carried interest

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Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

asset allocation, backtesting, barriers to entry, Basel III, business process, buy low sell high, capital controls, carried interest, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, information asymmetry, intangible asset, Lean Startup, market clearing, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs

Proceeds shared with the GP in the third and fourth step are referred to as a GP’s carried interest (or profit share)—the key incentive for PE professionals—and is most frequently set at a 20% share of a fund’s net profits. An example of the generic language defining the steps in a distribution waterfall is set out in Exhibit 16.2.3 It should be noted that venture funds typically do not have a hurdle rate. Exhibit 16.2 Distribution Waterfall and Carried Interest CARRIED INTEREST: PE funds employ two common methodologies that determine when a GP is entitled to carried interest: all capital first carry and deal-by-deal carry with loss carry-forward. When an all capital first carry (also known as a European-style waterfall) is employed, a GP is entitled to carried interest only after all LP capital contributions made to the fund have been returned and a hurdle rate on all contributed capital has been achieved.

The fee structure in PE is commonly referred to as “2 and 20” and defines how a fund’s investment manager and GP—and in turn its PE professionals—are compensated: the “2%” refers to the management fee paid by the LPs per annum to a fund’s investment manager while the “20” represents the percentage of net fund profits—referred to as carried interest or “carry”—paid to its GP. The clear majority of profits, 80%, generated by a fund is distributed pro rata to a fund’s LPs. As long as carried interest remains the main economic incentive for PE professionals, their focus will continue to be on maximizing returns, which in turn benefits the LPs. Exhibit 1.7 visualizes the flow of fees and share of net profits to the entities involved in a PE fund. Exhibit 1.7 PE Fees and Carried Interest Returns in PE are typically measured in both internal rate of return and multiples of money invested.19 Given a fund’s cost structure, its net return—that is, the return on capital generated by the fund net of management fees and carried interest—is the relevant metric for its investors and LPs will ultimately define success on that basis at the end of the fund’s life.

Over the last decade, management fee offsets have increasingly been included in LPAs; when these offsets are in place, management fees charged to the LPs are reduced by a percentage of “other” fees collected by the fund—historically between 50 and 100%, now trending towards 100%. These offsets reduce the fee burden for LPs and shift a portion of the fee-based compensation from the GP to the limited partnership as a whole. CARRIED INTEREST: Proceeds from successful exits are distributed to a fund’s LPs and its GP in line with a distribution “waterfall” set out in a fund’s LPA.22 Carried interest is the share of a fund’s net profits paid to its GP—typically 20%—and serves as the main incentive for a PE firm’s principals. In a typical distribution waterfall, PE funds will return all invested capital and provide a minimum return to investors—a fund’s hurdle rate23 or preferred return—before any carried interest is paid out to the GP. After the hurdle rate has been reached, PE funds will typically include a “catch-up” mechanism that provides distributions to the GP until it has received 20% of all net profits paid out up to this point.


pages: 274 words: 81,008

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything by Jason Kelly

activist fund / activist shareholder / activist investor, barriers to entry, Berlin Wall, call centre, carried interest, collective bargaining, corporate governance, corporate raider, Credit Default Swap, diversification, Fall of the Berlin Wall, family office, fixed income, Goldman Sachs: Vampire Squid, Gordon Gekko, housing crisis, income inequality, late capitalism, margin call, Menlo Park, Occupy movement, place-making, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Rubik’s Cube, Sand Hill Road, shareholder value, side project, Silicon Valley, sovereign wealth fund

With Obama’s arrival in early 2009, the industry assumed it was mostly a matter of when, not if treatment of carried interest would change. Talk began to bubble about cutting a deal, specifically a “blended” rate that would raise the taxes on some portion of carried interest, or peg a rate somewhere between capital gains and ordinary income. The debate over health care reform served to sideline the issue once again, and while there was some talk of using carried interest as a way to pay for Obama’s health plan, the architects of that legislation ultimately decided not to use any non-health care revenue as sources of money. Private equity coasted for the rest of 2009. What appeared to be the final push came in the spring of 2010, when Baucus called representatives of the private equity real estate, hedge fund, and venture capital industries and said he was planning to use carried interest as a revenue generator that year.

The group also points to the fact that real estate partnerships and venture capitalists enjoy the same tax benefits. Those other industries, both of which are well-represented in Washington, did in fact initially give the private equity industry cover and ultimately helped delay any action on carried interest by the Congress. The emergence of a vocal Republican faction that had literally sworn not to raise taxes also helped stave off any changes. The bigger story around carried interest for private equity, though, may be what might be considered the political opportunity cost. The decision to make carried interest tax such a major issue right out of the gate meant that “Don’t you dare raise taxes on us billionaires” became the defining issue for an industry. It didn’t help that the initial make-up of the Private Equity Council was limited to a handful of the biggest firms run by the most visible titans of the industry, including Kravis, Bonderman, Rubenstein, and Schwarzman.

While distinct from a bill in the House introduced by Representative Sander Levin to treat carried interest as ordinary income, the two pieces of legislation converged in the collective Beltway mind. At the Private Equity Council, the staff and members realized that only a small handful of firms would go public, limiting the impact of the Blackstone bill. (In an only-in-Washington twist, the bill that unofficially bore its name had a grandfather clause that would have exempted Blackstone, effectively giving Steve Schwarzman’s firm a competitive advantage and reward for getting out first.) The Blackstone bill also served to muddy the broader issues, and some members begin to question what the driving principles were. On carried interest, the venture capital industry especially argued that it should be carved out from carried interest, positioning itself as a growth engine versus the leveraged buyout firms.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, carried interest, cloud computing, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, high net worth, index fund, information asymmetry, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, price stability, ride hailing / ride sharing, rolodex, Sand Hill Road, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

This economic incentive drives the behavior on the part of the GP that we see in most portfolio companies; that is, paying a GP to sit on the board is very unusual (other than post-IPO, where compensation is par for the course). Carried Interest The heart of compensation for GPs (at least for those who are successful investors) is carried interest. It’s rumored that the term “carried interest” derives from medieval traders who carried cargo on their ships that belonged to others. As financial compensation for the journey, the traders were entitled to 20 percent of the profits on the cargo. That sounds very civilized, if not rich. I’ve also heard—although my Google search is failing me now—that the carry portion of carried interest referred to the fact that the traders were allowed to keep as profit whatever portion of the cargo they could literally “carry” off the ship of their own volition. I prefer that story. Regardless of its historical origins, carried interest in the VC context refers to the portion of the profits that the GP generates on her investments and that she is entitled to keep.

Instead of investing in a VC fund, an LP could choose to invest in the S&P 500 or some other asset class. To account for this, some LPAs introduce the concept of a “hurdle rate” into the profits calculations. A hurdle rate says that unless the fund generates a return in excess of the hurdle rate (this is a negotiated number, but often around 8 percent), the GP is not entitled to take her carried interest on the profits. If the fund exceeds the hurdle rate, then the GP can start collecting her carried interest as if the hurdle rate didn’t exist. So, as long as you clear the bar, you are good; fall short and you get nothing. A “preferred return” is another mechanism to accomplish this, but it is more LP favorable. Unlike the “clear the bar and take the money” aspect of a hurdle rate, a preferred return doesn’t just fall away when you clear it.

Regardless of its historical origins, carried interest in the VC context refers to the portion of the profits that the GP generates on her investments and that she is entitled to keep. As with the management fee, the actual amount of carried interest varies among venture funds but often ranges between 20 and 30 percent of the profits. As it turns out, how we define “profits” and how and when the GP decides to distribute those profits to herself and her LPs is a matter for negotiation in the LPA. Let’s use a simple example to illustrate. Go back to that $100 million venture fund we talked about before, and assume that we are in year three of the fund’s existence. The GP invested $10 million in a portfolio company earlier in the fund’s life, and now the company is sold for $60 million. So, on paper at least, the GP has generated a tidy profit of $50 million for that investment.


Fortunes of Change: The Rise of the Liberal Rich and the Remaking of America by David Callahan

affirmative action, Albert Einstein, American Legislative Exchange Council, automated trading system, Bernie Sanders, Bonfire of the Vanities, carbon footprint, carried interest, clean water, corporate social responsibility, David Brooks, demographic transition, desegregation, don't be evil, Donald Trump, Douglas Engelbart, Douglas Engelbart, Edward Thorp, financial deregulation, financial independence, global village, Gordon Gekko, greed is good, high net worth, income inequality, Irwin Jacobs: Qualcomm, Jeff Bezos, John Markoff, Kickstarter, knowledge economy, knowledge worker, Marc Andreessen, Mark Zuckerberg, market fundamentalism, medical malpractice, mega-rich, Mitch Kapor, Naomi Klein, NetJets, new economy, offshore financial centre, Peter Thiel, plutocrats, Plutocrats, profit maximization, quantitative trading / quantitative finance, Ralph Nader, Renaissance Technologies, Richard Florida, Robert Bork, rolodex, Ronald Reagan, school vouchers, short selling, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, stem cell, Steve Ballmer, Steve Jobs, unpaid internship, Upton Sinclair, Vanguard fund, War on Poverty, working poor, World Values Survey

This link would seem to explain the motives of such donors. “They got what they paid for,” said Leo Hindery, who leads InterMedia, a private equity group, but opposed the carried interest loophole. In line with this theory, the Nation magazine noted that James Simons gave the maximum to Schumer’s committee around the time that the carried interest issue was before the Senate. The quid pro quo view surely explains the motives of some hedge fund and private equity donors, both in 2007 and afterward, and it fits with Schumer’s reputation as a willing handmaiden of Wall Street. At the same time, hedge fund donors started to favor Democrats by a large margin in 2000, well before the carried interest loophole emerged as an issue or Schumer headed up the DSCC. That pattern held when Republicans controlled the Senate and Democrats had no prospects for raising anyone’s taxes.

Another populist, James Webb, also got c02.indd 49 5/11/10 8:51:58 AM 50 fortunes of change big cash infusions from the DSCC to win an expensive Senate race in 2006. Both Brown and Webb voted against the carried interest loophole. Hedge funds and private equity firms paid for a huge lobbying push to hold onto their tax perks in 2007. The single biggest contract for Washington lobbying that year was a $3.7 million agreement that the Blackstone Group signed with Ogilvy Public Relations Worldwide—with the goal of derailing the carried interest tax hike. It made sense that Blackstone would spend so much, given that its partners stood to lose many millions of dollars if the tax hike went through. Just as it made sense that the main hedge fund lobbying group, the Managed Funds Association, would fiercely oppose a tax on carried interest. After all, the way that hedge fund managers made such crazy amounts of money was by taking a 20 percent cut of all of the profits they earned for clients.

Some insights to the strange new politics of class come from taking a closer look at the Democrats’ push to raise taxes on income from partnerships such as private equity firms and hedge funds. This “carried interest” income has long been taxed as capital gains, but in 2007 House Democrats voted to tax it as regular income, walloping some of the highest earners in the United States. Democrats would have used the money to spare middle-class households from the dreaded alternative minimum tax. Wealth redistribution doesn’t get much clearer than this plan, which would have appropriated more than $10 billion from a tiny number of super-wealthy financiers and given it to millions of Americans of more modest means. Among the Senate champions of this specially targeted tax on rich people was none other than Barack Obama. Given that Obama was actively trying to raise money from precisely the wealthy who would have been hard hit by the carried interest tax, you might think that he would have weaved and dodged on the issue—voicing just enough support for the tax to appease his party’s left wing, but not so much that his big money backers would see him as truly serious on the issue.


pages: 363 words: 92,422

A Fine Mess by T. R. Reid

Affordable Care Act / Obamacare, Bernie Sanders, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Donald Trump, Double Irish / Dutch Sandwich, game design, Gini coefficient, High speed trading, Home mortgage interest deduction, Honoré de Balzac, income inequality, industrial robot, land value tax, loss aversion, mortgage tax deduction, obamacare, Occupy movement, offshore financial centre, oil shock, plutocrats, Plutocrats, race to the bottom, Ronald Reagan, seigniorage, Silicon Valley, Skype, Snapchat, sovereign wealth fund, Tesla Model S, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, We are the 99%, WikiLeaks

“The hedge fund guys didn’t build this country,” Trump said. “These are guys that shift paper around and they get lucky.”13 One smart line of investment that the hedge fund guys make every year is their contribution to members of Congress. The politicians, in turn, serve their funders by protecting the carried-interest preference from all challengers. Despite its unpopularity, this particular tax break has proven so hard to eliminate that Barack Obama sought to circumvent it instead: he proposed to keep the carried-interest provision but to add a new requirement—it’s been dubbed the Buffett Rule—that says anybody with adjusted gross income over $1 million must pay at least 30% of it in income tax. It was this presidential initiative that prompted the financier Stephen Schwarzman to evoke the Nazis: “It’s like when Hitler invaded Poland in 1939.”

