Dear Joba:
Fuck off.
Clay
ps - JB's a sox fan. wasn't in the disclosure. sorry.
Saturday, September 1, 2007
Friday, August 24, 2007
Mixed Messages
Yesterday, a UPenn academic concluded that the industry will side-step any change in the tax code, resulting in a minimal increase in federal revenues. I suppose the industry could think this is a bad message, as it implies that the industry is sneaky, underhanded tax-avoiders (naw...).
But my guess would have been that the lobbyists/PR firms attached to the industry had a hand in getting the word out about this piece. The message is "Don't raise our taxes, Congress - it won't generate any revenue!"
Today, one of the industry's leading firms says "Don't raise our taxes, Congress - it WILL generate revenue." Am I wrong, or did Blackstone just step all over yesterday's message?
But my guess would have been that the lobbyists/PR firms attached to the industry had a hand in getting the word out about this piece. The message is "Don't raise our taxes, Congress - it won't generate any revenue!"
Today, one of the industry's leading firms says "Don't raise our taxes, Congress - it WILL generate revenue." Am I wrong, or did Blackstone just step all over yesterday's message?
Thursday, August 23, 2007
Man, I wish I'd thought of this:
Oh wait, I did. Woohoo!
A UPenn law professor says PE firms will find work-around to changes in tax code:
http://dealbook.blogs.nytimes.com/2007/08/23/how-much-would-a-private-equity-tax-hike-raise/
The paper itself is here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007774
His discussion of the alternative structures of PE firms under a new tax regime is of interest -- he approaches, but does not fully articulate, what is the key here -- that a change in tax regime would change the balance of power between GPs and LPs, and force a change in the negotiations between these parties.
Why, then, do people say stuff like this:
It is possible, I spose, at the margin, that some manager will choose to ply their skills for an investment bank or an advisory shop instead of a private investment manager if they can't keep more of their income. But it is tough to imagine a mass exodus from PE or hedge funds if, instead of keeping 85% of your $6 million bonus, you keep 72% (the max Alternative Minimum Tax rate for individuals is 28% I believe). Especially when your $6M bonus at a big investment bank you also keep 72% (and leaving aside that your $6M bonus may only be $3M, and your commute is the 2-train and not the Merritt).
In negotiations, managers would have no superior alternative to staying put and paying the higher tax rate. At which point, LPs need not sacrifice a PENNY.
I don't know who Harvey Leiderman is. But he's full of shit.
A UPenn law professor says PE firms will find work-around to changes in tax code:
http://dealbook.blogs.nytimes.com/2007/08/23/how-much-would-a-private-equity-tax-hike-raise/
The paper itself is here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007774
His discussion of the alternative structures of PE firms under a new tax regime is of interest -- he approaches, but does not fully articulate, what is the key here -- that a change in tax regime would change the balance of power between GPs and LPs, and force a change in the negotiations between these parties.
Why, then, do people say stuff like this:
“If you tax the managers more heavily, they’re going to take a bigger bite out of what goes to the investors,” added Harvey Leiderman, a pension attorney in the San Francisco office of Reed Smith LLP. “You may intend to tax Wall Street and end up taxing Main Street,” he said. (http://www.pionline.com/apps/pbcs.dll/article?AID=/20070528/PRINTSUB/70525063/1031/TOC)This is just not true. If you tax managers more heavily, they may ask LPs for "relief" - either in existing funds or future ones. But LPs only have to grant that relief in negotiations if they feel it in their interests to do so; i.e., if good managers have other opportunities equally or more valuable than the partnership arrangement with LP investors.
It is possible, I spose, at the margin, that some manager will choose to ply their skills for an investment bank or an advisory shop instead of a private investment manager if they can't keep more of their income. But it is tough to imagine a mass exodus from PE or hedge funds if, instead of keeping 85% of your $6 million bonus, you keep 72% (the max Alternative Minimum Tax rate for individuals is 28% I believe). Especially when your $6M bonus at a big investment bank you also keep 72% (and leaving aside that your $6M bonus may only be $3M, and your commute is the 2-train and not the Merritt).
In negotiations, managers would have no superior alternative to staying put and paying the higher tax rate. At which point, LPs need not sacrifice a PENNY.
I don't know who Harvey Leiderman is. But he's full of shit.
