News: The carried interest taxman (finally) cometh

Friday, July 29, 2022

The carried interest taxman (finally) cometh

Jul 29, 2022

By Sam Sutton , Kate Davidson and Aubree Eliza Weaver

Presented by

Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro .

Private equity titans woke up to unwelcome news on Thursday morning after Senate Majority Leader Chuck Schumer and Sen. Joe Manchin (D-W.V.) unveiled a sweeping climate, health care and tax proposal that would spell trouble for the industry's compensation structure.

While Senate Democrats estimate the plan to tax carried interest as regular income will only generate $14 billion — the bill has a $739 billion price tag — groups representing private equity firms and other private investment businesses are hammering Senate leaders for going after a tax benefit that most Democrats have long considered a loophole.

"We just learned that the economy just shrank for the second quarter in a row. Prices are going through the roof for families and employers. Now, some in Washington want to move forward with a new tax on private investment that will hurt jobs, pensions, and small businesses," said Drew Maloney, president and CEO of the private equity industry association the American Investment Council.

The industry is already targeting Sen. Kyrsten Sinema (D-Ariz.), who opposed earlier efforts to raise corporate taxes. Private equity lobbyists also said they've started reaching out to Democrats on the House side.

This is not the first time policymakers have sought to change the tax code to generate more revenue from private equity funds. If that tax language makes it to President Joe Biden's desk, however, the new rules would be hitting the industry at an unusual time.

From me : "Private equity has long benefited from low interest rates that pumped up the size of their deals, amplified their returns and made it easier to raise money from public pensions and sovereign wealth funds. Rising rates will make it much tougher to sell the businesses they bought through their investment funds — particularly for those who larded up their portfolio companies with cheap debt during the boom times.

What's more, the Securities and Exchange Commission is pursuing a new rule that would compel private fund managers to provide regular updates on the fees and expenses they charge their fund investors — and prevent them from diverting money from their portfolio companies to swell their own balance sheets."

Those dynamics have the most bearing on smaller firms , particularly those with limited track records or unproven management teams. Leaders at one the industry's leviathans, The Carlyle Group, weren't exactly sounding the alarm over the proposal during their earnings call on Thursday morning (where they also reported revenues of more than $1 billion).

"We've got people all over the world subject to all kinds of different tax rates," Carlyle Group CFO Curtis Buser told analysts during the call. "Changes in local taxation doesn't affect our corporate play."

IT'S FRIDAY — Or, to quote David Lynch, "It's a Friday once again!" Send your questions, plus any tips or story ideas, to kdavidson@politico.com , ssutton@politico.com or aweaver@politico.com .

A message from Altria:

Moving beyond smoking. Altria's companies are leading the way in moving adult smokers away from cigarettes – by taking action to transition millions toward less harmful choices. We are investing in a diverse mix of businesses to broaden options beyond traditional, combustible cigarettes. See how we're moving.

Driving the Day

Personal income, spending and inflation data released at 8:30 a.m. … Employment cost index data released at 8:30 a.m. … University of Michigan consumer sentiment and inflation expectations survey released at 10 a.m.

RECESSION? — POLITICO's Ben White: "The White House faces a fresh political nightmare as a report Thursday showed the economy contracted 0.9 percent in the second quarter of the year, offering Republicans a tantalizing opportunity to declare that the U.S. is in recession. The report from the Commerce Department on gross domestic product over the April-June period followed a first-quarter decline of 1.6 percent and meets one — though far from the only — criteria for an economic recession. The figure is a first estimate and subject to future revisions."

DEMOCRATS DRAFTING A PROPOSAL TO BAN CONGRESSIONAL STOCK TRADES — Bloomberg's Bill House and Jarrell Dillard: "House Democrats are readying a proposal to restrict members of Congress, their staff and their families from trading securities . A framework for legislation is set to be released next week by the Committee on House Administration, according to a person familiar with the matter, who asked for anonymity because the plan hasn't been made public.

"'We'll have something very soon,' California Democrat Zoe Lofgren, the head of the committee, said Thursday, without giving any details."

WEST VIRGINIA PUNISHES BANKS THAT DON'T SUPPORT COAL — NYT's David Gelles: "West Virginia on Thursday morning announced that five major financial institutions, including Goldman Sachs and JPMorgan, would be barred from doing business with the state because they have stopped supporting the coal industry. The announcement, made by West Virginia's treasurer, Riley Moore, is the first time a state has moved to sever banking relationships with major Wall Street firms over objections to their efforts to reduce dangerous planet-warming emissions.

CFPBUSTED — From POLITICO's Katy O'Donnell: "The Consumer Financial Protection Bureau on Thursday fined U.S. Bank $37.5 million for allegedly opening unauthorized accounts using customers' personal data."

Also from Katy: "House Republicans on Thursday accused Consumer Financial Protection Bureau Director Rohit Chopra of ' conspiring with state agencies to pursue duplicative enforcement actions.' In a letter to Chopra, they requested information about his communications with state attorneys general since taking office in October."

