[corp-focus] Blackstone and Capital's Scam

[robert weissman]

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Blackstone and Capital's Scam
By Robert Weissman
June 27, 2007

Blackstone.

That is the ultimate refutation to the unbelievably brazen campaign
being run by Wall Street hucksters and the knee-jerk oppositionists to 
law and order at the U.S. Chamber of Commerce.

Blackstone is the giant private equity firm that, ironically, has just 
gone public (at least in part). Private equity firms are making 
headlines for making zillions of dollars buying publicly traded firms 
and taking them private (and later selling them again on public stock 
exchanges).

The Wall Street-Chamber campaign alleges that the U.S. financial 
services sector is facing a competitiveness crisis, due to regulation, 
litigation and prosecution.

Yes, really.

Here's the Chamber's CEO Tom Donohue, commenting as the House Committee 
on Financial Services met yesterday to discuss the role of the 
Securities Exchange Commission in protecting investors and overseeing 
the capital markets: "A broken securities class action lawsuit system 
and an unpredictable and inefficient regulatory system have created a 
drag on the competitiveness of our capital markets," said Donohue.

Go ahead and wipe away the crocodile tears.

You have to work mighty hard to muster sympathy for Wall Street. Leave 
aside the very trivial role played by Wall Street firms in supporting 
actual investment and innovation. Concede for a moment the questionable 
premise that Wall Street firms provide a genuinely important social 
function in facilitating development of the real economy. Forget about 
the massive financial frauds perpetrated by Wall Street and corporate 
CEOs over the last decade.

Just consider the profits and earnings for those who make their living 
on Wall Street. The guys in the fancy suits are doing alright for 
themselves.

Wall Street bonuses totaled $23.9 billion in 2006, according to the New 
York State comptroller, up 17 percent over 2005. It takes top Wall 
Street traders about two hours to make as much as the median U.S. 
household earns in a year, notes Sam Pizzigati, editor of the on-line 
newsletter Too Much.

Profits at Citigroup actually fell in 2006 -- and the company was still 
the third most profitable publicly traded corporation in the United 
States, according to Fortune.  Bank of America saw profits soar by 28 
percent to $21.1 billion, to register the fourth highest profitability 
in the United States. J.P. Morgan came in ninth. Profits at Goldman 
Sachs were up 90 percent, to $9.5 billion -- good for sixteenth on the 
Fortune list.

And then there's Blackstone. In selling part of itself on the publicly 
traded markets, the firm was forced to disclose important financial 
information. CEO Steve Schwarzman made $400 million in 2006. He grabbed 
$677 million when the company became publicly traded. And his share in 
the company is valued at $7.7 billion.

The phantasmagoria peddled by various blue-ribbon commissions anointed 
by Wall Street and the Chamber disregards these riches and concentrates 
on one overriding deception: The claim that regulation and litigation is 
driving companies to float their Initial Public Offerings (IPOs, the 
moment when they initially sell their stock) on foreign markets.

There has been some diversification of IPOs, but it mostly reflects the 
fact that stock markets in other countries are rapidly developing, and 
companies in those countries are choosing to list on their home country 
exchanges.

Once you take that into account, plus the role of a London-based market 
in attracting small-firm IPOs, it turns out there in fact has not been a 
shift of IPOs to other national markets. A devastating January 2007 
White Paper from Ernst & Young looking at every IPO in the first half of 
2006 found that 90 percent were conducted in the launching company's 
home country. Of the remaining 10 percent, only a few were "in play" -- 
most went to regional markets, or were small-caps that went to the 
London Alternative Investment Market. Of the IPOs in play -- a grand 
total of 17 for the first six months of 2006 -- about two-thirds were 
listed on U.S. exchanges.

And then there's this: Blackstone, the cutting edge of high-fallutin' 
finance, chose to do its own IPO on the New York Stock Exchange. And it 
did quite nicely for itself.

There actually is a looming crisis on Wall Street, but it is the 
opposite of what the Street's elite claim. The last five years has seen 
the rapid evolution of esoteric financial instruments that are subject 
to almost no regulation or even disclosure requirements. Private equity 
deals depend on massive amounts of debt; hedge funds too are placing 
massive bets using borrowed money; and debt itself is being traded like 
a commodity as never before. The assurance from Wall Street is: don't 
worry; only sophisticated players are involved in these deals, they know 
what they are doing, and they can afford to absorb losses.

But those same sophisticated players were badly burned by the Enron, 
WorldCom and related frauds of the nineties' stock market bubble. These 
characters can apparently be defrauded without too much difficulty. Far 
more importantly, they regularly suspend their good judgment in pursuit 
of fads -- which means lots of institutional players make the same 
mistakes at the same time.

It's reasonable to ask, so what? If the rich get soaked, that's their 
problem.

But the institutional players bought into Wall Street's financial 
exotica are investing regular people's pension and retirement monies, so 
lots of people stand to get hurt.

Even more importantly, the scope of debt-heavy bets now being placed on 
Wall Street are so huge that the market movers and shakers are doing 
more than gambling with their own money -- they are placing the health 
of the entire financial system at risk. That raises the prospect of huge 
potential taxpayer bailouts, or financial crises with impacts on the 
real economy that are too large to be averted by government action.

For their own good, but more crucially for the good of the rest of us, 
what Wall Street and the global financial system need is much more 
regulation, prosecution and stricter liability rules. Things are moving 
far too fast, with far too little acknowledgement of risk, and far too 
little oversight or disclosure.


Robert Weissman is editor of the Washington, D.C.-based Multinational 
Monitor, <http://www.multinationalmonitor.org> and director of Essential 
Action <http://www.essentialaction.org>.

(c) Robert Weissman

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