Generally, we don’t get to see the benefits of the carried-interest preference for any specific taxpayer. But that changed, briefly, in 2012, when the Republican presidential nominee, Mitt Romney, was pressured into releasing a couple of his tax returns. In the year 2010, Ann and Mitt Romney reported adjusted gross income of $21.6 million; most of this was deferred salary paid by the investment firm from which Romney had retired twelve years earlier. The couple gave generously to charity—about $7 million—and reported capital losses on various transactions. This reduced their taxable income to $17.1 million. Had this income been reported as salary, they would have paid more than 35% of it in income tax. But under the tax code, almost all of the Romney income was deemed carried interest. Consequently, their tax rate fell to 13.9%—a lower rate than taxpayers earning less than 1% of their income.

To add to the candidate’s embarrassment, the return showed that Romney held some of his money in the Cayman Islands, a famous haven for people trying to hide money from the tax authorities. Romney conceded that he had accounts in the Cayman Islands but said this was not for tax purposes. To which the attorney Frank Schuchat responded, “To say you put money in the Caymans, but not for tax purposes, is like saying you bought a condom, but not for sex.” The carried-interest tax break is one of those things that make the United States exceptional when it comes to tax policy. “Most other countries would never think of a dodge like ‘carried interest,’” notes the tax expert Richard Bird. “It’s proof—as if any more proof were needed—that big money gets its way in the U.S. Congress.” And this mammoth tax gift to the richest Americans is one of the reasons that the problem of inequality is so much “more pronounced” in the United States than in other developed democracies.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Despite this lackluster performance record as compared to the broad equities market, record amounts of capital continue to flow into the hedge fund industry. In recent years, the private equity industry compensation vehicle of carried interest (the profit share paid to the manager for performance) has also been the subject of much scrutiny. As a complex tax issue, carried interest has often been described as the primary means by which asset managers—including both private equity managers and hedge fund portfolio managers—rake in large amounts of compensation.27 Because carried interest and performance fees represent the majority of the large sums earned by the top-performing independent asset managers, the taxation of carried interest has become a controversial political issue. Currently in the United States, carried interest has been defined as a capital gain for individuals receiving these payments, and as such it has been subject to materially lower capital gains tax rates.

Currently in the United States, carried interest has been defined as a capital gain for individuals receiving these payments, and as such it has been subject to materially lower capital gains tax rates. Supporters of characterizing carried interest as a capital gain argue that this policy encourages productive investment and economic growth. Detractors point to relative tax burdens and the undermining of a progressive taxation system. Whatever the relative merits of these positions, it is indisputable that carried interest and its capital gains treatment are certainly contributing to the rise and continued financial success of this new elite. THE COMPENSATION STRUCTURE AND ITS NUANCES The Problem of Bundling Beta and Alpha Performance fees are almost always paid on return, not alpha. Alpha is the amount of risk-adjusted value, relative to the appropriate benchmark, that a manager has added through investment management talent—that is, through some combination of security selection, timing, sizing investments, or risk management.

Third, there are incentive arrangements that pay off to the stewards of capital when investors Conclusion 327 earn a return. In public environments, these incentives are sometimes structured as stock options for management teams to earn money when the stock performs well. In private equity environments, these incentives are structured as carried interest, a portion of the profits of the partnership that goes to the manager. However, the future of investment must contemplate how some of these arrangements can distort behavior. Might the carried-interest feature cause certain stewards to treat it like a call option and invest in circumstances that are “heads I win, tails you lose”? Might there be opportunities for making corporate boards more shareholder friendly and reducing some cases of corporate abuses? Certainly, activist investors to some degree are pursuing such enhanced governance structures, but there is work that remains to be done.


pages: 253 words: 65,834

Mastering the VC Game: A Venture Capital Insider Reveals How to Get From Start-Up to IPO on Your Terms by Jeffrey Bussgang

business cycle, business process, carried interest, digital map, discounted cash flows, hiring and firing, Jeff Bezos, Kickstarter, Marc Andreessen, Mark Zuckerberg, Menlo Park, moveable type in China, pattern recognition, Paul Graham, performance metric, Peter Thiel, pets.com, risk tolerance, rolodex, Ronald Reagan, Sand Hill Road, selection bias, shareholder value, Silicon Valley, Skype, software as a service, sovereign wealth fund, Steve Jobs, technology bubble, The Wisdom of Crowds

But the potential for really big money lies in the “carried interest,” that is, the percentage of profits—usually in the 20 to 25 percent range—that a VC fund earns if their fund performs well. So what’s the VC business model? Raise a fund, get paid 2 to 2.5 percent annually in fees to manage that fund, cover salaries and expenses, and make investments that you hope will generate large capital gains. When those returns are actually generated (e.g., because the portfolio company has a successful sale or IPO), the VC funds typically get their carried interest in the capital gains. Let’s walk through a typical example to see how carry is calculated. Let’s say there’s a $150 million fund with three general partners with 2 percent in annual fees and 20 percent in carried interest. The firm takes in $3 million in annual revenue and after paying for rent, support staff, associates, travel, et cetera, the three partners might take $400,000 to $500,000 each in salary.

The firm takes in $3 million in annual revenue and after paying for rent, support staff, associates, travel, et cetera, the three partners might take $400,000 to $500,000 each in salary. If the fund returns two times the capital, or $300 million, over the ten-year life of the fund, then $150 million is considered capital gains. The VCs get 20 percent of that amount, or $30 million in carry, to be divided up between the partners according to who has how much of the carried interest (a very sensitive division, the implications of which I’ll cover in a moment). If the fund doesn’t generate any capital gains, the VCs get nothing beyond their salaries paid out of the annual revenue. Because VC funds are treated as separate economic entities, once the VCs have finished investing in a particular fund, they need to raise another one from their limited partners. Funds do have long shelf lives—typically ten years—because the companies they invest in usually do not achieve liquidity for five to seven years.

Thus, both fee income and carry opportunity from multiple funds are gradually harvested year by year. Note that associates and principals don’t typically have carry. Junior partners with small slivers of carry (perhaps having one or two of the twenty “carry points”) are usually supervised by senior partners who closely oversee the diligence and decision-making process. If the partners themselves are not on an equal footing in terms of carried interest, an individual partner may not be able to “speak for the firm” when it’s time to make tough decisions about follow-on rounds and M&A transactions. Even the most senior partners within a firm still need to get to consensus across the partnership. That said, when your “deal champion” (i.e., the investment professional that is advocating your case within the partnership) is a subordinate within the VC firm, it can be a harder and longer process than when the deal champion is one of the senior partners.


pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey

activist fund / activist shareholder / activist investor, asset allocation, banking crisis, Bonfire of the Vanities, business cycle, carried interest, collateralized debt obligation, corporate governance, corporate raider, credit crunch, diversification, diversified portfolio, fixed income, Gordon Gekko, margin call, Menlo Park, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, sealed-bid auction, Silicon Valley, sovereign wealth fund, The Predators' Ball, éminence grise

Off and on over the previous year, various senators and congressmen had brought up the idea of altering the treatment of carried interest for private equity and hedge fund managers. The press was filled with stories of hedge fund gurus who made more than $1 billion in 2006, and Fortress had revealed during its IPO that its three founders, Wesley Edens, Peter Briger Jr., and Michael Novogratz, and two other senior managers had received $1.7 billion from their firm shortly before Fortress’s IPO. The capital gains advantage was not unique to private equity or hedge funds. It stemmed from general principles of tax and partnership law and the gaping differential between the tax rates on ordinary income and capital gains. Carried interest by definition consists of investment profits, which are capital gains for tax purposes, and partnership law allows profits to be allocated to different classes of partners as the partnership chooses.

(The investors, who become limited partners in a partnership, don’t write a check for their full commitment at the outset; they merely promise to deliver their money whenever the general partner issues a demand, known as a capital call, when it needs money for a new investment. Even so, the general partner collects the full 1.5 percent from the limited partners every year no matter how much of the money has been put to work. When the funds themselves begin to wind down after five or six years, the management fee is substantially reduced.) Richer yet was the potential bonanza Blackstone stood to make in “carried interest.” By the conventions of the business, private equity firms take 20 percent of any gains on the investments when they are sold. If Blackstone raised the hoped-for $1 billion and the fund averaged $250 million in profits a year (a 25 percent return) for five years running—a not impossible mark—Blackstone would be entitled to $50 million a year, or $250 million over five years. On top of that, the companies Blackstone bought would reimburse Blackstone for the costs it ran up analyzing them before it invested and for its banking and legal fees.

Its companies would also pay advisory fees to Blackstone for the privilege of being owned by it. A more lucrative compensation scheme was hard to imagine. The fee structure ensured that if the fund was big enough, the financiers would become millionaires even if they never made a dime for their investors. The management fees alone guaranteed that with a large fund. If they made good investments and collected their 20 percent carried interest, they stood to make a lot more. While the individual partners at a successful midsized firm such as Gibbons, Green, or van Amerongen might earn $2 million in a good year, the industry’s kingpins, Henry Kravis and George Roberts, overseeing multibillion-dollar funds, each took home upward of $25 million in 1985. This was several times more than what the CEOs of Wall Street’s most prestigious investment banks made at the time, and it dwarfed what Peterson had earned as CEO of Lehman.


pages: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

"Robert Solow", 8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, carried interest, collateralized debt obligation, collective bargaining, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, full employment, future of work, gender pay gap, George Akerlof, Gini coefficient, glass ceiling, helicopter parent, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, Paul Samuelson, payday loans, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Steve Jobs, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, Winter of Discontent, women in the workforce, working poor, young professional, zero-sum game

Hereafter cited as Kroll and Dolan, “Forbes 400.” The founders who hold these shares include: Jeff Bezos (1), Bill Gates (2), Warren Buffett (3), Mark Zuckerberg (4), Larry Ellison (5), Larry Page (6), and Sergey Brin (9). Others among the top one hundred—for example, George Soros (60) and Carl Icahn (31)—owe their fortunes to carried interest. reported by one-percenters: Victor Fleischer, “How a Carried Interest Tax Could Raise $180 Billion,” New York Times, June 5, 2015, http://nytimes.com/2015/06/06/business/dealbook/how-a-carried-interest-tax-could-raise-180-billion.html. Fleischer reaches this result by inference from the legal structures typically employed by investment funds. In particular, investment funds are generally organized as partnerships, and the fund managers of investment funds are themselves also organized as partnerships.

These are not marginal or idiosyncratic categories of income (although the need to translate from tax categories to moral ones inevitably introduces judgment and imprecision into any accounting). Founder’s shares, carried interest, and executive stock compensation give nominally capital gains a substantial component of labor income, especially among the very rich. To begin with, roughly half of the twenty-five largest American fortunes, according to Forbes, arise from founder’s stock still held by the founders who built the firms. Moreover, the share of total capital gains income reported to the Treasury that is attributable to carried interest alone—to the labor of hedge fund managers—has grown by a factor of perhaps ten in the past two decades and now comprises a material share of all the capital gains reported by one-percenters.

