Both the House and Senate this morning will hold hearings on carried interest tax treatment — which could result in a doubling of taxes on private equity and venture capital profits (for GPs, not LPs). I’ll be live-blogging right here, once they get underway at a little after 10am… Also, we’ll have written testimony posted the minute hearings are convened…
Ok, Rangle is seated, and we’re about to get underway. Here is some written testimony:
Jonathan Silver, managing director of Core Capital Partners
Leo Hindery Jr., Managing Director, InterMedia Partners
Leon Metzger, Former Vice Chairman and Chief Administration Officer of Paloma Partners Management Company
Darryll K. Jones, Professor of Law, Stetson University College of Law, Gulfport, Florida
Daniel J. Shapiro, Partner, Schulte, Roth & Zabel LLP, London, England
Mark P. Gergen, Professor of Law, The University of Texas School of Law
Peter R. Orszag, Director, Congressional Budget Office
Leonard E. Burman, Ph.D., Director, Urban-Brookings Tax Policy Center
Let live-blogging commence
* The live feed of the House hearing is available here, but we have a big problem: The audio isn’t working! I’ve emailed a committee staffer, but no response yet. I’m already regretting my decision to stay in Boston…
* Staffer responds that his audio is OK. Loading up a new computer as we speak? Anyone else having the same problem?
* Ok, laptop works. Congressmen currently blathering on… No witnesses called yet.
* Ok, here we go. For context: The House hearing will be wide-ranging. It will begin with general tax discussions, and move into carried interest. The Senate hearing is that body’s third on carried interest, so it will focus on potential impact of tax treatment changes to limited partners. Russell Read, chief investment officer of CalPERS, will be among those testifying in the Senate.
* Senate hearing more interesting so far. You can watch it here. Senate’s audio kicks the House audio’s butt. But the House’s video is superior.
* Donald Trone, president of the Foundation for Fiduciary Studies, cited the WSJ story about how certain VC funds “staple” niche funds to general funds — either officially or unofficially.
* Prediction that tax change would result in LP ROI of less than 1 basis point, according to UC Berkeley professor Alan Auerbach. Russ Read of CalPERS says he “doesn’t know” what the effect would be, although he hints that it could be higher than one basis point. Sen. Max Baucus is questioning Read.
* Read says that CalPERS’ “ability to negotiate terms is very limited.” If the largest LP in America is “limited,” what chance does the average LP have?
* The Wall Street to Main Street blog — run by anti-change Congressman Tom Reynolds (R-NY) is also doing updates on the House hearing.
* Sen. Grassley is now asking Read if a tax change would spark a change to fees paid by limited partners. This is the heart of this hearing’s matter. Read still playing the “we don’t know” card — but hints that he’d prefer not needing to find out.
* I’m ignoring the first House panel for now… as it’s not carry-specific.
* Read says it is not CalPERS’ role to support or oppose federal tax policies. This is not going well for the GOP…
* First House panel has concluded.
* GOP Senator Mike Crapo is giving the party line about how a change to carried interest will lead to capital moving offshore. Maybe Schwarzman will just remain in St. Tropez indefinately, and buy a villa for Tony James.
* Crapo cited a study that a tax change would generate $3.2 billion in federal revenue. All of these numbers — including higher estimates up to $8 billion — are beyond hypthetical, given that carry from 2007 and 2008 will be far different than it was in 2006.
* Sen. John Ensign suggesting that a tax change would cause fewer people to invest in PE — because it would reduce the amount of money people can make. Maybe, but one could argue that there already are too many PE funds (and certainly hedge funds). More importantly, there was hardly a shortage of PE labor back in the Clinton years, when the capital gains rates were higher…. I really believe this is a red herring. Only one person has told me he’d quit investing if this change happened, and I don’t actually believe him.
* Ensign now put forth the “sweat equity” argument. Maybe I can get capital gains treatment on my peHUB-related bonus… If only I had some lobbyists behind me.
* Ensign is mixing apples and oranges, by bringing in the so-caled Blackstone Bill (which is the only bill currently offered in the Senate), but using it to dismiss an argument related to the Levin bill (House bill focused on carried interest for all funds). Don’t think it was intentional — think he was confused.
* Oh yeah, very confused. He just cited Blackstone’s claim that the Senate bill would cause it to lose 40% in market cap. He then tells Read it would be a problem if all of CalPERS’ PE funds lost 30%-40% in market cap. Hey Ensign: That would only affect publicly-traded funds!
* Sen. Maria Cantwell (D-WA) is now speaking. She used to be a top marketing exec with Real Networks, which I’m using to watch the Senate hearings. First time I’ve used it in a while — still quite good.
* Now time for an interesting Washington note: This morning at 9am PT, KKR’s George Roberts will appear before the Washington State Investment Board to pitch his firm’s third European fund. The SEIU is making waves on this — publicly asking the board to delay an investment decision until KKR answers a variety of SEIU questions about impact on workers at KKR portfolio companies, etc.
* Sen. Gordon Smith (R-OR) is leaving for a vote. But, before he leaves, he suggests that “we’re all here” because of the “extravagant lifestyle of one man.” That’s right — Schwarzman just got called out. Should have taken my advice and canceled that birthday bash. (note: Smith still seems predisposed to opposing tax treatment change)
* That’s it for the Senate hearing. Baucus called it “very constructive.” House is still in recess, so we’ll pick this back up when they return to session…
* Oops — seems the first House panel was just in recess. It’s back — and it’s still just talking general econ policy.
