Monday, July 21, 2008

Pete Peterson's Billion $ Foundation to Anchor Second Great Guilded Age

Warren Buffet previewed his peer's magnanimous $1 billion donation in late June. Bloomberg reported the Oracle of Omaha saying:

"I know of one fellow that's just been involved in a public offering. I think he's going to be setting up a billion-dollar foundation.''

Buffett may have been referring to Peter G. Peterson, a co- founder of Blackstone Group LP, the New York-based private-equity firm that raised $4.13 billion in an initial public offering last week. Peterson, 81, plans to donate a ``substantial amount'' of the cash and stock he gets from the IPO to ``various charities,'' according to a June 21 filing by Blackstone with the U.S. Securities and Exchange Commission.

The Peter G. Peterson Foundation, founded earlier this year by the senior chairman of The Blackstone Group, is dedicated to increasing public awareness of the nature and urgency of several key challenges threatening America's future, and to accelerating action on them. One of their first grants went to Public Agenda to the Students Face Up to the Nation's Finances initiative. The $500,000 grant will help Public Agenda refine and disseminate a package of learning materials designed to raise college students' awareness of our national fiscal challenges and engage college students across the nation in a discussion of the solutions.

This all sounds wonderful and important, so why blog about it? Pete Peterson is a key player in America's government industrial monstrosity (Eisenhower's military-industrial complex on steroids). He benefits mightily from Uncle Sam's preferred taxation on private equity underwriters (PEU's).

Mr. Peterson served as head of the Department of Commerce under President Richard M. Nixon. He helped open up China as America's trading partner. In May 2007 China returned the favor, purchasing a $3 billion equity stake in the Blackstone Group. As founder and chair, Pete likely got a big chunk of the proceeds for a mere 10% of the company.

Fast forward to Blackstone's $4.1 billion independent public offering, which got placed at $31 a share. The top two leaders, Peterson and Steven Schwarzman pocketed $2.6 billion in that transaction. Shareholders haven't fared as well as the PEU boys. The stock trades at $17.25, a 45% haircut (investment loss).

What does this have to do with Pete Peterson's foundation? Other than allowing Social Security to garner those kinds of investment losses, he's worried about the government's financial troubles. Yet, Pete and his partner pay preferred, as in lower, taxes on their billion dollar proceeds. Of the $7.1 billion proceeds, the total from the $3 billion China deal and the $4.1 billion IPO, Peterson and Schwarzman grossed $4.5 billion. Taxes on "carried interest"are 15% vs. the top income tax rate of 34%. How much did these guys save, or deny the federal government currently in dire finances?

At a 15% tax rate, a $4.5 billion profit adds $675 million to the federal Treasury. At 34%, Uncle Sam would garner $1.53 billion. By not paying their fair share, the PEU boys short the already hurting federal government by $855 million.

Do you think this material will make Public Agenda's curriculum? Not if they want another $500,000 grant from the Peter G. Peterson Foundation. Welcome to the Second Great Guilded Age! We'll see if Pete's prediction comes true. "If Americans are told the truth, and if they feel the required sacrifices for our common future are fairly shared, I have enormous faith that they will respond with a commitment to identify and implement the right solutions," Mr. Peterson said. Start sharing fairly, a truly honorable man would do so...