A complete meritocratic accounting of earned advantage is more expansive than this and traces income through its shallow sources back to its deep roots—to reveal that some income nominally attributed to capital in fact originates in labor and therefore should be counted as earned through effort, skill, and industry. An entrepreneur who sells founder’s shares in her firm, an executive who realizes appreciation after being paid in stock, and a hedge fund manager who gets paid a “carried interest” share of profits on funds she invests (but does not own) all report capital gains income on their tax returns. But all these types of income ultimately reflect returns to the founder’s, the executive’s, or the manager’s labor and, the meritocrat insists, are on this account earned. A similar analysis applies to pensions and owner-occupied housing. All this income is earned in a way that distinguishes it from the true capital income of the hereditary rentier who lives, at leisure, from returns on an inherited patrimony.


pages: 481 words: 120,693

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Boris Johnson, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, disruptive innovation, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, starchitect, stem cell, Steve Jobs, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

Bloomberg is, of course, himself both a plutocrat and one of the country’s most prominent financial entrepreneurs. As New York’s mayor, he has defended Wall Street with the hometown zeal of a Detroit politician supporting the carmakers or a prairie leader backing farmers. Nonetheless, here was Bloomberg on carried interest: “Since fair is fair, tax loopholes in the financial industry that are outdated should be closed, too, such as taxing carried interest at ordinary income rates. And I say this even though many of the people who would be affected are my constituents—so I assume I will get some phone calls later this afternoon.” GALT’S GULCH Carried interest is a very specific issue that touches a very specific group of people. The rise of Occupy Wall Street has brought a broader critique of the 1 percent to the fore, and in doing so has spurred some of the plutocrats to mount a more general self-defense.

Two other former Obama backers on Wall Street—both claim to have been on Rahm Emanuel’s speed dial list—recently told me that the president is “antibusiness”; one went so far as to worry that Obama is “a socialist.” In some cases, this sense of siege is almost literal. In the summer of 2010, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private equity firm compensation—by treating carried interest as ordinary income—was “like when Hitler invaded Poland in 1939.” However histrionic his metaphors, Schwarzman (who later apologized for the remark) is a Republican, so his antipathy for the current administration is no surprise. What is perhaps more surprising is the degree to which even former Obama supporters in the financial industry have turned against the president and his party. A private equity manager who is a passionate Democrat and served in the Clinton administration proudly recounted to me his bitter exchange with a Democratic leader in Congress, who was involved in the tax reform effort.

A private equity manager who is a passionate Democrat and served in the Clinton administration proudly recounted to me his bitter exchange with a Democratic leader in Congress, who was involved in the tax reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.” Indeed, within the private equity fraternity, which would be hardest hit by a change in the tax treatment of carried interest, this is very much the majority view. When I met him in his boathouse on Martha’s Vineyard, the cofounder of a private equity firm warned that raising the taxes on his industry would “kill” investment in this country and drive the money overseas. He also said it was morally unjust because private equity professionals like himself put their own money at risk and so did not deserve to have their profits taxed like regular income.


pages: 558 words: 168,179

Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right by Jane Mayer

affirmative action, Affordable Care Act / Obamacare, American Legislative Exchange Council, anti-communist, Bakken shale, bank run, battle of ideas, Berlin Wall, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Climategate, Climatic Research Unit, collective bargaining, corporate raider, crony capitalism, David Brooks, desegregation, diversified portfolio, Donald Trump, energy security, estate planning, Fall of the Berlin Wall, George Gilder, housing crisis, hydraulic fracturing, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, job automation, low skilled workers, mandatory minimum, market fundamentalism, mass incarceration, Mont Pelerin Society, More Guns, Less Crime, Nate Silver, New Journalism, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, oil shock, plutocrats, Plutocrats, Powell Memorandum, Ralph Nader, Renaissance Technologies, road to serfdom, Robert Mercer, Ronald Reagan, school choice, school vouchers, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, the scientific method, University of East Anglia, Unsafe at Any Speed, War on Poverty, working poor

As Chrystia Freeland writes in her book Plutocrats, the June 21, 2007, initial public offering of stock in Blackstone, his phenomenally successful private equity company, “marked the date when America’s plutocracy had its coming-out party.” By the end of the day, Schwarzman had made $677 million from selling shares, and he retained additional shares then valued at $7.8 billion. Schwarzman’s stunning payday made a huge and not entirely favorable impression in Washington. Soon after, Democrats began criticizing the carried-interest tax loophole and other accounting gimmicks that helped financiers amass so much wealth. In the wake of the 2008 market crash, as Obama and the Democrats began talking increasingly about Wall Street reforms, financiers like Schwarzman, Cohen, and Singer who flocked to the Koch seminars had much to lose. The hedge fund run by another of the Kochs’ major investors, Robert Mercer, an eccentric computer scientist who made a fortune using sophisticated mathematical algorithms to trade stocks, also seemed a possible government target.

He described McCarthy as a “serial offender” who had played “a pretty big part in lowering the bar on what is acceptable in American politics.” — Shortly before the Kochs held their second summit of the year, a June get-together at the St. Regis Resort in Aspen, they got a break that enormously increased their network’s financial clout when House Democrats passed a bill, backed by President Obama, to eliminate the so-called carried-interest loophole. The idea of eliminating the special tax break enjoyed by private equity and hedge fund managers struck fear in the finance industry. Obama had won the support of a surprisingly large share of New York’s finance titans in 2008, but his stance on the tax—which would never make it through the Senate—enraged many of its heaviest hitters. Stephen Schwarzman, the chairman and CEO of the enormously lucrative private equity firm the Blackstone Group, whose personal fortune Forbes then estimated at $6.5 billion, would call the administration’s efforts to close the loophole “a war,” claiming it was “like when Hitler invaded Poland in 1939.”

Financiers resented being blamed for the collapse of the economy in 2008, they took extreme umbrage when Obama had chastised them as “fat cats,” and they claimed that his administration was run by college professors who knew nothing about business. But Schwarzman and a number of other financiers regarded this as a new level of affront and flocked to the June Koch summit with their checkbooks in hand, determined to prevent his reelection. Ironically, it was probably Schwarzman’s own excesses that had brought the carried-interest loophole to critics’ attention. In 2006, when he decided to transform Blackstone from a private partnership into a public company, he had been required to disclose his earnings for the first time. The numbers stunned both Wall Street and Washington. He made $398.3 million in 2006, which was nine times more than the CEO of Goldman Sachs. On top of this, his shares in Blackstone were valued at more than $7 billion.


The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank

carbon footprint, carried interest, Cass Sunstein, clean water, congestion charging, corporate governance, deliberate practice, full employment, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Paul Samuelson, plutocrats, Plutocrats, positional goods, profit motive, Ralph Nader, rent control, Richard Thaler, Ronald Coase, Ronald Reagan, sealed-bid auction, smart grid, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, trickle-down economics, ultimatum game, winner-take-all economy

A year later, hedge fund manager John Paulson earned some $4 billion. These managers also enjoy remarkably favorable tax treatment, for reasons that no one can seem to explain with a straight face. For example, even though “carried interest”—mainly their 20 percent commission on portfolio gains—has the look and feel of ordinary income, it’s taxed at the 15 percent capital gains rate rather than the 35 percent top rate for ordinary income. That provision alone saved Mr. Paulson some $800 million dollars in taxes in 2007. Congress periodically considers proposals to tax carried interest as ordinary income. To no one’s surprise, financial industry lobbyists are always quick to insist that doing so would kill the geese that lay the golden eggs. The deals brokered by their clients often create enormous value, to be sure.

The deals brokered by their clients often create enormous value, to be sure. Yet the proposed legislation would not block a single transaction worth doing. The same deal that currently augments a hedge fund manager’s after-tax income by $1 million would augment it by $765,000 if carried interest were taxed as ordinary income. Can anyone credibly claim that this would make him abandon the deal? Economic analysis suggests that higher taxes on hedge fund managers would actually boost production in other sectors of the economy by alleviating wasteful overcrowding in the market for aspiring portfolio managers. This market is a prime example of a winner-take-all market—essentially a tournament in which a handful of winners are selected from a much larger field of initial contestants. Such markets tend to attract too many contestants for two reasons. One is an information bias.

See Civil Aeronautics Board California: pollution from cars in, 113; Proposition 13 in, 48–49; starve-the-beast strategy in, 47–50 229 230 INDEX campaign finance: government waste reduction through reform of, 51; perception of corruption in, 57 Canada, lack of corruption in, 56 cap-and-trade system, 181 capital gains tax rate, 163 capitalism: assumption of greed in, 33; labormanaged firms in, 32–34; task specialization in, 43 car(s): congestion fees for, 113–14, 182–83; context in evaluation of speed, 26; gasoline prices’ effect on design of, 181; need for corporations in industry, 90; pollution regulations for, 113; taxing by weight, 183–84 carbon dioxide tax, 179–82; cap-and-trade system as, 181; and climate change, 4, 179–82, 215; pace of implementation of, 4, 180–81 carried interest, 163 Carter, Jimmy, 112 cash-on-the-table metaphor, 31, 32, 35–36, 43 CEOs: before-tax versus after-tax incomes of, 154–55; competition in hiring of, 153–54; decision leverage of, 151–52; income growth of, 1, 61, 149–55; relationship between pay and ability of, 149–55; spending by, 60, 78 Cervantes, Miguel de, 215 Chicago Board of Trade, 177 children: helmet rules for, 187–89. See also schools Citizens United v.


pages: 363 words: 28,546

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, diversification, diversified portfolio, equity premium, Eugene Fama: efficient market hypothesis, family office, financial innovation, fixed income, German hyperinflation, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, Long Term Capital Management, mortgage debt, passive investing, purchasing power parity, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

So if the limited partners have committed $100 million in capital, payouts from the investments must rise above $100 million before the general partners begin to receive carried interest. Thereafter, the GPs will be paid 20 percent of any returns. So if the fund eventually closes out with $200 million in exit proceeds, the GPs will earn $20 million (i.e., 20 percent of $200 million - $100 million). But some firms base their carry on the difference between the exit proceeds and the investment capital rather than committed capital. The investment capital is the committed capital less the management fee, so this variation on the carry results in a larger payout to the GPs. To complicate matters, private equity funds often have hurdle rates that must be earned by the limited partners before carried interest is paid to the general partners. Metrick and Yasuda (2010) show that the most common hurdle rate for both VC and buyout funds is 8 percent.

Cambridge Associates, an institutional investment consulting firm, provides an index of returns net of fees as reported to the limited partners that CA has as clients. Since CA has a large share of the institutional market, its index covers upward of 80 percent of all VC funds in existence. The index begins in 1981. Metrick (2007, Chapter 3) provides an analysis of the biases in each index. The returns on SHE are actually lower than those on CA despite the fact that the latter nets out management fees and carried interest. He uses a rough estimate of management fees and carried interest to adjust the SHE returns to a net basis. This results in a 7.5 percent gap between the CA and SHE indexes.6 Metrick argues that the CA index has survivorship bias due to the fact that many VC firms attract institutional money only after they have had successful VC funds. He suggests treating the CA index as an upper bound for estimates of true VC returns. All VC returns are plagued by stale pricing.

The limited partners agree to commit a certain amount of capital, and the general partners draw down this amount as they invest in enterprises. The drawdown period typically takes several years, so the investors must keep the capital in liquid form in the meantime. Capital is typically committed for 10 years with limited extensions at the discretion of the general partners. Fees generally take two forms, a management fee levied on the committed capital and an incentive fee (termed carried interest or carry) based on performance. A typical fee structure involves a 2 percent management fee and a 20 percent incentive fee. The 2 percent management fee is levied on the committed capital from the beginning of the fund regardless of how much has been drawn down. So if there is a $100 million fund with capital committed for 10 years, then the total management fee will be $20 million over the 10-year period ($2 million per year).2 The incentive fee kicks in after the limited partners have recovered their committed capital.


