The Golden Ass

How Blackstone CEO Steve Schwarzman’s antics may cost him and his colleagues billions of dollars.

Stephen Schwarzman

In this new Gilded Age, there are few limits on how magnates can flaunt their fortunes and game the system in their favor. But Stephen Schwarzman, co-founder and CEO of the Blackstone Group, may have barreled headlong into them. This spring, the private-equity magnate has dominated headlines—in a bad way—with a series of eye-catching deals and events. Schwarzman’s unseemly behavior is drawing unwanted attention to a secretive industry and may have the unintended effect of wounding private equity’s golden-egg-laying goose.

Historically, private-equity moguls have been publicity shy, and wisely so. The fees and returns earned by outfits like Kohlberg, Kravis & Roberts and the Carlyle Group are closely guarded secrets. Holding cards close to the vest has been a key to avoiding regulation and scrutiny by legislators. And while the combination of exhibitionism and cash seems to be acceptable in tycoons who market lifestyles—say, Richard Branson and Donald Trump—there seems to be an unspoken rule that billionaire money managers shouldn’t rub the peasants’ faces in it too much.

For most of Blackstone’s charmed life, Schwarzman enjoyed a lower public profile than co-founder Pete Peterson, the former commerce secretary and frequent fretter about the nation’s finances. These two make an odd couple: Schwarzman the boisterous consumer who spends like there is no tomorrow, and Peterson the eminence grise who worries that the nation is spending like there’s no tomorrow. But in 2007, Schwarzman has practically been begging for attention. First, he threw himself a (much-covered) 60th-birthday party at the Park Avenue Armory in February. It featured, among others, Martin Short, Rod Stewart, Marvin Hamlisch, and Patti LaBelle leading the Abyssinian Baptist Church choir singing, according to a great article in the Wall Street Journal, “a tune about Mr. Schwarzman.” (“He’s Got the Whole World in His Hands”?) The best bit: “A huge portrait of Mr. Schwarzman, which usually hangs in his living room, was shipped in for the occasion.” (I wasn’t invited, but my gift would have been a first edition of Christopher Lasch’s Culture of Narcissism.)

Next came a cover story in the March 5 Fortune declaring Schwarzman, who had just completed the gigantic acquisition of Equity Office Properties, “The New King of Wall Street.” Then, only a few months after saying that Sarbanes-Oxley was deterring companies from going public, he filed a huge IPO for the Blackstone Group. If it goes through as planned, according to the Wall Street Journal, Schwarzman’s sale will be worth $7.5 billion. This offering included several wrinkles that solidified Schwarzman’s smartest-guy-in-the-room reputation but also seemed designed to elicit scrutiny. As the Financial Times reported ($ required), the preliminary prospectus said the firm planned to “book profits from private equity at the time an asset is bought”—not when the assets are sold, as most businesses do. More significantly, the offering was structured as a “publicly traded partnership” to take advantage of an absurd wrinkle in the tax code. Under current rules, the asset-management fees that private-equity partnerships like Blackstone reap are taxed not at the 35 percent corporate income-tax rate, but at the 15 percent long-term capital-gains rate, allowing Blackstone to save tens of millions of dollars annually on its tax bill. Finally, in May, at a time when concerns about China’s role in the global economy and its influence on the United States were at a fever pitch, Schwarzman agreed to sell a 10 percent stake in Blackstone to an entity controlled by China’s government.

Meanwhile, Schwarzman allowed reporters a peek behind the curtain into his private life. A brilliant article by Henny Sender and Monica Langley in last week’s Wall Street Journal ($ required) depicted him as a titan of self-indulgence. Among the priceless anecdotes: Employees in his 11,000-square-foot Palm Beach residence must avoid rubber-soled shoes lest the squeaking sounds they make impinge upon his poolside bliss. And his personal chef “often spends $3,000 for a weekend of food for Mr. Schwarzman and his wife, including stone crabs that cost $400, or $40 per claw.” Apres moi, le IPO.

Now, plenty of people on Wall Street live in a similar fashion—though they are usually smart enough not to allow reporters past the gatehouse. And while  Schwarzman, whom I’ve never had the privilege to meet or interview, may be a lovely man, a wonderful father, a fantastic boss, and a committed philanthropist, his public image to date is that of an ungracious, vain yutz.

His public image is so poor in part because he hasn’t followed the usual rules. Once you’re the King of Wall Street, you’re expected to pivot quickly from a ferocious competitor into a philanthropic, public-minded teddy bear. That’s the path Wall Street Kings of recent vintage such as Sandy Weill, Henry Paulson, Michael Bloomberg, and Robert Rubin have taken. That’s also what Schwarzman’s Blackstone Group co-founder, Pete Peterson, has done. But Schwarzman has shown few signs of such an evolution. Back in the fall of 2004, he told ($ required) Landon Thomas of the New York Times that he wanted to be a “Wise Man” in the mold of fellow Yalies Cyrus Vance and Averell Harriman, and sent out not-so-subtle signals that he wanted to be the next treasury secretary. But he has reaped headlines primarily for spending money rather than giving it away, and his involvement in public policy has been minimal.

And now Schwarzman may pay for his antics. He’s like an NBA player who, having gone the length of a court for a slam-dunk with the game already put away, starts trash-talking, jumps atop the scorers’ table, gestures obscenely at opposing fans, pinches a cheerleader, chest-bumps the referee, sticks his tongue out at the camera, all while grabbing his crotch and yelling loudly that he’s the man. That would certainly get the attention of the ordinarily forgiving disciplinarians in the league office.

Which is precisely what Schwarzman has done. Last Thursday, Sens. Max Baucus and Charles Grassley introduced legislation aimed at publicly traded partnerships like Blackstone. (Andrew Ross Sorkin of the New York Times reports that it has already been dubbed Blackstone’s law.) The law, if passed, would ensure that a publicly held Blackstone Group would essentially pay taxes as an ordinary corporation rather than as a partnership—i.e., its tax rate would soar from 15 percent to 35 percent. What’s more, there’s a possibility that Congress, in its wisdom, could extend this tax treatment to the hundreds of other massively profitable, privately held partnerships that enjoy similar tax benefits. Since private-equity types calculate net worth in terms of after-tax income, such a change would require the nation’s private-equity titans—from Henry Kravis to Stephen Feinberg of Cerberus—to take a significant haircut. Each dollar earned as profit based on fees would be worth only 65 cents instead of 85 cents, which would significantly reduce the net worth of their businesses. (The vast profits funds make from taking real capital gains wouldn’t be affected.)

Schwarzman has done what nobody on Wall Street thought he could do: create a huge private-equity firm from scratch, engineer ever-larger deals, sell a stake to China, and, perhaps, take his firm public. He might have to add to that list another accomplishment: He may have single-handedly ignited class warfare that will beggar himself and his Park Avenue neighbors.