Monday, April 22, 2024

Levered, Tax Hating PEUs Are Debt Hawks?

Semafor reported:

“Our national fiscal trajectory is unsustainable,” Hank Paulson said. “The national debt we have will ultimately, if unchecked, destroy our economic well-being and our national security, which is rooted in the economy.” 

 The sheer amount of debt doomerism I heard this week was notable. The U.S. will spend more this year paying the interest on its $35 trillion debt than on either national defense or Medicare, according to the Congressional Budget Office — and that forecast assumed rates would start coming down in June, which looks increasingly unlikely. 

“Nobody seems to be worried that much” about America’s soaring debts, David Rubenstein said, “in part because people have been willing to buy our Treasury bills. At some point people won’t be willing to do that.” He reminded us that the Dutch guilder was once the world’s reserve currency. 

It’s easy to brush off Paulson and Rubenstein as hawks whose aversion to debt is generational and personal. Paulson was a spendthrift even when he ran Goldman Sachs, living in a 1,200-square-foot apartment and once returning a new winter coat his wife, Wendy, found too showy. Rubenstein grew up poor in Baltimore, worked in the Reagan White House, and, to hear him tell it, recently bought the Orioles as a bit of “patriotic philanthropy.”
Both Hank Paulson and David Rubenstein are private equity underwriters (PEU).  Rubenstein co-founded The Carlyle Group while Paulson founded and is executive chairman of TPG Rise Climate, the climate investing platform of the global private equity firm TPG.

Several items seem out of place.  First, David Rubenstein worked in the Carter White House, not Ronald Reagan's.  Second, the PEU boys love debt.  They hate paying taxes.

Rubenstein's firm levered Carlyle Capital Corporation out the wazoo with debt 30x equity.  A signature PEU move is to saddle affiliates with more debt to pay a sponsor dividend, aka liquidity recap.  A better term would be dividend bleeding.  

This is the first time I read Rubenstein's purchase of the Baltimore Orioles fit under "patriotic philanthropy."  That usually translates to "gigantic tax write off."  Will it drop Mr. Rubenstein's tax rate below 10%?

Update 4-23-24:  Semafor provided the following graphic today.  I adapted it slightly for this blog.

Also, it is important to remember how hard David Rubenstein worked over the last fifteen years to keep private equity's preferred "carried interest" taxation.  Frequent trips to Capital Hill, phone calls from senators and the most recent "Hail Kyrsten Sinema save" kept Mr. Rubenstein and his PEU peers happy.  It did worsen the deficit he claims to be so concerned about.