March 24th, 2008
NY Public Library 'Trades Naming Rights' to Greedy Hedge Fund Billionaire for Big Bucks
By David Morris
Recently, the New York Public Library announced it would rename its main library the Stephen A. Schwarzman Library in return for his contribution of $100 million to its $1 billion capital fund drive. As a born and bred New Yorker, I recoiled at the news and the message it sends to future generations of New Yorkers.
The 42nd Street library is by all accounts the jewel in the crown of the New York Public Library system. In both form and function, it honors the word “public.” Henry Hope Reed has accurately described the library as “a people’s palace of triumphant glory.” The pair of marble lions flanking its flagstone plaza arguably is more readily identified as New York than the Empire State Building. Twenty years after the library opened, Mayor Fiorello LaGuardia dubbed the lions “Patience” and “Fortitude” to remind the hundreds of thousands who passed the building each week of the values needed to get through the Depression.
Its newly redone main reading room—297 feet long, 78 feet wide, and just over 51 feet high—is nothing short of remarkable. Its ceiling murals rival those of European cathedrals. Some come simply to walk around and admire. The vast majority comes to a library unusual in that it is both one of the world’s largest lending libraries and one of the world’s foremost research libraries.
The 42nd Street library is a poster child for the public, for the “we,” for generosity and openness and sharing.
Stephen A. Schwarzman, on the other hand, is a poster child for the private, for the “me,” for greed and secrecy and accumulation.
To be honest, I’d oppose renaming the 42nd Street library for any person, but renaming it for this man, at this historical moment is mind-boggling.
Schwarzman is co-founder and chairman of the board of the Blackstone Group, one of the leading companies that have designed and promoted the financial architecture that has led to the current ever-widening collapse. Blackstone is to the first years of the 21st century what Enron was to the last years of the 20th century.
Blackstone is involved largely with private equity, the new name for what in the 1980s were called leveraged buyouts. Leveraged buyouts gained a deservedly bad reputation for pension raids, mass layoffs and the looting of venerable and sustainable companies. The name changed, but the game stayed the same.
In recent years, the fastest growing part of Blackstone’s portfolio is what it calls “marketable alternative investment assets.” This is the secret, unregulated and largely unmonitored world of hedge funds and credit derivatives and collateralized debt obligations. Warren Buffett, the second-richest man in the world, who knows the financial game as well as anyone, once called credit derivatives “financial weapons of mass destruction.” As the destruction of millions of lives continues, I leave it to others to decide whether those who built and used these weapons could be considered terrorists.
In recent years, funds like the Blackstone Group gained the public eye because, even in this new anything-is-OK gilded age, its directors’ annual salaries, as much as a billion dollars, seemed over the line. And then reporters discovered that much of this income was taxed at less than half the rate the average Joe and Jane would pay on their salaries.
Here’s how it works. In 2007, Schwarzman received a salary of $350,000, which is treated as ordinary income and taxed at a 35 percent rate. He also received some $400 million in cash distributions, which is considered a capital gain and taxed at a 15 percent rate. No one with a straight face could argue that this was truly a capital gain, because no one’s personal income was at risk.
In 2007, Congress tried to close this loophole. The bill, appropriately was called the Blackstone bill. Blackstone and several other hedge fund firms quickly founded the Private Equity Council to defend their ill-gotten gains. They could afford to spend liberally to influence politicians. And they did. In 2007, private equity firms spent over $10 million on lobbying. Blackstone spent twice as much as the rest of the industry combined.
The bill died in December.
In May 2007, Schwarzman and Blackstone created their own jewel in the crown: one of the largest IPOs (initial public offering) in history.
Even as the financial system was teetering, Blackstone urged the little people to buy in. As Steven Pearlstein accurately observed in March 2007 in the Washington Post, “So the Blackstone Group, which grew rich preaching the advantages of being private, now wants to go public. If you needed any proof that the market has peaked, that the bubbles in private equity, hedge funds, real estate and credit derivatives are about to burst, this is surely it.” It was time for the smart money to get out and the dumb money of hundreds of thousands of average citizens to come in.
Investors have lost about 60 percent of their money since the IPO, while in 2007 Stephen Schwarzman received a whopping $4.7 billion for his share of the sale. Of course, Schwarzman’s share has also lost value. It may be down to $2 billion.
Blackstone’s was not your typical IPO, not only because of its size but in the way it was structured. Adding insult to injury, it was structured as a partnership, in which investors are unit holders, not shareholders. They cannot elect company directors. Moreover, as Peter Tanous, president and CEO of Lynx Investment Advisory testified before Congress last year, unlike a public corporation with shareholders, Blackstone is not required to have a majority of independent directors on its board of directors. Directors have the right to sell the business without the consent of the investor and can pay themselves any salary they want since the firm is not required to have an independent compensation committee.
In the last three years, Schwarzman has received cash distributions of some $1 billion. Given that these were taxed at less than half the normal rate, he has avoided over $100 million in taxes, about the same amount he promises to contribute to the New York Public Library.
If firms like Blackstone did not hold Congress in thrall, this loophole would have long since been closed, channeling the money where it rightfully belongs, to the public sector to support public institutions, such as hospitals and police stations and libraries. That he is willing to contribute part of the money he has diverted from public use to a specific public use is a nice gesture, to be sure. But it is not a gesture that should result in New York’s main library being named after him.
Some will argue that many public buildings have the name of robber barons. What about the Carnegie libraries? Without excusing the excesses of many of the super rich in the late 19th century, few if any public libraries built with Andrew Carnegie’s money carried Carnegie’s name, and we should remember that, unlike Schwarzman’s contribution, Carnegie’s money paid for the construction of a library that did not exist before. Moreover, the robber barons, for all their villainy, created billions of dollars of real wealth, while Schwarzman and company created trillions of dollars of fictitious wealth, that is as rapidly disappearing as it was created.
Some might argue that this is all a tempest in a teapot. Schwarzman’s name will duly be chiseled into the building’s exterior, but people will continue to call it the New York Public Library or the 42nd Street library and life will go on. Perhaps. But Schwarzman has shown that he is not a man to hide his light under a bushel. In the last 18 months he has announced himself to the world in ostentatious and publicity-seeking fashion. Consider the $3 million birthday party he threw for himself last February. I would imagine he will insist the library use its new name on all public occasions and correspondence and publicity.
Perhaps as the financial crisis deepens, New York could follow the example of the Houston Astros which abruptly changed the name of Enron Field after massive accounting fraud charges landed Enron executives in deep legal trouble. But Schwarzman, apparently, has done nothing illegal. But that doesn’t mean he’s not a thief. He has put personal greed far above the public good. New York shouldn’t attach his name to one of its most honored public symbols.