* Still waiting… They’re now talking about how unusual it was to cut taxes at a time of war (back in 2003). Worthy conversation, but not what I’m tuning in for…
* Bruce Rosenblum’s pending testimony is now available. He is a Carlyle Group managing director, and chairman of the Private Equity Council. Here it is: Rosenblum.doc
* While wait for relevance, here is a CNBC debate from last night, between tax change proponent Sandy Levin (D-MI) and tax change opponent (R-NY).
* Not even all of the Congressmen still seem to be there. Don’t blame them — boring, and gotta get some lunch.
* Rep. Tom Reynolds (R-NY) is making a statement that (finally) deals with carried interest. He is the primary opponent, and his primary concern seems to be far broader than just taxation of PE and hedge fund managers. He says that “Democrats are using Blackstone as a Trojan Horse to smuggle into law higher taxes on capital gains.”
* Reynolds has upped the rhetorical ante, suggesting that the Levin Bill would put “grandma’s pension at stake.”
* The first panel is finally over. Committee is in recess for the next 45 minutes…
* Still waiting for the return. In the meantime, new CNBC video for you. Watch Reps. Phil English (R-PA) and Bill Pascrell (D-NJ) duke it out.
* Ladies & gentlemen: The House is back in session! Five corporate lawyers are at the table. Should be scintillating… Bring on the PE pros…
* They say Democrats understand the Internet better than Republicans, but not on the carried interest issue. First, you had the Reynolds blog. Now comes Rep. Eric Cantor (R-GA), with a Choose your own Adventure film…
* Done with statements, on to questions. Why do witnesses need to read their statements? Can’t the Congressmen just read them/get briefed on them ahead of time, so as to save time during actual hearings?
* Discussion is currently about offshore hedge fund structures. As we all know, I don’t do hedge funds. Time to head to the fridge for some leftover baby-back ribs. Mmmnnn… BBQ.
* Rep. Cantor gets us back on point. Asking if change to carried interest tax structure would alter the 2/20 structure. Maybe Bain would have to charge 35% carry… Daniel Shapiro responds that it’s too hard to predict. Exactly what CalPERS’ Read said this morning.
* Cantor follows up by asking if investment levels would be maintained, following a tax change. Shapiro takes a long time to say very little. So Cantor moves on to ask someone else. Keeps getting nowhere.
* Rep. Bill Pascrell (D-NJ) coins a new phrase: “Fortunes for the Fortunate.” Gotta love the alliteration.
* Sorry — took a brief break to converse with my boss about 2008 ad rates for peHUB and PE Week Wire. Back to our regularly scheduled live blogging…
* It’s now 3:40pm, and the second panel is still going strong. Beginning to wonder if the final panel — the one with actual PE pros testifying — will actually happen.
* On the other hand… I just exchanged emails with one of the final panel witnesses, and he’s been told that they will indeed testify today. No change they’re on before 5, though… Settle in: It’s gonna be a long night.
* Meaningless observation #98: The current attorney panel has three men and two women. Of those men, two are wearing bow ties.
* On the other, other hand: Congressional staffer thinks the last panel could get bumped — particularly if the committee doesn’t soon limit questions…
* DealBook reports on the Senate hearing. It correctly states that anti-change forces were dealt a blow, in that the witnesses did not say a tax treatment change would negatively impact pension fund returns.
It also quotes Michael Musuraca, a trustee for the $42 billion New York City Employees Retirement System, who did not testify: “I don’t buy that their paying additional taxes will limit their incentives to make money for themselves or their pensioners. I think they have enough incentives to do their business.”
* Second panel done. No recess. Moving on to panel #3.
* Witness just said we should not tax “carried interest capital gains differentially than other capital gains.” But if you don’t think carried interest is capital gains…
* Third panel witnesses are finishing up their statements we’ve got some passion here. Q&A coming shortly…
* Rep. Sandy Levin (D-MI) just said he’d limit each back-and-forth to three minutes, due to time constraints. Good. My wife wants to go out to dinner tonight.
* An interesting question just got raised: Should LPs be able a biz expense deduction on the fees they pay to private equity fund managers? The panel answer was “yes” under a consistent tax code. Of course, we don’t have one of those.
* I keep hearing about how private equity is being “singled out,” which will further complicate the tax code. Maybe, but isn’t that because PE pros identified a loophole within the tax code, and exploited it?
* Rep. Jim McCrery has brought up the clawback issue, and commented that the point of capital gains is to reward when “people with money take risk.” For him, that seems to be end-game. But it’s silly. First, GPs aren’t people with money. They are people managing someone else’s money. Second, capital gains isn’t simply to reward financial risk. If it was, cap gains would get applied to all sorts of things that it currently isn’t.
* Rep. Allyson Schwartz (D-PA) just said that pension funds are saying they’ll be hurt by a tax change. Name one. I can’t. CalPERS sure didn’t, during the Senate hearing.
* Good, someone mentioned the Senate hearings. And Schwartz apparently was using it as a strawman, as she quoted the NY pension guy above…
*** Just noticed some new witnesses for the final panel: William Stanfill, founding partner of Trailhead Ventures & Adam Ifshin, president of DLC Management Corp.
*** Eric Cantor is back — now attacking the witnesses that have already testified. Basically said they’ve ignored entrepreneurs. When you don’t like the message…
* CBO director Orszag just tried shooting down the “risk” argument by citing movie stars. For example, an actor does a film for a low base salary, with upside based on box office sales. He even turns down more guaranteed money elsewhere. If the film is a hit, he still pays ordinary income on his money.
* Many of the witnesses say that the Levin Bill is ready to go as-is, save for a few small technicalities.
* The Congressional seats are emptying… wonder how many folks will stick around for the last panel. You know what — I’m not either. Wish I could, but the day has gotten late. More tomorrow… Buh-Bye