusiasm
The legislation introduced last week by the Senate Finance Committee -- which, unlike the Rangel-Frank measure, would apply only to private-equity firms that go public -- didn't damp investor enthusiasm for the Blackstone IPO.

The company's shares rose $4.06, or 13 percent, on June 22 in their first day of trading. Schwarzman planned to sell about 5.7 percent of his stake for $449.2 million, according to a June 21 filing with the SEC. His remaining 23 percent stake in the company is worth $8.76 billion.

Lawmakers are searching for new revenue sources to offset the cost of their spending plans. The government may lose $4 billion to $6 billion a year in revenue because of financial firms' favorable tax treatment.

That figure may even be too low, congressional aides say: Billions more may be lost because many investments are routed through offshore tax havens such as the Cayman Islands, where 8,134 active hedge funds are registered. That's an increase of 123 percent over the past five years, according to the Cayman Islands Monetary Authority.

Lobbying
To help defend their profits, Blackstone, the Carlyle Group and Apollo Management LP helped found a Washington trade group, the Private Equity Council, which in turn hired three powerhouse lobbying firms to promote their interests: Capitol Tax Partners; Brownstein Hyatt Farber Schreck and Akin Gump Strauss Hauer & Feld LLP.

Among those registered to lobby for the council are former Democratic Representative Vic Fazio of California and former Assistant Treasury Secretary Jonathan Talisman. Blackstone is also represented by Washington-based Ogilvy Government Relations, whose lobbyists include Wayne Berman, a top fundraiser for Bush.

Ken Mehlman, former Republican National Committee chairman and White House political director, is also working on the issue at Akin Gump, the third-biggest lobbying firm by revenue in 2006.

`No Guarantee'
Blackstone spokesman John Ford declines to comment. Robert Stewart, a spokesman for the Private Equity Council, says the current tax system is appropriate because it recognizes that ``private-equity investments are in fact investments that can produce a profit or a loss, and there's no guarantee about them.''

The industry also has poured millions of dollars into lawmakers' campaign coffers. Employees and spouses at the top 10 firms ranked by fund size, including Blackstone and Carlyle, donated at least $461,050 to federal candidates, parties, and political action committees in the first three months of this year.

Excluding the 2008 presidential donations, giving almost doubled to $207,700, compared with $111,348 in donations by the same 10 funds in the first three months of 2005, according to Federal Election Commission figures. Democrats have received most of the money, bringing in $259,800, or 56 percent of the total from the top 10 firms, according to FEC figures.

Presidential Candidates
Private-equity firms or hedge funds were among the top donors to at least four presidential candidates in the first quarter of 2007, according to the Center for Responsive Politics, a Washington-based group that tracks money in politics. Former North Carolina Senator John Edwards received $182,250 from the employees of New York-based Fortress Investment Group LLC, making the hedge fund where he once worked his biggest backer.

Fortress's taxes would also increase under the Senate legislation proposed last week. Democratic Senator Christopher Dodd of Connecticut's biggest backers are employees of Stamford, Connecticut-based SAC Capital Advisors LLC, who gave $207,300.
Among Republicans, the biggest donors to former New York Mayor Rudy Giuliani -- with $195,800 -- are the employees of the New York-based hedge fund Elliott Management Corp. Former Massachusetts Governor Mitt Romney received $99,800 from Boston- based Bain Capital LLC, making the company he founded his third- largest donor.

Support From Dodd
The industry has already found some support in Congress. Last week, Dodd, who is chairman of the Banking Committee and whose state is home to thousands of hedge funds, asked the Securities and Exchange Commission to review the Senate's Blackstone legislation, saying it raised questions ``about its impact on the capital markets.''

Still, the increased lobbying is unlikely to quiet the growing clamor in Congress for a revision of the carried- interest benefit, which saves fund managers as much as 20 percentage points on their income taxes and also exempts them from the 2.9 percent payroll tax for Medicare.

Congressional aides say the huge wealth generated by the firms is an attractive source of revenue as Congress struggles to stave off a $30 billion increase in the alternative minimum tax on 30 million middle-income families that is scheduled to take effect this year.
Howard says the success of Blackstone's IPO may embolden lawmakers to pursue the industry by making it easier for them to counter arguments that Congress is interfering with the financial markets by raising taxes. ``The greater the IPO, the greater their temerity,'' he says.