Tuesday, July 31, 2007
Meanderings - pt 1
It's foggy in the ol' Towne today, which leaves me feeling nostalgic, anxious and relaxed, all at the same time. Therefore, for no reason whatsoever, a few thoughts:
1) So rarely do web comics intersect with my chosen fields of inquiry:
http://wondermark.blogspot.com/2007/07/323-in-which-it-almost-worked.html
Now, if only Dinosaur Comics will discuss the appropriate governance structure for a unit investment trust!
2) Good job with your news article placement, PR-firms-working-on-behalf-of-the-PE/VC/Hedge Fund industry!
Weak lede: "Some prominent Democrats are beginning to rethink proposed tax increases on hedge-fund and private-equity managers' earnings, after an aggressive pushback by industry lobbyists and arguments that the impact could extend far beyond Wall Street."
Even according to the article, however, the proponents of this change (e.g., Rangel, Levin, Frank) don't seem to be "rethinking" anything. Instead, the industry finally figured out a message (taxing carried interest = bad for pensions & NY) & got a couple of Dems to climb aboard. Now the strategy is to build a consensus for incrementalism and run out the clock.
Smart, and I still don't think it gets thru the Senate. But the politics of this are more sophisticated than the authors of this story represent.
3) I have been thinking about the NASD/NYSE regulatory merger. It's too complex and fascinating to do a slapdash post, so I'll wait. But the acronym really blows. And if I have a suggestion for where they can do some good work right out of the gate, it is in data collection, verification and distribution. But more later...
4) 130/30 funds are featured today in Morningstar. Read with the appropriately jaundiced eye.
1) So rarely do web comics intersect with my chosen fields of inquiry:
http://wondermark.blogspot.com/2007/07/323-in-which-it-almost-worked.html
Now, if only Dinosaur Comics will discuss the appropriate governance structure for a unit investment trust!
2) Good job with your news article placement, PR-firms-working-on-behalf-of-the-PE/VC/Hedge Fund industry!
Weak lede: "Some prominent Democrats are beginning to rethink proposed tax increases on hedge-fund and private-equity managers' earnings, after an aggressive pushback by industry lobbyists and arguments that the impact could extend far beyond Wall Street."
Even according to the article, however, the proponents of this change (e.g., Rangel, Levin, Frank) don't seem to be "rethinking" anything. Instead, the industry finally figured out a message (taxing carried interest = bad for pensions & NY) & got a couple of Dems to climb aboard. Now the strategy is to build a consensus for incrementalism and run out the clock.
Smart, and I still don't think it gets thru the Senate. But the politics of this are more sophisticated than the authors of this story represent.
3) I have been thinking about the NASD/NYSE regulatory merger. It's too complex and fascinating to do a slapdash post, so I'll wait. But the acronym really blows. And if I have a suggestion for where they can do some good work right out of the gate, it is in data collection, verification and distribution. But more later...
4) 130/30 funds are featured today in Morningstar. Read with the appropriately jaundiced eye.
Monday, July 30, 2007
Spatt's Replacement at SEC - Overdahl
http://www.sec.gov/news/digest/2007/dig072707.htm
Chester Spatt is returning to the Carnegie Mellon University's Tepper School of Business. The SEC's chief economist has a substantial amount of influence. Not surprisingly, the SEC's regulatory interests involve real analytical work of empirical data. In a sphere dominated by lawyers and politicians, s/he is often the last line of defense. Mr. Spatt did a fine job by my observation, which included some professional interaction with his staff on items that could easily have been resolved in a hackneyed fashion that hurt both investors and investment professionals. Hat's off to him - maybe he can help the Pirates.
Overdahl I don't know at all. We'll be watching, however. First item of concern would be that his most recent gig is advising the energy sector on derivatives. I'm all for private sector experience, mind you. I just think that it helps to have a buffer between you and the tendrils of influence...
Chester Spatt is returning to the Carnegie Mellon University's Tepper School of Business. The SEC's chief economist has a substantial amount of influence. Not surprisingly, the SEC's regulatory interests involve real analytical work of empirical data. In a sphere dominated by lawyers and politicians, s/he is often the last line of defense. Mr. Spatt did a fine job by my observation, which included some professional interaction with his staff on items that could easily have been resolved in a hackneyed fashion that hurt both investors and investment professionals. Hat's off to him - maybe he can help the Pirates.
Overdahl I don't know at all. We'll be watching, however. First item of concern would be that his most recent gig is advising the energy sector on derivatives. I'm all for private sector experience, mind you. I just think that it helps to have a buffer between you and the tendrils of influence...
Friday, July 27, 2007
I told Mrs. Blunt that...