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, bitcoin, blockchain, business cycle, business process, buy and hold, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, gig economy, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, Vilfredo Pareto, zero-sum game

They benefit from unjustifiable tax advantages for carried interests. Carried interest is the portion of an investment fund’s returns eligible for a capital gains tax rate of 23.8 percent instead of the ordinary income tax rate of up to 37 percent. President Trump promised to close the loophole during his presidential campaign, but Congress caved in to the lobbying of private equity firms and did not close the loophole. Instead of an outright repeal, Congress required that a fund’s general partners hold the relevant investments for three years instead of one. Moreover, private fund managers discovered a way to keep the carried interest advantage in the tax law’s exemption for corporations. They set up corporate structures for executives entitled to receive carried interest. The second pitfall is that the US lacks a framework for data protection and data ownership.

Valeo (1976), 182 bundling, 19 Bureau of Labor Statistics (BLS), 41, 42 business dynamism, decline in, 81 Cagé, Julia, 192, 193 campaign finance contributions, 176–181; impact on policy choices, 9; and future of Europe’s free markets, 148–149; and endogeneity bias, 157–160; skewness of, 166–170; soliciting, 176–177; laws regulating, 181–182; measuring impact of, 182–186; Citizens United v. FEC, 186–189; and lobbying, 189; benefits for politicians and business groups, 189–192; in Europe, 192–194, 202–203; and state politics in US, 195–197; difficulties in tracking, 197–202 capital, growth rate of, 65 capital share, 108 Cardiff Reports, 136 Caree, Martin, 147 carried interest, 221 Carril, Rodrigo, 288 cartel enforcement, 146–147 Case, Anne, 223, 229 cell phones. See mobile telecommunications Center for Responsible Politics, 184 Century Aluminum, 160 Chalmers, John M. R., 220 Chamberlin, Edward, 87 Chicago School of antitrust, 87 China shock, 58–60, 291 Churchill, Winston, 129–130, 207 Citigroup, 249 Citizens United v. FEC (2010), 186–189 Civil Aeronautics Board, 2 Clayton Act (1914), 86–87, 131 Clinton, Hillary, 180, 186 club economy, 283–284 Code of Federal Regulations, 95 Coll, Steven, 4 college premium, 16 competition: and airline industry, 2–4; and telecommunications industry, 3; decline in, 9–10, 291–294; growth and, 18–20; inequality and, 20–22; domestic, 21, 24; foreign, 21–22, 24, 92–93; and limited resources, 22–23; and economic freedom, 23; lobbying against, 23–24; assessing, 25; and deregulation of airlines and telecommunications, 30–31; and persistence of market shares over time, 51–53; among defense contractors, 288; impact of, 288–289, 294; purpose of, 294.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

All in all, this results in a fixed component for them of about two-thirds of the general partners' compensation.44 The final element of the PE firm's compensation is carried interest - the investment manager's share of the profits of an investment above the amount the manager committed to the partnership. For many years now, market practice has been that carried interest is 20 per cent of the profits generated over and above an agreed hurdle rate - i.e. a return on an investment below which a company will not pursue an investment opportunity or project. This element of the compensation is specifically meant to motivate general partners to perform, and PE capital gains are taxed at a favourable rate. But in practice, fees are so high that carried interest amounts to only about a third of general partners' compensation. PE firms also protect themselves by loading down the companies they acquire with debt, typically 60-80 per cent of the cost of an acquisition.

A new breed of financial operator has moved into the market, largely following a PE model, often ‘selling' many of its places to local authorities but also generating private profit. In 2015, the five biggest care home chains controlled about a fifth of the total number of care home beds in the UK. These operators were attracted by stable cash flows, part of which came from local authorities, and opportunities for financial engineering: cheap debt; property which could be sold and leased back; tax breaks on debt interest payments and carried interest; and - ultimately - frail and vulnerable residents whom the state would have to look after if the business failed. The corporate structures of some care home owners became exceedingly complex and often hidden in tax havens, while corporation tax payments were low or nil. Given that local authorities still funded many care home placements and that the nurses employed in the homes had been state-trained, opaque corporate structures and minimal tax payments are hardly the way to provide an essential public service.

As we saw in Chapter 5, another crucial success for the NVCA came when it persuaded the US government to relax the interpretation of the ‘prudent man' investment rule (keeping pensions funds out of high-risk investments) to allow pension fund managers to invest up to 5 per cent of pension funds in riskier investments like VC ones. It meant that, from 1979 onwards, large sums of workers' pensions savings flowed into VC funds - funds on which venture capitalists typically received a management fee of 2 per cent of total volume, as well as 20 per cent ‘carried interest' of profits (i.e. the share of the profits that go to those managing the funds), like private equity.13 In 1984, during a tour of Silicon Valley by the then French President, Frangois Mitterrand, the discrepancy between the venture capitalists' newfound bullishness and their actual achievements was picked up in an exchange between Paul Berg, one of the winners of the Nobel Prize in Chemistry that year, and Tom Perkins (the co-founder of Kleiner-Perkins) boasting about his sector's role in biotech.


pages: 273 words: 87,159

The Vanishing Middle Class: Prejudice and Power in a Dual Economy by Peter Temin

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, American Legislative Exchange Council, American Society of Civil Engineers: Report Card, anti-communist, Bernie Sanders, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, corporate raider, Corrections Corporation of America, crack epidemic, deindustrialization, desegregation, Donald Trump, Edward Glaeser, Ferguson, Missouri, financial innovation, financial intermediation, floating exchange rates, full employment, income inequality, intangible asset, invisible hand, longitudinal study, low skilled workers, low-wage service sector, mandatory minimum, manufacturing employment, Mark Zuckerberg, mass immigration, mass incarceration, means of production, mortgage debt, Network effects, New Urbanism, Nixon shock, obamacare, offshore financial centre, oil shock, plutocrats, Plutocrats, Powell Memorandum, price stability, race to the bottom, road to serfdom, Ronald Reagan, secular stagnation, Silicon Valley, Simon Kuznets, the scientific method, War on Poverty, Washington Consensus, white flight, working poor

These incomes are lightly taxed due to the carried interest exemption, a tax loophole that taxes the income of hedge fund managers as capital gains instead of labor income, as shown dramatically by presidential candidate Mitt Romney’s tax returns. He paid taxes of less than 15 percent of his high income (which was smaller than the financial superstars’ incomes just described).24 The carried interest loophole is only one of the ways that members of the FTE sector reduce the taxes they pay. As congressional leaders were completing a massive tax and spending bill in late 2015, lobbyists descended from those that started in the early 1970s added fifty-four words that preserved a loophole for real estate and Wall Street investors that enabled them to put real estate in trusts to avoid taxes. The carried interest exemption and real estate trust provision are only two examples of tax loopholes initiated and maintained by lawyers and lobbyists for wealthy people.25 The rapid growth and high returns in finance raise questions about the role of finance in economic growth.


pages: 301 words: 88,082

The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business by Richard Brooks

accounting loophole / creative accounting, bank run, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, carried interest, Celtic Tiger, collateralized debt obligation, commoditize, Corn Laws, corporate social responsibility, crony capitalism, Double Irish / Dutch Sandwich, financial deregulation, haute couture, intangible asset, interest rate swap, Jarndyce and Jarndyce, mega-rich, Northern Rock, offshore financial centre, race to the bottom, shareholder value, short selling, supply-chain management, The Chicago School, The Wealth of Nations by Adam Smith, transfer pricing

‘His lobbying had been extremely effective.’‌27 This was the kind of time frame the private equity industry, which typically hangs around three to six years before cashing in, could deal with. Its leading lights made their serious income by putting in a small amount of their own money, typically between 1 and 3% of the investment in a fund, in return for perhaps 20% of the fund’s profit. Treated as a capital gain on an investment, this so-called ‘carried interest’ would be taxed at a quarter of the top income tax rate, or even less after other allowances. As the industry took off over the following years, expanding six-fold to attract £34bn worth of investments in 2006, the private equity fund managers scooped the jackpot.‌28 One of their number, alas, forgot to put his cross in the ‘no publicity’ box. Cleaning up ‘Any commonsense person would say that a highly paid private equity executive paying less tax than a cleaning lady or other low-paid workers can’t be right,’ admitted chairman of the SVG private equity group, Nicholas Ferguson, in June 2007.‌29 By the time parliament’s Treasury Select Committee took its withering look at the inequities of private equity that year, Gordon Brown – now prime minister – was already promising to rein in the tax concessions he had introduced a few years earlier with eyes wide open but now, in the face of public outcry, disingenuously referred to as an unintended ‘loophole’.

Completing the private equity circle of tax avoidance, Murphy’s most significant investment is almost certainly in Alliance Boots (on the board of which he sits), which we have already seen avoiding tax at both the corporate level by paying vast sums of interest offshore, and at the ownership level through Swiss and Gibraltar holding companies and trusts. Now its British, but non-domiciled, private equity manager sitting in London can escape tax when he cashes in his ‘carried interest’. KKR’s sale in 2012 of just half of its stake to an American chain for a £3bn gain suggests the non-dom tax break could prove highly valuable. It was soon reported that Murphy was one of seven out of KKR’s eight UK partners to claim the advantageous tax status, the others not British-born.‌34 The non-dom tax break, it was clear, was handing a competitive advantage in the battle for control over expanding swathes of British business to those with little attachment to the country.

Since over half the company’s income came in the form of interest paid tax-deductibly by British PFI companies controlled by HSBC – reducing their total tax bills to a piddling £0.9m in 2010/11 – the structure was highly tax effective.‌16 Nowhere was it better exemplified than at the Home Office and its PFI contract with Annes Gate Property plc. The millions that this company was paying on loans carrying interest at 14.75% headed to its owner and funder, HICL in Guernsey. The tax efficiency of PFI could sit gallingly alongside the real world consequences of the exorbitant initiative. When in 2011, for example, HICL bought a stake in the company running a 35-year PFI contract for the Pinderfields hospital in Wakefield, it acquired a loan that would pay over £1m a year ultimately to Guernsey.‌17 There of course it would not incur any of the tax that might in some small way have compensated for the £20m deficit back at the hospital trust, which was caused by the PFI payments in the first place and by 2012 had led to job cuts and nurses having to clean the wards.‌18 For many companies owning interests in PFI companies the offshore flit was irresistible.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

accounting loophole / creative accounting, active measures, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, business cycle, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Powell Memorandum, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

In 2007, the top twenty-five hedge fund managers earned nearly $900 million on average.9 Despite their awe-inspiring incomes, some of these financiers have been able to exploit features of tax law that predate the rise of hedge funds to pay only a 15 percent federal tax rate. Yes, 15 percent. “Carried interest” provisions allow fund managers to treat some of the spectacular fees investors pay them as capital gains—a favorable treatment supposedly reserved for those who are putting their own investments at risk. Warren Buffett used to say that it was outrageous that he and his secretary paid the same tax rate. Those benefitting from the “carried interest” loophole can do him one better. They pay a dramatically lower rate than their secretaries. As egregious as this loophole is, the defense game of Wall Street supporters like Schumer kept it firmly in place. Adopting the Scarlett O’Hara defense, he insisted that he supported reform but wanted to get it right—something that, hopefully, would happen tomorrow.

About the only area where audits have gone up is among poorer taxpayers who claim the Earned Income Tax Credit.12 Another way public officials have cut the taxes of upper-income filers without passing new laws is by leaving in place loopholes through which rich Americans and their accountants shovel lightly taxed cash. Take one of the more egregious examples: the ability of private equity and hedge fund managers to treat much of their extraordinary incomes as capital gains, subject only to a 15 percent tax rate. (In 2006, the top twenty-five hedge fund managers earned nearly $600 million on average, with the richest, James Simons, taking in $1.7 billion.)13 The “carried interest” provision that allows this sweetheart deal is a bug in the tax code that predates the rise of hedge funds. But while this loophole is almost universally viewed as indefensible (and may finally be closed a bit in 2010), it has been protected for years by the fierce lobbying of its deep-pocketed beneficiaries and the strong backing of Wall Street supporters like Senator Chuck Schumer, Democrat of New York.

