To Secret You Could Drive A Truck Through

I know the secret of investing. Sell a product at a price the public is willing to pay and you will make a profit every time. That is all there is. And yet there is never a shortage of people willing to pay the Wall Street cognoscenti (meaning the ones who know the secret) to share the secret with them. From the complexity of Credit Mobilier to the simple inspiration of Carlo Ponzi, the conceit never fails to attract the rubes and suckers. Here’s the latest packaging of the pitch.
*
First you form a corporation or a group. Being a private company you don’t have to share any public information other than your company name. What does your group do? You buy other companies. But because you avoid “hostile takeovers” there are no disgruntled stockholder lawsuits to force you to reveal any details about yourselves, such as profit margins and credit ledgers. This leaves you free to convince the “market place” that you are, secretly, a financial wizard. And with so many investor wanting to believe there are secrets to investing, it is easy to convince them that you know the secret. This is called in the Business World “Corporate Good Will”. In the magic world it’s called “The trick.” And it seems to be the basic business plan of the Blackstone Group.
*
I am not even suggesting that the “Blackstone Group” is perpetuating fraud. All they are doing is taking money from people who are determined to give it to them. When Blackstone went public a few weeks ago (Symbol BX), the prospectus explained they were, “…a leading global alternative asset manager and provider of financial advisory services…(including) management of corporate private equity funds, real estate opportunity funds,…hedge funds, senior debt funds, proprietary hedge funds and closed-end mutual funds….also…financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.” I’ve read that five times now and typed it out and I still can’t figure out exactly what the hell they do, other than let their clients say “We hired the Blackstone Group”. That’s what they call Corporate Good Will.
*
In their filing with the Securities and Exchange Commission (SEC) Blackstone listed 31 pages of “risk factors” for potential investors to watch out for, but with all that Corporate Good Will that was just more blood in the water. The initial asking price for the 133,333, 334 Limited Partnership shares offered on June 26th was $31.00 each. It closed that day at $35.06 a share, and then fell to $32.44., before leveling off by mid-July at around $29.50. That seems like a huge loss to Blackstone’s owners, until you remember they haven’t lost anything, except the cost of printing up all those shares, if anybody actually does that anymore. But on a profit of almost $5 billion, under the Bush Tax Cut Theory of Economics, Blackstone paid the government $553 million in taxes and the government then reimbursed Blackstone $775 million.
*
Here’s how it worked; First, Blackstone set up a corporation to represent the Limited Partnerships (called a Blocker Corporation) and charged it a 2% management fee. That produced $850 million for Blackstone last year, and reduced the total taxable profit to about $4 billion. Then, following federal tax codes they were allowed to deduct $1.3 billion as depreciation to the “corporate good name” because of the sale. That reduced the taxable profit to about $3.7 billion, which Blackstone used as a base to figure the corporate taxes at 35%.
*
Then they divided up the profit of $3.7 billion, but by delaying the actual payout over 15 years, they redefined it as a long term capital gain, which reduced the tax rate on it to 15%. The Government then owed the Blackstone Group about $198 million dollars above and beyond the cash they actually made from the sale of the stock. One writer described it as a “tax low, deduct high” approach.
*
This is what happens when the pencil pushers who structured the sale of the stock also wrote the laws by which the sale was taxed. Or, to put it another way, this is what happens when the American people elect a Republican President and a Republican Congress.
*
There are two more private equity funds set to make public offerings in the next year, Kohlberg Kravis Roberts and Och-Ziff Capital Management. They will likely structure their sales the same way, which I would describe as a Secret designed to drive a truck through.
- 30 –