Chuck Schumer would get involved in the taxation of carried interest issue. And lo & behold:
http://dealbook.blogs.nytimes.com/2007/07/27/schumers-defense-of-private-equity-may-add-fuel-to-the-fire/
It makes too much sense. Schumer, along with the King of New York, is already on record as believing that the U.S. financial services industry is over-regulated compared with the UK. Plus, as chair of the DSCC, he can lever his support for contributions from PE's leaders (if you don't think this article made its way into his daily clips, you don't know Chuck...).
The Dealbook entry, by the way, makes a strange point, suggesting that energy lobbyists would target PE tax breaks out of spite, apparently. I suspect, in fact, that the opposite is likely - Schumer is trying to engage the energy lobby and their spearcarriers in Congress (who aren't generally from the Northeast or CA -- that means you, Chairmen Dingell and Bingaman) to help slow the PE-tax effort or they can expect the harsh light of politics to be turned on its tax breaks.
This is a smart play by Schumer - energy industry taxation is a snarl of givebacks and takeaways, and transparency and public attention are what the industry (hell, most industries) would like to avoid on tax issues...
http://dealbook.blogs.nytimes.com/2007/07/27/schumers-defense-of-private-equity-may-add-fuel-to-the-fire/
It makes too much sense. Schumer, along with the King of New York, is already on record as believing that the U.S. financial services industry is over-regulated compared with the UK. Plus, as chair of the DSCC, he can lever his support for contributions from PE's leaders (if you don't think this article made its way into his daily clips, you don't know Chuck...).
The Dealbook entry, by the way, makes a strange point, suggesting that energy lobbyists would target PE tax breaks out of spite, apparently. I suspect, in fact, that the opposite is likely - Schumer is trying to engage the energy lobby and their spearcarriers in Congress (who aren't generally from the Northeast or CA -- that means you, Chairmen Dingell and Bingaman) to help slow the PE-tax effort or they can expect the harsh light of politics to be turned on its tax breaks.
This is a smart play by Schumer - energy industry taxation is a snarl of givebacks and takeaways, and transparency and public attention are what the industry (hell, most industries) would like to avoid on tax issues...
Tuesday, July 17, 2007
New Bain fund: "Buy 2 get 1 Free" (well, not free...)
http://online.wsj.com/article/SB118463876366768388.html?mod=rss_Deals_and_Deal_Makers
Interesting -- price pressure seems to be getting to everyone, including Bain...
As I mentioned once before (and more soon, I hope), I think there are several options the industry and policymakers can use to tax private investment companies fairly, without veering too far to the other side. But one possibly consequence of employing these options is to shift the balance of power towards LPs and away from general partners in private investment companies. LPs will need to approve changes to existing agreements and will have more leverage to negotiate lower fees from general partners unwilling/unable to put their own skin in the game...Strange, they are usually so good at investing...
http://online.wsj.com/article/SB118463122029268294.html?mod=rss_Deals_and_Deal_Makers
(subscription req. I think)
Private Equity firms are good at looking for value (they want to invest in assets that others have undervalued for whatever reason...). But in Congress, buying a stock (or a Committee ranking member) when it is down doesn't work all that well. In Congress, you pay for growth (and yes, if majorities switch, you get caught with a lot of useless friends...but investors need long time horizons. Lobbying is all about making quick moves with money (and other assets) to make tactical moves. So maybe the investing industry should leave the lobbying to the hedge funds...
I am not convinced that the study is methodologically appropriate, btw -- they are comparing presidential fundraising and congressional fund raising, which is problematic. But if it is true, it also illuminates a further problem with the industry's position on the tax status of carried interest -- the industry would like everyone to just stop talking about this so they can go back to doing what they do best. But politicians are naturally advocates and activists (even conservatives) -- it is hard to lobby them (even if they are your natural allies) to keep their mouths shut...
(subscription req. I think)
Private Equity firms are good at looking for value (they want to invest in assets that others have undervalued for whatever reason...). But in Congress, buying a stock (or a Committee ranking member) when it is down doesn't work all that well. In Congress, you pay for growth (and yes, if majorities switch, you get caught with a lot of useless friends...but investors need long time horizons. Lobbying is all about making quick moves with money (and other assets) to make tactical moves. So maybe the investing industry should leave the lobbying to the hedge funds...