., 17, 34, 41, 53, 105, 152, 157, 183, 186, 192, 193, 195, 200, 201, 210, 213, 214, 216, 217, 219, 221, 222, 223, 230, 233, 234, 236, 238–39, 245, 250–51, 253, 254–55, 258, 264, 265, 266, 271, 280, 293–94, 304 business: anti-labor agenda of, 55, 121–24, 127–32, 135, 219, 303 conservative support for, 122–23 Democrats supported by, 53, 86, 127, 129–32, 140, 174–88, 220–21, 223–52 economic reforms opposed by, 79–80, 86, 87–88, 130–32 financial resources of, 74, 121–22, 131, 170–72, 179–80, 209 “grassroots” campaigns by, 66, 89, 114, 119–27, 131, 144, 179–80, 274 inside vs. outside strategies of, 121 large, 119–27, 128, 129–32, 179–80, 205–6, 231, 275–78, 279 lobbyists for, 89, 117, 118, 124–26, 135–36, 144, 183–84, 198, 205–7, 218, 238–39, 275–77 organizations for, 88, 104–7, 116–36, 144, 160, 179–80, 205–6, 231, 275–78, 279, 291; see also specific organizations political influence of, 65–66, 74, 79, 84–85, 104–7, 110–12, 116–36, 150–51, 160, 169, 170–72, 179–80, 183–84, 197–98, 207, 230–31, 242–43, 271–75, 282, 292–93, 304 Powell memorandum on, 117–18, 119, 125 regulation of, 55–56, 116–36, 179–80, 187, 205–6, 219–21, 246–47, 273–77 Republicans supported by, 34, 49, 53, 65, 86, 121–26, 129–32, 140, 157, 170, 174–88, 189, 194–222, 230–31, 244–46, 267 small, 119–20, 129–30, 131, 205–6, 243 tax reform opposed by, 47, 49, 50, 64, 106–7, 124–25, 132–34, 177, 179–80, 187, 312n see also corporations business cycles, 17–18 Business-Industry Political Action Committee, 122 Business Roundtable, 120, 121, 125, 126–27, 129–30, 205–6, 231 Byrd, Robert, 130–31 cable networks, 106, 156–57, 158 California, 84, 176, 240, 247, 300 Campaigns and Elections, 203 campaign spending, 66, 118, 121–22, 150–51, 163–64, 166, 167, 169, 170–84, 197–98, 203, 207, 209–10, 219, 223–52, 258–59, 271–75, 276, 304 Campbell, Anne, 176 Canada, 29, 31, 38–39, 52, 58, 60, 68 Cao, Joseph, 337n capital gains, 14, 16, 18, 39, 46, 50–51, 99–100, 133–34, 151, 214, 228–30, 312n Carlson, Tucker, 147 Carlton Group, 133–34 “carried interest” provision, 51, 228–29 Carter, Jimmy, 98–100, 116, 126–27, 130, 131, 132–33, 134, 137, 141, 152, 172–73, 175, 184, 186, 202, 255 Carville, James, 5 Cato Institute, 209 Census Bureau, U.S., 13, 311n Center for American Progress, 266 Center for Responsive Politics, 207, 227 Chafee, Lincoln, 265 Chamber of Commerce, 119, 127, 128, 129–30, 205–6, 231, 275–78, 279 Cheney, Dick, 189–90, 217 chief executive officers (CEOs): autonomy of, 231, 292–93 conflicts of interest of, 55, 66 incomes of, 1, 16, 56, 62, 66–67, 154–55, 198 international comparison of, 62–65 organizations for, 119–21 pay packages for (executive compensation), 2, 57, 61–66, 70, 198, 219–21, 246–47, 279, 319n, 320n, 335n political influence of, 117–19 retirement benefits of, 64 Chiles, Lawton, 131, 181 Christian Coalition, 203 Christian Conservatives; see Religious Right Christian Right, 139, 146–49, 160, 201–4, 205, 234–35 Church, Frank, 175 Citigroup, 71, 226, 249–50, 254, 261 Citizens United case, 293 Civic Culture, The (Almond and Verba), 144 civic groups, 107–12, 139, 143–45, 147, 155, 156, 158 civil rights movement, 95, 138, 139, 190, 202, 235, 275 class divisions, 29, 75–77, 131–32, 148, 151–55 see also specific classes Class War?


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

Worse, these funds have a much-criticized record of restructuring in ways that lead to large job losses and heavy debt, with the restructured firms often going into bankruptcy not long after the private equity firms sell them off. The reduced tax rate that private equity funds manage to pay, due to the so-called carried-interest loophole, was something Trump railed against in the campaign but never insisted on its repeal—if he mentioned it at all—as the tax bill wended its way through Congress on the way to his signature. Confronted with the broken promise, his advisers blamed Congress. See Louis Jacobson, “Despite Repeated Pledges to Get Rid of Carried Interest Tax Break, It Remains on the Books,” Politifact, Dec. 20, 2017. 7.Over the ten-year period 2018–2028, the tax cut alone (with interest) is expected to add $1.9 trillion to the deficit. If the temporary tax cuts were made permanent, then the addition to the deficit would be $3.2 trillion. 8.

Key reforms include full taxation of dividends, capital gains, interest on local bonds, and the elimination of a host of loopholes, including the provision providing for a step-up in basis for capital gains taxation when assets are inherited, so that taxes are only paid on the difference between the price at which the asset is sold and the price at the time of inheritance—the entire capital gain during the previous generation goes untaxed. 52.Among these is the “carried interest” provision (in the Internal Revenue Code of 1986) noted earlier: those in private equity (buying firms, restructuring them, and then selling them) typically pay the low capital gains tax rate on their income, rather than the far higher rate that those working in other sectors have to pay. 53.Though the evidence, in each of these cases, is that the responses are normally small, or as economists say, the tax elasticities are low. 54.See Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth (San Francisco: W.

., and administration antitrust cases, 62 Social Security privatization, 214 Supreme Court’s loss of status as fair arbiter, 165–66 tax cuts, 25 Bush, Jeb, 178 Bush v. Gore, 165–66 Cambridge Analytica, 127–28, 132 campaign spending, 171–73; See also Citizens United Canada, 17 capital-income ratio, 54 capitalism American-style, See American-style capitalism end of communism as alleged triumph of, 3 capitalized value of rents, 282n17 capital stock, 53 capture, 149, 223, 333n32 carbon tax, 194, 206–7 carried-interest loophole, 258n6 Carter, Jimmy, and administration, 78 Case, Anne, 41–42 CEA (Council of Economic Advisers), xii Centers for Disease Control, 41 central banks, 142 CEO salaries, 39, 198, 298n89 Chao, Elaine L., 335n6 Charter Communications, 147 charter schools, 342n43 checks and balances, 163–67, 232–34 Chicago School, 68–69 childcare, 197 China economic ideology, 28–29 GDP, 272n12 and globalization, 81, 94–98 and global risk-free return on capital, 53 growth rate, 37 lack of privacy protections, 135 and risk-free return on capital, 53 trade wars, 93–94 and US unemployment, 83 churn, 314n21 cigarette companies, 18, 20 Circle, The (Eggers), 128 Citigroup, 107 Citizens United v.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

At the same time it was raising $20 billion for a new buyout fund and $10 billion for a new real estate fund.) The general partners get a management fee, usually 1% or 2% of capital committed,24 plus a carried interest in 20% of any profits earned by the partnership. In other words, the limited partners get paid off first, but then get only 80% of any further returns. The general partners therefore have a call option on 20% of the partnership’s total future payoff, with an exercise price set by the limited partners’ investment.25 You can see some of the advantages of private-equity partnerships: • Carried interest gives the general partners plenty of upside. They are strongly motivated to earn back the limited partners’ investment and deliver a profit. • Carried interest, because it is a call option, gives the general partners incentives to take risks. Venture capital funds take the risks inherent in start-up companies.

BEYOND THE PAGE ● ● ● ● ● U.S. venture capital investment brealey.mhhe.com/c15 Most venture capital funds are organized as limited private partnerships with a fixed life of about 10 years. Pension funds and other investors are the limited partners. The management company, which is the general partner, is responsible for making and overseeing the investments, and in return receives a fixed fee and a share of the profits, called the carried interest.5 You will find that these venture capital partnerships are often lumped together with similar partnerships that provide funds for companies in distress or that buy out whole companies or divisions of public companies and then take them private. The general term for these activities is private equity investing. Venture capital firms are not passive investors. They tend to specialize in young high-tech firms that are difficult to evaluate and they monitor these firms closely.

Assuming that the new money is invested to earn a fair return, give values for the following: a. Number of new shares. b. Amount of new investment. c. Total value of company after issue. d. Total number of shares after issue. e. Stock price after the issue. f. Price of the right to buy one new share. INTERMEDIATE 8. Definitions Here is a further vocabulary quiz. Briefly explain each of the following: a. Zero-stage vs. first- or second-stage financing. b. Carried interest. c. Rights issue. d. Road show. e. Best-efforts offer. f. Qualified institutional buyer. g. Blue-sky laws. h. Greenshoe option. 9. Venture capital a. “A signal is credible only if it is costly.” Explain why management’s willingness to invest in Marvin’s equity was a credible signal. Was its willingness to accept only part of the venture capital that would eventually be needed also a credible signal?


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

If the process is unsuccessful, the equity will prove worthless and some of the lenders may take a hit. The general partners (those who run the fund) will earn their cut in two ways. First, they will take an annual management fee, which may be as much as 2 per cent of the funds invested. This fee is designed to cover the managers’ running costs. Secondly, they will take a performance fee, known as ‘carried interest’, when the assets are sold, often 20 per cent of all profits after an agreed hurdle return has been reached. It is this carried interest that has made private equity fund managers rich. And it has also aroused plenty of controversy, given that it is taxed in many jurisdictions as a capital gain, rather than as income. Since capital gains usually bear a lower tax rate, this results in the anomalous situation where private equity managers are taxed at a lower rate than their office cleaners, as one financier memorably described it.

