When I wrote the “The Audacity of Greed” in 2008, I had a chapter called “Vodka and Penises” which detailed a rather unique birthday party thrown in Sardinia, Italy, in 2000 by Tyko CEO Dennis Kozlowski in honor of his wife–it featured vodka spraying from the penis of a replica of Michelangelo’s David. Kozlowski, who eventually went to jail for stealing lots of company money including the funds to pay for this little soiree, flew seventy-five guests to the Hotel Cala di Volpe where the privileged invitees played golf and tennis, ate fine food, listened to a performance by the singer Jimmy Buffett (who was paid a fee of $250,000 to appear) and enjoyed a birthday cake in the shape of a woman’s breasts festooned with sparklers on top.
It was a symbol of the greed and avarice coursing through American business.
And it ain’t over–as Leon Black is happy to demonstrate.
Let’s set the backdrop first: millions of Americans are without work, millions more can’t find decent paying work, we still are trying to dig out of a financial crisis caused largely by greed and avarice on Wall Street, we have the greatest divide between rich and poor in 100 years, and we are enduring a longer-term attack against the people by a bankrupt “free market” system that values a few CEOs over the rest of us.
No matter. The party must continue:
Last Saturday night, the financier Leon D. Black celebrated his 60th with a blowout at his oceanfront estate in Southampton, on Long Island. After a buffet dinner featuring a seared foie gras station, some 200 guests took in a show by Elton John. The pop music legend, who closed with “Crocodile Rock,” was paid at least $1 million for the hour-and-a-half performance.
Mr. Black had his backyard transformed into a faux nightclub setting, constructing a wooden deck over his swimming pool and building a tent for Mr. John’s concert. After a buffet of crab cakes and steak, partygoers sat on couches with big puffy pillows.
Who was there?
The stars of music and fashion collided with a who’s who of Wall Street. Revelers included Michael R. Milken, the junk-bond pioneer and Mr. Black’s boss at Drexel Burnham Lambert in the 1980s; Julian H. Robertson Jr. , the hedge fund investor; Lloyd C. Blankfein, the chief executive of Goldman Sachs; and Mr. Schwarzman, head of Blackstone Group.Rounding out the guest list were politicians including Mayor Michael R. Bloomberg and Senator Charles E. Schumer of New York, who rubbed elbows with the media celebrities Martha Stewart and Howard Stern.[emphasis added]
On Saturday night, to be sure, there was little talk of carried interest at the Blacks’ home on Meadow Lane, one of the Hamptons most desirable addresses for its panoramic views of the Atlantic Ocean and Shinnecock Bay. He counts among his neighbors Calvin Klein and David H. Koch, the billionaire industrialist.[emphasis added]
So, here is what is important to glean from this obscene affair, which underscores how we have been robbed–and how we will continue to be robbed in the future.
In my most recent book, “It’s Not Raining, We’re Being Peed On,” I wrote about “carried interest”. Private equity firms get a special tax break—it’s called “carried interest”, Rather than being taxed at the top rate of 35 percent, the private equity fund managers like Black only pay 15 percent through a loophole called “carried interest.” To understand carried interest, you have to first understand how money managers get paid in the yacht-sailing, mansion-buying world of private equity.
First, they receive a fee, which is a percentage of the funds they invest. This fee is usually in the range of two percent, and is taxed like your run-of-the-mill wage income.
Second, and far more lucratively, money managers get a fee based on the performance of their fund—a fee in the range of 20 percent. It’s the second fee that is the so-called “carried interest”—and it’s how the money managers of private equity really rake in the big bucks that pay for their Picassos, yachts and mansions.
In the normal world of taxable income (and let me say that nothing in the tax code is simple when it comes to schemes that allow people like Black to shelter their money), carried interest is taxed as investment income—at the capital gains level of 15 percent (much lower than the top wage income rate), even though most of these managers invest very little, if any, of their own money.
So, a private equity big shot honcho hauling down millions of dollars in “incentive” is taxed at a 15 percent rate, while the receptionist who works in his office, or the police officer who guards the equity baron’s property, probably earn $50,000 or so if they’re lucky—and those average working people pay a 25 percent tax rate on that income (not to mention payroll taxes), a far larger share of their income than the fellow who banks “carried interest.”
Which is how Black can afford to throw obscene birthday parties.
How “carried interest” continue to remain in place can be summed up, in large part, with two words: Chuck Schumer. Schumer has been one of Wall Street’s greatest defenders. And, while there have been calls to eliminate the “carried interest” bonanza, Schumer has blocked that effort time and again, and has also, most recently, flip-flopped on the absurd proposal to give corporate American a tax holiday on the profits companies have stashed over seas.
I understand the movtivation: Wall Street is a huge honeypot for campaign contributions. That is Schumer’s obsession.
But, keeping “carried interest” costs billions of dollars in money lost to our government’s treasury–money for schools, health care for seniors, research, and jobs.
One final point on the private equity world. Even if the “carried interest” is eliminated, we need to keep another point in mind: private equity firms make their huge profits by buying up companies and stripping them of hundreds of thousands of workers in the name of “efficiency”. The longer-term economic crisis is, at heart, a hammering down of wages–which has led to deep despair among the people who can’t make ends meet. Private equity firms have been at the leading edge of feeding that disastrous economic system.
Which is why we should care–and take notice–of the people who party and rub shoulders at these kinds of obscene events.
They just do not care.
Ultimately, for all the rhetoric, this is about the power and wealth of the business and political elite.
It is not about us. Until we torch this system.
*This blog originally appeared in Working Life on August 19, 2011.