I am not convinced that the study is methodologically appropriate, btw -- they are comparing presidential fundraising and congressional fund raising, which is problematic. But if it is true, it also illuminates a further problem with the industry's position on the tax status of carried interest -- the industry would like everyone to just stop talking about this so they can go back to doing what they do best. But politicians are naturally advocates and activists (even conservatives) -- it is hard to lobby them (even if they are your natural allies) to keep their mouths shut...
Friday, July 13, 2007
Hillary Comes Out...for Taxing Carry as Income
http://www.hillaryclinton.com/news/release/view/?id=2396
The "Don't get me wrong..." line can be read as "Please don't cancel your fundraiser, Mr. Rattner"...
Seriously, though, I am surprised by the speed with which a consensus has emerged on this. Some of that is probably due to the relative incompetence/naivete with which the industry has approached the political process. (Sending Mr. Kravis up to the Hill is not having the intended effect...)
An underlying factor may be the weakening of the alliance between high finance and the Republican party. The PE industry doesn't have friends in Republican party like they used to.
What's amazing is that a cursory review of Mitt.com reveals no effort from the Republican party's official spokesman for this guy (and him, and him) to defend the current tax policy. I remember a time (*sniff*) when the 'publicans would be crawling all over one another for a shot at declaring Democrats as "for a Tax Increase" - but not a peep from The Haircut. Or the Non-Haircut either.
All of that having been said, I still don't think it becomes law. I suppose I could see it passing the Congress, being vetoed and failing to make the 2/3 - but even that seems unlikely. For one thing, Chuck has already made his concerns clear. And there are a lot of Democrats who will do fundraisers in the PE and IM industry as election day approaches, and too many ways for the Senate to scuttle it. (Btw: Committee Chairman Dodd has been surprisingly quiet on the issue...thankfully, Chairman Baucus looks forward to a spirited discussion...)
But the industry's relatively weak PR skills, and the de minimus $ at stake (HC says $4-$6 billion, or .2% of federal spending) makes it an ideal summer punching bag for presidential candidates...
ps - The title was not intended to drive traffic from those seeking more prurient HRC stories...but I'll take it!
The "Don't get me wrong..." line can be read as "Please don't cancel your fundraiser, Mr. Rattner"...
Seriously, though, I am surprised by the speed with which a consensus has emerged on this. Some of that is probably due to the relative incompetence/naivete with which the industry has approached the political process. (Sending Mr. Kravis up to the Hill is not having the intended effect...)
An underlying factor may be the weakening of the alliance between high finance and the Republican party. The PE industry doesn't have friends in Republican party like they used to.
What's amazing is that a cursory review of Mitt.com reveals no effort from the Republican party's official spokesman for this guy (and him, and him) to defend the current tax policy. I remember a time (*sniff*) when the 'publicans would be crawling all over one another for a shot at declaring Democrats as "for a Tax Increase" - but not a peep from The Haircut. Or the Non-Haircut either.
All of that having been said, I still don't think it becomes law. I suppose I could see it passing the Congress, being vetoed and failing to make the 2/3 - but even that seems unlikely. For one thing, Chuck has already made his concerns clear. And there are a lot of Democrats who will do fundraisers in the PE and IM industry as election day approaches, and too many ways for the Senate to scuttle it. (Btw: Committee Chairman Dodd has been surprisingly quiet on the issue...thankfully, Chairman Baucus looks forward to a spirited discussion...)
But the industry's relatively weak PR skills, and the de minimus $ at stake (HC says $4-$6 billion, or .2% of federal spending) makes it an ideal summer punching bag for presidential candidates...
ps - The title was not intended to drive traffic from those seeking more prurient HRC stories...but I'll take it!
Disclaimers! (Part 2 of...)
One more key disclaimer:
NONE of the opinions contained herein are those of my employer or any of its clients. They are mine, and are prepared in a nonprofessional capacity. So there.
NONE of the opinions contained herein are those of my employer or any of its clients. They are mine, and are prepared in a nonprofessional capacity. So there.
Low-brow financial humor
"Steve, you aren't making the job of our lobbyists any easier..."
http://dealbook.blogs.nytimes.com/2007/07/13/tax-loopholes-sweeten-a-deal-for-blackstone/
This is part of why I've taken to advising Mrs. Blunt to relax about the so-called "threat" to carried interest posed by the proposed change in tax law. As we speak, these guys (and these, and these) are I'm sure thinking up ways to avoid the hit.