CHINA TIES — Sen. Tommy Tuberville (R-Ala.) and four other Senate Republicans are demanding the SEC investigate a pair of stock trading apps owned by Chinese businesses that they allege have "close ties to Chinese telecom giants Xiaomi and Tencent, which have reportedly aided the Chinese Communist Party in its efforts to surveil and suppress its citizens."

ICYMI: FALLING GAS PRICES BLUNT GOP ATTACKS — Our Ben Lefebvre: "The Republicans blaming President Joe Biden for sky-high gasoline prices are running into a problem : There may not be enough fuel left in that tank to reach November. With just over 100 days to go until an election that could end Democratic control of both houses of Congress, it appears that gasoline prices may have peaked too soon to remain the lethal campaign weapon for Republicans that they seemed to be a month ago."

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today .

Crypto

GENSLER: WE NEED TO BRING EXCHANGES UNDER THE SEC — SEC staff are working on ways to bring crypto exchanges under the securities regulator's direct oversight, SEC Chair Gary Gensler said in a video released via Twitter on Thursday. "With so many retail customers trading on crypto platforms, we should make sure that those platforms offer similar protections [as registered securities exchanges]," he said. Staff has also been tasked with coming up with ways to assure customer digital assets are protected and to segregate market-making businesses from associated trading platforms, he said.

Gensler has made similar statements in the past . However, Republican lawmakers, crypto watchdogs and trading platforms are starting to pressure the agency to offer more clarity on what type of activities – or digital assets – are permissible. Coinbase is reportedly being investigated for improperly listing tokens that the SEC maintains are securities. That characterization has ruffled feathers on Capitol Hill, particularly with the Senate Banking Committee's ranking Republican Pat Toomey.

"The SEC has reasons for why it thinks these digital assets are securities, which I'm very skeptical of," Toomey said in prepared remarks at Thursday's Senate Banking Committee hearing on crypto scams. "Yet, the SEC still failed to disclose its rationale publicly before launching an enforcement action. That kind of approach is patently unfair to developers and investors alike."

A message from Altria:

Fed File

FED'S RATE HIKES MAY HAVE ONLY JUST BEGUN TO BITE — Reuters' Ann Saphir and Lindsay Dunsmuir: "The [GDP] report likely won't change Fed Chair Jerome Powell's view that an economy that is adding hundreds of thousands of jobs a month is not in recession, and won't deter him from raising borrowing costs further. But he and colleagues will be parsing it carefully for clues on where their policy tightening to bring down decades-high inflation is already having an effect, where it may yet begin to bite, and whether they are on track for the soft landing they aim for or the harder crash that analysts increasingly fear."

Economy

A KEY CULPRIT BEHIND RECESSION TALK? INVENTORY SWINGS — An important part of the economy's contraction in the second quarter was the result of firms slowing the expansion of their inventories , WSJ's Jon Hilsenrath: "Businesses stocked up aggressively at the end of 2021 to get around supply-chain problems and in some cases in anticipation of robust consumer spending. In recent months, after realizing they had overstocked, many have slowed orders to suppliers and filled sales out of existing inventories, meaning less national output."

Jobs Report

Daniel Tannebaum is joining the Atlantic Council as a nonresident senior fellow with the GeoEconomic Center's Economic Statecraft Initiative. Tannebaum is a partner at Oliver Wyman and head of the anti-financial crime practice for the Americas.

Michael Shapiro is now managing director of government affairs for Blackstone, with a focus on infrastructure investments and projects. He most recently was deputy assistant secretary for economic policy at the Department of Transportation and was a member of the White House Infrastructure Implementation Task Force.

INTRODUCING POWER SWITCH: The energy landscape is profoundly transforming. Power Switch is a daily newsletter that unlocks the most important stories driving the energy sector and the political forces shaping critical decisions about your energy future, from production to storage, distribution to consumption. Don't miss out on Power Switch, your guide to the politics of energy transformation in America and around the world. SUBSCRIBE TODAY .

Fly Around

Barclays joined a host of European banks feeling the pinch of a U.S. regulatory probe into breaches related to the use of messaging apps such as WhatsApp, setting aside $200 million to cover the costs in half-year results on Thursday. — Reuters' Iain Withers and Tom Sims

The once resilient Chinese economy is looking shaky, and the companies that flocked to the country to partake in boom times are being confronted by a sobering reality : flat growth in what was once seen as a reliable economic opportunity. — NYT's Daisuke Wakabayashi and Patricia Cohen

Germany's economy hasn't grown for nearly five years. Its recovery from the Covid-19 pandemic has been weaker than any major advanced economy. Its ability to fill its energy needs is in question. And now the country once known as the economic engine of Europe is teetering on the brink of a recession . — WSJ's Tom Fairless

A message from Altria:

Moving beyond smoking. Altria's companies are leading the way in moving adult smokers away from cigarettes. Today, we are taking action to transition millions toward less harmful choices.

From cigarettes to innovative alternatives. By investing in a diverse mix of businesses, Altria is working to further broaden options. Our companies are encouraging adult smokers to transition to a range of choices that go beyond traditional, combustible cigarettes.

From tobacco company to tobacco harm reduction company. And while Altria is moving forward to reduce harm, we are not moving alone. We are working closely with FDA and other regulatory bodies, and will work strictly under their framework.

See how we're moving.