Index AAA Status of US Adams, Douglas Adams, John Addison, Lord Adenauer, Konrad adjustable rate mortgages adulterating coins affluent society Afghanistan ageing populations agrarian revolution Ahamed, Liaquat AIG air miles Alaska Amazon.com Angell, Norman Anglo Irish Bank annuities Argentina Aristophanes Arkansas Asian crisis of 1997 – 8 asset prices assignats Athens Austen, Jane austerity Austria Austrian school Austro-Hungarian empire Aztecs B&Q baby boomers Babylon Bagehot, Walter bailouts balanced budget Baldwin II, King of Jerusalem Balfour, Arthur Bancor Bank for International Settlements bank notes Bank of England bank reserves bank runs bankruptcy codes Banque Generale Barclays Capital Baring, Peter Baring Brothers Barnes & Noble barter Basle Accords Bastiat, Frederic BCA Research BCCI bear markets Bear Stearns Beaverbrook, Lord Belgium Belloc, Hillaire Benn, Tony Benn, William Wedgwood Bernanke, Ben Bernholz, Peter bezant Big Bang Big Mac index bills of exchange bimetallism biofuels Bismarck, Otto von Black Death Black Monday black swan Blackstone Blair, Tony Blum, Léon BMW Bodencreditanstalt Bohemia Bolsheviks Bonnet, Georges Bootle, Roger Brady, Nicholas Brady bonds Brazil Bretton Woods system Brodsky, Paul Brooke, Rupert Brown, Gordon Bruning, Heinrich Brutus Bryan, William Jennings bubbles budget deficits budget surplus building societies Buiter, Willem Bundesbank Burns, Arthur Bush, George W. Business Week Butler, Eamonn Calder, Lendol California Callaghan, Jim Calvin, John Canada Canadian Tar Sands capital controls capital economics capital flows capital ratios carried interest carry trade Carville, James Cassano, Joseph Cato Institute Cayne, Jimmy CDU Party ‘Celtic tiger’ central bank reserves Cesarino, Filippo ‘Chapter’ Charlemagne Charles I, King of England cheques/checks chief executive pay Chile China Churchill, Winston civil war (English) civil war (US) Citigroup clearing union Clientilism Clinton, Bill CNBC collateralized debt obligations commerical banks commercial property commodity prices Compagnie D’Occident comparative advantage conduits confederacy Congdon, Tim Congress, US Connally, John Conservative Party Consols Constantine, Emperor of Rome consumer price inflation continental bonds convergence trade convertibility of gold suspended Coolidge, Calvin copper Cottarelli, Carlo Council of Nicea Cowen, Brian cowrie shells Credit Anstalt credit cards credit crisis of 2007 – 8 credit crunch credit default swaps ‘cross of gold’ speech Cunliffe committee Currency Board currency wars Dante Alighieri David Copperfield Davies, Glyn debasing the currency debit cards debt ceiling debt clock debt deflation spiral debt trap debtors vs creditors, battle defaults defined contribution pension deflation Defoe, Daniel Delors, Jacques Democratic convention of 1896 Democratic Party Democratic Republic of Congo demographics denarii Denmark deposit insurance depreciation of currencies derivatives Deutsche Bank Deutschmark devaluation Dickens, Charles Dionysius of Syracuse Dodd – Frank bill dollar, US Dow Jones Industrial Average drachma Duke, Elizabeth Dumas, Charles Duncan, Richard Durst, Seymour Dutch Republic East Germany East Indies companies Economist Edward III, King of England Edwards, Albert efficient-market theory Egypt Eichengreen, Barry electronic money embedded energy energy efficiency estate agents Estates General Ethelred the Unready euro eurobonds eurodollar market European Central Bank European Commission European Financial Stability Facility European Monetary System European Union eurozone Exchange Rate Mechanism, European exorbitant privilege farmers Federal Reserve Federal Reserve Bank of Philadelphia Federalist party fertility rate ‘fiat money’ Fiji final salary pension Financial Services Authority Financial Times Finland First Bank of the United States First World War fiscal policy fiscal union Fisher, Irving fixed exchange rates floating currencies florin Florio, Jim Ford, Gerald Ford, Henry Ford Motor Company Foreign & Colonial Trust foreign direct investment foreign exchange reserves Forni, Lorenzo Forsyte Saga France Francis I, King of France Franco-Prussian War Franklin, Benjamin French Revolution Friedman, Milton Fuld, Dick futures markets Galbraith, John Kenneth Galsworthy, John GATT Gaulle, Charles de Geithner, Tim General Electric General Motors general strike of 1926 Genghis Khan Genoa conference George V, King of England Germany gilts Gladstone, William Glass – Steagall Act Gleneagles summit Glorious Revolution GMO Gokhale, Jagadeesh gold gold exchange standard gold pool gold standard Goldman Sachs goldsmiths Goodhart, Charles Goodhart’s Law Goschen, George Gottschalk, Jan government bonds government debt Graham, Frank Granada Grantham, Jeremy Great Compression Great Depression Great Moderation Great Society Greece Greenspan, Alan Gresham, Sir Thomas Gresham’s Law Gross, Bill G7 nations G20 meeting Guinea Habsburgs Haiti Haldane, Andrew Hamilton, Alexander Hammurabi of Babylon Havenstein, Rudolf von Hayek, Friedrich Heavily Indebted Poor Countries initiative hedge funds Henderson, Arthur Henry VIII, King of England Hien Tsung, Chinese emperor Hitler, Adolf Hoar, George Frisbie Hohenzollern monarchy Holy Roman Empire Homer, Sydney Hoover, Herbert House of Representatives houses Hume, David Hussein, Saddam Hutchinson, Thomas Hyde, H.


pages: 233 words: 71,775

The Joy of Tax by Richard Murphy

banking crisis, banks create money, carried interest, correlation does not imply causation, en.wikipedia.org, failed state, full employment, Gini coefficient, high net worth, land value tax, means of production, offshore financial centre, quantitative easing, race to the bottom, savings glut, seigniorage, The Spirit Level, The Wealth of Nations by Adam Smith, transfer pricing

In the meantime, whoever previously owned the Treasury bond or gilt now has freshly created money instead, made out of thin air, which they can now go and spend. Debt has been cancelled and money has been created and whilst, of course, all money is ultimately a government debt (which is why notes have the phrase ‘I promise to pay the bearer’ on them), it’s also true they are never repaid and don’t carry interest. The government debt that once carried interest can now be interest free. And the deficit that gave rise to the Treasury bond or gilt has now been replaced by newly created money, which just goes to prove that this is exactly what a government does when it runs a deficit – it creates government-made money. If you don’t believe this you wouldn’t be alone. Indeed, the person who in my opinion was the second greatest economist of the last century, J.


pages: 300 words: 78,475

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream by Arianna Huffington

American Society of Civil Engineers: Report Card, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, extreme commuting, Exxon Valdez, full employment, greed is good, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, new economy, New Journalism, offshore financial centre, Ponzi scheme, post-work, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, single-payer health, smart grid, The Wealth of Nations by Adam Smith, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration

There were plenty—it’s just that almost all of them were either voted down or taken out and never even put up for a vote. Even something as simple and sensible as putting a cap on credit card interest rates. Senator Sheldon Whitehouse’s amendment to do just that was voted down 60 to 35.51 So much for “financial stability.” Though I suppose it depends on whose financial stability you care about—the banks’ or the taxpayers’. Or how about payday lending—the largely unregulated advances on a paycheck that can carry interest rates in the triple digits? In Missouri, for example, rates can top 600 percent.52 Yes, you read that right. Not exactly a recipe for “financial stability.” North Carolina’s Kay Hagan offered an amendment that would have clamped down on the $40 billion industry. It was killed without a vote.53 Then there is the Merkley-Levin amendment that would have prohibited banks from making risky proprietary trades—a version of the Volcker Rule.54 It also never even made it to a vote.

Treasury.45 And they wouldn’t ban companies using offshore tax havens from receiving government contracts, which is stunning given the hard times we are in and the populist groundswell against the way average Americans are getting the short end of the stick. But the bills would end one of the more egregious examples of the tax policy double standard, finally forcing hedge-fund managers to pay taxes at the same rate as everybody else. As the law stands now, their income is considered “carried interest,” and is accordingly taxed at the capital gains rate of 15 percent.46 According to former labor secretary Robert Reich, in 2009 “the 25 most successful hedge-fund managers earned a billion dollars each.”47 The top earner clocked in at $4 billion. Closing this outrageous loophole would bring in close to $20 billion in revenue—money desperately needed at a time when teachers and nurses and firemen are being laid off all around the country.48 But the two sets of rules—and the clout of corporate lobbyists—leave even commonsense, who-could-argue-with-that proposals in doubt, and leave the middle class shouldering an unfair share of a very taxing burden.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, longitudinal study, mass incarceration, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, zero-sum game

Feige and Richard Cebula (2011), “America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.,” Munich Personal RePEc Archive, MPRA Paper No. 29672 (Jan 2011). blamed income inequality Kim M. Bloomquist (2003), “Tax Evasion, Income Inequality and Opportunity Costs of Compliance,” Paper presented at the 96th Annual Conference of the National Tax Association. carried-interest tax Nicholas Kristof (6 Jul 2011), “Taxes and Billionaires,” New York Times. Laura Saunders (6 Aug 2011), “'Carried Interest' in the Cross Hairs,” Wall Street Journal. investment tax credit Don MacKenzie, Louise Bedsworth, and David Friedman (2005), “Fuel Economy Fraud: Closing the Loopholes That Increase U.S. Oil Dependence,” Union of Concerned Scientists. Jim Hopkins (10 Feb 2004), “SUV Sales Climb on Tax Loophole,” USA Today. lost federal revenue Scott Horsley (30 Jun 2011), “What Tax ‘Loopholes’ Does Obama Want to Close?”

There are a lot of creative companies figuring out ways to follow the letter of the tax law while completely ignoring the spirit. This is how companies can make billions in profits yet pay little in taxes. And make no mistake, industries, professions, and groups of wealthy people deliberately manipulate the legislative system by lobbying Congress to get special tax exemptions to benefit themselves. One example is the carried-interest tax loophole: the taxation of private equity fund and hedge fund manager compensation at the 15% long-term capital gains tax rate rather than as regular income. Another is the investment tax credit, intended to help building contractors, that people used to subsidize expensive SUVs. There's also tax flight—companies moving profits out of the country to reduce taxes. Estimates of lost federal revenue due to legal tax avoidance and tax flight are about $1 trillion.


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

affirmative action, Affordable Care Act / Obamacare, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, carried interest, circulation of elites, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, creative destruction, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, Gunnar Myrdal, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Kenneth Arrow, Mark Zuckerberg, mass affluent, mass incarceration, means of production, meta analysis, meta-analysis, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, plutocrats, Plutocrats, Ponzi scheme, Ralph Waldo Emerson, rolodex, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

Over the last decade, the political arm of the income defense industry has been wildly successful. The tax cuts passed by Bush and extended by Obama represent a total of $81.5 billion transferred from the state into the hands of the richest 1 percent. Meanwhile, hedge fund managers and their surrogates have deployed millions of dollars to lobbyists to maintain the so-called carried interest loophole, a provision of tax law that allows fund managers to classify much of their income drawn from investing gains as “carried interest” so that it is taxed at the low capital gains rate of 15 percent, rather than the marginal income rate, which would in most cases be more than twice that. It was this wrinkle in the law that helped Mitt Romney, a man worth an estimated quarter of a billion dollars, pay an effective tax rate of just under 14 percent in 2010.


pages: 519 words: 155,332

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It by Steven Brill

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, airport security, American Society of Civil Engineers: Report Card, asset allocation, Bernie Madoff, Bernie Sanders, Blythe Masters, Bretton Woods, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, currency manipulation / currency intervention, Donald Trump, ending welfare as we know it, failed state, financial deregulation, financial innovation, future of work, ghettoisation, Gordon Gekko, hiring and firing, Home mortgage interest deduction, immigration reform, income inequality, invention of radio, job automation, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, Mahatma Gandhi, Mark Zuckerberg, mortgage tax deduction, new economy, obamacare, old-boy network, paper trading, performance metric, post-work, Potemkin village, Powell Memorandum, quantitative hedge fund, Ralph Nader, ride hailing / ride sharing, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, telemarketer, too big to fail, trade liberalization, union organizing, Unsafe at Any Speed, War on Poverty, women in the workforce, working poor

That rate had always been lower than earned income rates, and has kept getting lower, beginning with the lobbyists’ reversal of Jimmy Carter’s tax reform proposal in 1978. Those who can often be found at the absolute top of the earnings scale—people who manage hedge funds and private equity and venture funds—enjoy a loophole that allows the money they make by investing money for others (their “carried interest”) to be taxed as capital gains, not earned income, even though they get the money for their work, not as a return on money they have invested. Despite that carried interest loophole (which came from a little noticed but ardently lobbied IRS decision in 1993), Americans who have focused on such issues have been conditioned to believe that capital gains deserve favorable treatment. The rationale is that policymakers want to encourage investment and account for the fact that returns on those investments may occur over longer periods, during which inflation may have reduced the real value of any paper profit.