Conceptually (and this is a good time for the disclaimer) you could structure your partnership agreement with tiered equity, in which general partners (& staff) put up some capital and in return receive a share of the carry. It would appear to be capital gains, as financial capital is at risk. For instance, a mild-mannered young associate could put up $1000 (held in escrow? loaned to her by the firm?), and should the firm lose capital, she would lose the stake. But when carried interest is distributed to the firm's partners and staff, the ratio of return for that $1000 could be far in excess of that offered to limited partners. This is just one idea, but it essentially reflects the tax treatment of options (partnership shares would function a bit like Incentive Stock Options in that case).
This is part of why I've taken to advising Mrs. Blunt to relax about the so-called "threat" to carried interest posed by the proposed change in tax law. As we speak, these guys (and these, and these) are I'm sure thinking up ways to avoid the hit.
Conceptually (and this is a good time for the disclaimer) you could structure your partnership agreement with tiered equity, in which general partners (& staff) put up some capital and in return receive a share of the carry. It would appear to be capital gains, as financial capital is at risk. For instance, a mild-mannered young associate could put up $1000 (held in escrow? loaned to her by the firm?), and should the firm lose capital, she would lose the stake. But when carried interest is distributed to the firm's partners and staff, the ratio of return for that $1000 could be far in excess of that offered to limited partners. This is just one idea, but it essentially reflects the tax treatment of options (partnership shares would function a bit like Incentive Stock Options in that case).
Disclaimers! (Part 1 of...)
As mentioned, I am not an attorney. Anything on this blog that sounds like legal advice is not, and if you follow it as legal advice, then you (& you alone) bear the risk that it is in fact bad advice.
As also mentioned, I am not a financial adviser. I don't have a series 7, nor a CFA, nor do I have one of those wierd designations that guys put on their shingle that supposedly equip them for managing other peoples' money. If you want financial advice from such a person, please pay for it (or alternately, read David Swensen's book and buy index funds...).
The beautiful & talented Mrs. Blunt is an employee of a never-to-be-named private investment company. I will not reveal any company- or strategy-specific information relating to her work (or my own for that matter). Sometimes the opinions I offer will be in our own financial interest at an abstract level (e.g., I may make an argument for a regulation that, if implemented, would result in a financial benefit to me - or the reverse. Hopefully these occurrences are as common as the inverse phenomenon. If not, feel free to call me on it.
I will try to provide analyses of data that support the arguments I make where possible. In so doing, I may use data that is not publicly available. I cannot always make the underlying data available (sorry). I'll try to make it clear when that is the case. When I can, I am happy to share it (or point to the source...)
I'm sure I'll think of more.
As also mentioned, I am not a financial adviser. I don't have a series 7, nor a CFA, nor do I have one of those wierd designations that guys put on their shingle that supposedly equip them for managing other peoples' money. If you want financial advice from such a person, please pay for it (or alternately, read David Swensen's book and buy index funds...).
The beautiful & talented Mrs. Blunt is an employee of a never-to-be-named private investment company. I will not reveal any company- or strategy-specific information relating to her work (or my own for that matter). Sometimes the opinions I offer will be in our own financial interest at an abstract level (e.g., I may make an argument for a regulation that, if implemented, would result in a financial benefit to me - or the reverse. Hopefully these occurrences are as common as the inverse phenomenon. If not, feel free to call me on it.
I will try to provide analyses of data that support the arguments I make where possible. In so doing, I may use data that is not publicly available. I cannot always make the underlying data available (sorry). I'll try to make it clear when that is the case. When I can, I am happy to share it (or point to the source...)
I'm sure I'll think of more.
Raison d'etre...
This is an effort to keep up with and inform people about financial markets, and in particular about their regulation. I work for a firm that provides economic and financial expertise for litigation, business strategy, and regulatory compliance. I find this stuff interesting (god help me) and will try to keep my commentary of the "offering well-thought out speculation" type rather than the "you must agree with my weltanschauung or we will duel in Basel" type.
What I am not is:
What I am not is:
- A PhD (I have an MBA from the Yale School of Management - boolah boolah & all that rot);
- An attorney (bullet dodged successfully...); or
- A portfolio manager or financial adviser (or even a particularly successful investor).
What the #*$% is this?
- A blog, duh.
- An effort to employ currently underutilized assets (educational & otherwise) thus making the world's allocation of resources a bit more Pareto-optimal.
- Comments on, analysis of and information about changes in U.S. and international financial market regulation.
- A heroic quest to dispel common myths and elaborate rationalizations about finance and investing (or, alternately, occasional thoughts on avoiding the worst financial ideas...)
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