“They [the financial services industry] can have three people working on a paragraph.” The imbalance could be measured not just in bodies but also in the unending flow of alternative-language proposals and “white papers” that the lobbyists churned out. One was a glossy “study” full of color graphs and charts, written by consultants on behalf of a group representing private equity funds, defending the “carried interest” tax loophole. The seemingly authoritative graphs and heavily footnoted text purported to explain how taxing those who run these funds at the same rates that everyone else pays on their earned income would be disastrous for the economy, killing millions of jobs and driving away trillions of investment dollars. The purpose of such voluminous, jargon-filled gibberish, explained one lobbyist who chuckled when I questioned the backup for one of the footnotes, was to give members of Congress who wanted to side with deep-pocketed groups like the private equity funds some ostensible scholarship to point to in justifying their votes.


pages: 291 words: 92,688

Who Is Rich? by Matthew Klam

carried interest, dark matter, liberation theology, Mason jar, mass incarceration, plutocrats, Plutocrats, race to the bottom, Silicon Valley

He’d also appeared on TV financial news shows once or twice, fending off attacks on private equity, citing a study by some think tank or university, he couldn’t remember, that proved he’d created eight thousand jobs. But I was drawn to his posture of authority; he was conventionally handsome, and I could imagine him mistreating his family in all the ways Amy had mentioned, growling at breakfast, forgetting birthdays, spending Christmas alone in a hotel in Lisbon, falling asleep at dinner. I couldn’t fully assess the debate on carried interest, or whether the companies he’d succeeded in turning around justified the ones he’d accidentally leveraged into bankruptcy, or, more generally, whether bankers should have their intestines wrapped around their throats for wrecking the earth’s economy, but I’d heard from Amy how hard he worked to unlock potential value in undercapitalized industries. I worked just as hard to unlock the business in her pants.

She had all the wrong instincts, took her cues from all the wrong people, from a clergy of predators and an old Nazi pope in a crown. Nothing weird about that, nothing wrong with liberation theology in a banking context in a late-capitalist nightmare in the midst of an environmental meltdown. Arcane legislation written in secret by industry cronies on obscure financial practices and windfalls for carried interest had made her rich. She’d been formed by her parents’ immigrant struggle, a smoldering blue-collar rage, and the last two bull markets. Socially progressive, fiscally conservative, except the second part canceled out the first. She backed the NRDC, PETA, NOW, and Planned Parenthood, but also believed in trickle-down and thought lazy people who sat in drum circles on private property complaining about corporate greed weren’t helping.


pages: 302 words: 95,965

How to Be the Startup Hero: A Guide and Textbook for Entrepreneurs and Aspiring Entrepreneurs by Tim Draper

3D printing, Airbnb, Apple's 1984 Super Bowl advert, augmented reality, autonomous vehicles, basic income, Berlin Wall, bitcoin, blockchain, Buckminster Fuller, business climate, carried interest, connected car, crowdsourcing, cryptocurrency, Deng Xiaoping, discounted cash flows, disintermediation, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, family office, fiat currency, frictionless, frictionless market, high net worth, hiring and firing, Jeff Bezos, Kickstarter, low earth orbit, Lyft, Mahatma Gandhi, Mark Zuckerberg, Menlo Park, Metcalfe's law, Metcalfe’s law, Mikhail Gorbachev, Minecraft, Moneyball by Michael Lewis explains big data, Nelson Mandela, Network effects, peer-to-peer, Peter Thiel, pez dispenser, Ralph Waldo Emerson, risk tolerance, Robert Metcalfe, Ronald Reagan, Rosa Parks, Sand Hill Road, school choice, school vouchers, self-driving car, sharing economy, short selling, Silicon Valley, Skype, smart contracts, Snapchat, sovereign wealth fund, stealth mode startup, stem cell, Steve Jobs, Tesla Model S, Uber for X, uber lyft, universal basic income, women in the workforce, Y Combinator, zero-sum game

To this day, the venture capital industry suffers in the institutional investor marketplace, where they believe it is not an asset class, but an anomaly, with just a handful of firms that through some alchemy are able to consistently produce strong results. It took years for the venture industry to recover. And when it did, John, Steve and I made some significant money through our profits interest (called “carried interest”) from our success with DFJ ePlanet. With our newfound wealth, we each discussed what we would like to do going forward. We decided to peel off into what we would call the three rockets. John Fisher decided to focus on late-stage investing and created and helped build DFJ Growth with Barry Schuler, former CEO of AOL, and Mark Bailey, who previously worked at KPCB, Symantec and WebMD. Later they were joined by a former venture capitalist from the Tribune Group, Randy Glein, who became a major workhorse for the fund.

You need to know your customer and your competition well. You need to know everything about your technology. You need to be on top of your business model, you need to be open to new ways of thinking, and you need to be enthusiastic and optimistic about your business. A note about venture capitalists. They make their money by generating profits for their investors. Their main source of income is a “carried interest” that only gets large if they take big risks on companies they invest in. They are willing to lose a few of their investments as long as their winners become extraordinarily large. They do that by pushing potentially great companies through their investment committees and finding a few companies that will provide outsized returns for their investors. venture capitalists know only too well that many, in fact most, startups don’t succeed, so venture capitalists have to count on the few that do succeed to become very large so they can make many times their money from investments in the successful companies.


Capitalism, Alone: The Future of the System That Rules the World by Branko Milanovic

"Robert Solow", affirmative action, Asian financial crisis, assortative mating, barriers to entry, basic income, Berlin Wall, bilateral investment treaty, Black Swan, Branko Milanovic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, colonial rule, corporate governance, creative destruction, crony capitalism, deindustrialization, dematerialisation, Deng Xiaoping, discovery of the americas, European colonialism, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, ghettoisation, gig economy, Gini coefficient, global supply chain, global value chain, high net worth, income inequality, income per capita, invention of the wheel, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, liberal capitalism, low skilled workers, Lyft, means of production, new economy, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, post-materialism, purchasing power parity, remote working, rent-seeking, ride hailing / ride sharing, Silicon Valley, single-payer health, special economic zone, The Wealth of Nations by Adam Smith, Thorstein Veblen, uber lyft, universal basic income, Vilfredo Pareto, Washington Consensus, women in the workforce, working-age population, Xiaogang Anhui farmers

It theoretically could be that the asset classes held by the rich are more risky and more volatile, so that their higher return might be ascribed partially to a premium for risk. However, thirty years is a long enough period to even out the consequences of risk, and over the longer term, rich wealth-holders did do better than the middle class. Asset classes held by the rich are also more valuable because they tend to be taxed less than asset classes held by the middle class. Thus capital gains and, in the United States, carried interest (income received by investment fund managers) are, in most cases, taxed at lower rates than interest from savings accounts.26 The rich also enjoy the advantages of size: entry costs (the minimum amount required for investment) to high-yield assets are high and discourage small investors; rich investors can also avail themselves of much better advice about where to invest and, per unit of dollar invested, pay lower fees.

Fiscal data tend to show somewhat higher concentration of income from capital, but they have their own shortcomings: the units can be at times families and at times individuals simply because of changes in tax rules, or there may be sudden movements between capital income reported in tax returns and corporate profits (using one or the other depending on what is taxed less, as happened in the United States with the Tax Reform Act of 1986). 25. The existence in rich countries of an important part of the population without assets is not unique to the United States. Grabka and Westermeier (2014) estimate that 28 percent of German adults have zero or negative net wealth, while the bottom half of the Swedish population has negative wealth (Lundberg and Walderström 2016, table 1). 26. Carried interest is taxed as a capital gain, at a rate of about 20 percent. Interest from savings accounts is taxed as ordinary income, where the top rate is around 40 percent. 27. Bas van Bavel (pers. comm.) gave me the example of BNP Paribas Fortis wealth management fund, which distinguishes between its retail, priority, private banking, and wealth management clients. For the last group, whose investments must be at least 4 million euros, the number of investment options is much greater, and management fees (as a percent of invested assets) are lower. 28.


pages: 124 words: 39,011

Beyond Outrage: Expanded Edition: What Has Gone Wrong With Our Economy and Our Democracy, and How to Fix It by Robert B. Reich

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, banking crisis, business cycle, carried interest, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, full employment, Home mortgage interest deduction, job automation, Mahatma Gandhi, minimum wage unemployment, money market fund, Nelson Mandela, new economy, Occupy movement, offshore financial centre, plutocrats, Plutocrats, Ponzi scheme, race to the bottom, Ronald Reagan, single-payer health, special drawing rights, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, women in the workforce, working poor, zero-sum game

Mitt Romney paid less than 14 percent on income in excess of $20 million, in both 2010 and 2011. That’s because so much of the income of the super-rich is classified as capital gains, which, at 15 percent, creates a loophole large enough for the super-rich to drive their Ferraris through. Well-heeled tax lawyers and accountants are kept busy year-round figuring out how to make the earnings of their clients look like capital gains. Congress still hasn’t closed the “carried interest” loophole that allows mutual-fund and private-equity managers to treat their incomes as capital gains. Great wealth creates opportunities for ever greater tax loopholes. In 2010, eighteen thousand American households earning more than half a million dollars paid no income taxes at all. The estate tax (which affects only the top 2 percent) has also been slashed. As recently as 2000 it was 55 percent and kicked in after $1 million.


pages: 134 words: 41,085

The Wake-Up Call: Why the Pandemic Has Exposed the Weakness of the West, and How to Fix It by John Micklethwait, Adrian Wooldridge

Admiral Zheng, Affordable Care Act / Obamacare, basic income, battle of ideas, Berlin Wall, Bernie Sanders, Boris Johnson, carried interest, cashless society, central bank independence, Corn Laws, coronavirus, COVID-19, Covid-19, creative destruction, David Ricardo: comparative advantage, Deng Xiaoping, Dominic Cummings, Donald Trump, Etonian, failed state, Fall of the Berlin Wall, global pandemic, Internet of things, invisible hand, Jones Act, knowledge economy, laissez-faire capitalism, McMansion, night-watchman state, offshore financial centre, oil shock, Panopticon Jeremy Bentham, Parkinson's law, pensions crisis, QR code, rent control, road to serfdom, Ronald Reagan, school vouchers, Shoshana Zuboff, Silicon Valley, smart cities, trade route, universal basic income, Washington Consensus

Lobby groups cleverly mix greed and fear: you get some money if you support them, but if you don’t, your opponent will get a fortune in your party primary. The lobbyists’ most seductive gift is not an all-expenses-paid trip but a supply of briefing documents that help an overworked politician to stay on top of the news and cope with the tsunami of words that washes over their desks. Much of the lobbyists’ energy goes into protecting arcane pieces of legislation that matter enormously to one group. The “carried interest” tax break that gives private equity an advantage over other ways of running a company is always due to be scrapped in each tax reform package, but mysteriously never is. Back in 1920, the US Congress, ruminating on the First World War, passed the Merchant Marine Act, decreeing that all goods being transported from one American port to another must be carried by US ships owned by US citizens and operated by US crews.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, Plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

Eliminating these provisions alone would go a long way toward meeting deficit-reduction targets called for by fiscal conservatives who worry about the size of the public debt. Yet another source of unfairness is the tax treatment on so-called carried interest. Some Wall Street financiers are able to pay taxes at lower capital-gains tax rates on income that comes from managing assets for private equity funds or hedge funds. But why should managing financial assets be treated any differently from managing people, or making discoveries? Of course, those in finance say they are essential. But so are doctors, lawyers, teachers, and everyone else who contributes to making our complex society work. They say they are necessary for job creation. But in fact, many of the private equity firms that have excelled in exploiting the carried interest loophole are actually job destroyers; they excel in restructuring firms to “save” on labor costs, often by moving jobs abroad.


pages: 497 words: 123,778

The People vs. Democracy: Why Our Freedom Is in Danger and How to Save It by Yascha Mounk

affirmative action, Affordable Care Act / Obamacare, Andrew Keen, basic income, battle of ideas, Boris Johnson, Branko Milanovic, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, Cass Sunstein, central bank independence, centre right, clean water, cognitive bias, conceptual framework, David Brooks, deindustrialization, demographic transition, desegregation, Donald Trump, en.wikipedia.org, Francis Fukuyama: the end of history, German hyperinflation, gig economy, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invention of the printing press, invention of the steam engine, investor state dispute settlement, job automation, Joseph Schumpeter, land value tax, low skilled workers, Lyft, manufacturing employment, Mark Zuckerberg, mass immigration, mortgage tax deduction, Naomi Klein, new economy, offshore financial centre, open borders, Parag Khanna, plutocrats, Plutocrats, post-materialism, price stability, ride hailing / ride sharing, rising living standards, Ronald Reagan, Rosa Parks, secular stagnation, sharing economy, Thomas L Friedman, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, universal basic income, upwardly mobile, World Values Survey, zero-sum game

According to Oxfam, for example, the fifty largest American companies have, by perfectly legal means, shifted over $1 trillion to offshore tax havens, costing the US government about $111 billion in lost tax revenue.21 Rich individuals are taxed in a similarly lax manner. One reason why some billionaires pay a lower effective tax rate than their secretaries, as Warren Buffett has famously lamented, is that politicians continue to give massive handouts to them: the carried-interest deduction, for example, allows hedge fund managers to halve the tax they would ordinarily pay on the bulk of their earnings.22 But another big reason is that rich individuals have been just as adept at evading the taxman as corporations: as the leak of the Panama Papers demonstrated, vast fortunes are channeled into offshore tax havens every year; though much of this activity is illegal, it rarely results in prosecutions.23 To ensure that both individuals and corporations pay their fair share of taxes, we should therefore be willing to consider what a tax system might look like if it was invented from scratch.

See also Gabriel Zucman, The Missing Wealth of Nations: The Scourge of Tax Havens (Chicago: University of Chicago Press, 2015); and Scott D. Dyreng and Bradley P. Lindsey, “Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms’ Tax Rates,” Journal of Accounting Research 47 (2009): 1283–1316. 22. Michael S. Knoll, “The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income,” William and Mary Law Review 50, no. 1 (2008): 115–161. On the “Buffett Rule,” see Warren E. Buffett, “Stop Coddling the Super-Rich,” New York Times, August 14, 2011, http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html; and Chris Isadore, “Buffett Says He’s Still Paying Lower Tax Rate than His Secretary,” CNN Money, March 4, 2013, http://money.cnn.com/2013/03/04/news/economy/buffett-secretary-taxes/index.html. 23.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Andrei Shleifer, asset allocation, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, John Meriwether, Long Term Capital Management, mail merge, margin call, mass immigration, merger arbitrage, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, Vanguard fund, Y2K, Yogi Berra, zero-sum game

And through it all, hedge funds will remain the alternative investment that not only makes money, but perhaps more important, rationalizes the irrational market by flattening out the kinks in the global market. In the Words of a Hedge Fund Legend . . . Barton M. Biggs, Managing Partner, Traxis Partners 1. How would you define a hedge fund? A hedge fund is a pool of money run by a small number of cocky, arrogant souls who charge outrageous fees including a carried interest and expect to shoot the lights out. 2. How or why did you get started in the industry? I began running a fund for Alfred Jones and the first hedge fund A.W. Jones & Co. back in 1964 when I was an analyst at E.F. Hutton & Co. 3. What hedge fund strategies do you use? I am a macro hedge fund manager and am inclined to concentrate on financial assets which I consider to be my circle of competence, in other words I don’t dabble in commodities and currencies. 4.


pages: 190 words: 53,409

Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, hindsight bias, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, invisible hand, labor-force participation, lake wobegon effect, loss aversion, minimum wage unemployment, Network effects, Paul Samuelson, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, selection bias, side project, sovereign wealth fund, Steve Jobs, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy

You wouldn’t think he’d have much to complain about. But, to hear him tell it, he’s beset by a meddlesome, tax-happy government and a whiny, envious populace. He recently grumbled that the U.S. middle class has taken to “blaming wealthy people” for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had “skin in the game,” and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland.19 Surowiecki went on to note that other wealthy executives have been voicing similar complaints. The venture capitalist Tom Perkins and the Home Depot cofounder Kenneth Langone, for example, each recently likened populist criticism of the wealthy to the Nazis’ attacks on the Jews. Schwarzman and others have also been channeling vast sums to political action committees that lobby for still lower top tax rates and even less strict business regulation.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, transfer pricing, wealth creators, white picket fence, women in the workforce, zero-sum game

But how do they get this past those supposedly sophisticated outside investors? Let’s say a private equity firm buys a successful pharma company and generates huge internal profits, whether from creating an even better pharma company or from debt-fuelled looting. The GPs’ first trick is the famous 2 and 20 formula: they take 2 per cent of the value of invested funds annually as management fees, plus the so-called carried interest, which is typically 20 per cent of any internal profits generated, though often only after the fund has attained a ‘hurdle rate’ of profit. That formula may sound reasonable, but in the real world the mathematics rips surprisingly large chunks of the profits away from the outside investors and channels them into the moguls’ pockets, especially when the portfolio company fares badly.22 Below that exists another world of chicanery of hidden fees, usually at the level of the portfolio companies the PE firms buy.

Worse still, these rewards to owners are income, so ought to attract income tax but instead are classified as capital gains, which by any reasonable definition they are not. 18. Normal companies typically use something like three times as much debt as equity (the owners’ own money), while with private equity it’s roughly the other way around. See Appelbaum and Batt, Private Equity at Work, p.77, which also has the 40 per cent figure for enterprise value. On the tax changes in the UK, see ‘Private equity execs face bigger tax on “carried interest”’, Financial Times, 31 March 2016. Research shows that private equity firms are significantly more aggressive in using tax havens and other schemes to escape paying tax, and this is particularly true of the larger firms, which can afford the armies of lawyers and accountants necessary to design the complex schemes that really shake the taxman off. See Brad Badertscher, Sharon P. Katz and Sonja Olhoft Rego, ‘The Impact of Private Equity Ownership on Portfolio Firms’ Corporate Tax Planning’, Harvard Business School Working Paper 10–004, 4 March 2010.


pages: 223 words: 58,732

The Retreat of Western Liberalism by Edward Luce

"Robert Solow", 3D printing, affirmative action, Airbnb, basic income, Berlin Wall, Bernie Sanders, Boris Johnson, Branko Milanovic, Bretton Woods, business cycle, call centre, carried interest, centre right, Charles Lindbergh, cognitive dissonance, colonial exploitation, colonial rule, computer age, corporate raider, cuban missile crisis, currency manipulation / currency intervention, Dissolution of the Soviet Union, Doha Development Round, Donald Trump, double entry bookkeeping, Erik Brynjolfsson, European colonialism, everywhere but in the productivity statistics, Fall of the Berlin Wall, Francis Fukuyama: the end of history, future of work, George Santayana, gig economy, Gini coefficient, global pandemic, global supply chain, illegal immigration, imperial preference, income inequality, informal economy, Internet of things, Jaron Lanier, knowledge economy, lateral thinking, liberal capitalism, Marc Andreessen, Mark Zuckerberg, Martin Wolf, mass immigration, means of production, Monroe Doctrine, moral panic, more computing power than Apollo, mutually assured destruction, new economy, New Urbanism, Norman Mailer, offshore financial centre, one-China policy, Peace of Westphalia, Peter Thiel, plutocrats, Plutocrats, precariat, purchasing power parity, reserve currency, reshoring, Richard Florida, Robert Gordon, Ronald Reagan, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, Snapchat, software is eating the world, South China Sea, Steve Jobs, superstar cities, telepresence, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tyler Cowen: Great Stagnation, universal basic income, unpaid internship, Washington Consensus, We are the 99%, We wanted flying cars, instead we got 140 characters, white flight, World Values Survey, Yogi Berra

Most of these, I take to be self-evident – though incomplete. But whatever your remedies to the crisis of liberal democracy, nothing much is likely to happen unless the West’s elites understand the enormity of what they face. If only out of self-preservation, the rich need to emerge from their postmodern Versailles. At the moment they seem busier shoring up its fortifications. In 2009, the Obama administration proposed a modest taxation of carried interest that would have treated a small slice of capital earnings as income. This would have taken a tiny bite out of the incomes of the largest hedge-fund and private-equity tycoons. As Warren Buffet said, ‘It is not fair that I am paying lower taxes than my secretary.’ Wall Street rose up in opposition. ‘My administration is the only thing standing between you and the pitchforks,’ Obama told bankers in 2009.


pages: 261 words: 70,584

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Albert Einstein, asset allocation, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

The top 20% of households paid 81.2% of all taxes during the presidency of Bill Clinton, and in 2006, these households paid a record 86.3% of all taxes.63 And that trend is only going to continue since, according to President Obama’s 2010 federal budget, increased taxes on “the rich” will equal 0.3% of GDP—echoes of Herbert Hoover’s tax hikes that put the “Great” into “Great Depression.”64 Or of California today. What about the wealthy? Presently, the goal in Washington is to take people who earn $250,000 a year or more in income, approximately 2.6 million Americans, and collect $636.7 billion in taxes from them.65 Additionally, “carried interest” from a hedge fund, a venture capital firm, a private equity firm, or some other partnership presently taxed at 15% may soon be taxed at 39.6%.66 In 1984, a tax on retirees’ Social Security benefits was introduced, which made up to 50% of a beneficiary’s Social Security check taxable if the person’s other income—retirement plan payout, investment income, and so on—exceeded $25,000 annually ($32,000 for couples).


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, assortative mating, Benoit Mandelbrot, Brownian motion, capital asset pricing model, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, transaction costs, zero-sum game

The massive growth of the alternative assets industry over the last three decades is an underappreciated development in our capital markets. That development is predicated on the idea that some investors—such as hedge funds, private equity funds, and venture capital funds—are truly skilled and can generate alpha. That alpha generation serves as the foundation for their fees. Their fee structures—so-called carried interest—are a function of their performance, so, the logic goes, they only get paid when they do well. Of course, the reality is not quite so benign. These investors have been shown to not outperform reasonable benchmarks on average, and the evidence of skill for most of them is fleeting—except for, perhaps, funds in the top decile of those funds. And their compensation is predicated on benchmarks that don’t usually reflect the risks they undertake.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

This is not just about revisiting approaches and mindsets that result in excessive rigidity and austerity, and do so by chronically underestimating the size of the negative fiscal multipliers and the need for greater policy responsiveness—that is, the extent to which fiscal cuts unleash a dynamic that causes a disproportionately large reduction in overall aggregate demand. It is also about using tax and expenditure measures more actively to improve the quality of spending without unduly impacting the incentives that fuel innovation and entrepreneurship. In the United States, for example, this would include—going from the least to the most controversial—closing tax loopholes and cascading exemptions, increasing the taxation of carried interest earned by private equity firms and hedge funds, reforming inheritance taxation, streamlining home mortgage subsidies, and a higher marginal tax rate for the highest-income earners. It would also involve decisive steps to modernize a system of corporate taxation that is littered with anomalies, distortions, and misaligned incentives that undermine rather than promote economic growth—including by encouraging firms to spend a lot of money on “inversions,” that is, the purchase of foreign entities in order to geographically shift and reduce tax burdens while keeping productive operations as is.


pages: 252 words: 72,473

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy by Cathy O'Neil

Affordable Care Act / Obamacare, Bernie Madoff, big data - Walmart - Pop Tarts, call centre, carried interest, cloud computing, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Emanuel Derman, housing crisis, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, illegal immigration, Internet of things, late fees, mass incarceration, medical bankruptcy, Moneyball by Michael Lewis explains big data, new economy, obamacare, Occupy movement, offshore financial centre, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price discrimination, quantitative hedge fund, Ralph Nader, RAND corporation, recommendation engine, Rubik’s Cube, Sharpe ratio, statistical model, Tim Cook: Apple, too big to fail, Unsafe at Any Speed, Upton Sinclair, Watson beat the top human players on Jeopardy!, working poor

Credit card defaults leapt to record highs. The human suffering, which had been hidden from view behind numbers, spreadsheets, and risk scores, became palpable. The chatter at Shaw was nervous. After the fall of Lehman Brothers in September of 2008, people discussed the political fallout. Barack Obama looked likely to win the election in November. Would he hammer the industry with new regulations? Raise taxes on carried interest? These people weren’t losing their houses or maxing out their credit cards just to stay afloat. But they found plenty to worry about, just the same. The only choice was to wait it out, let the lobbyists do their work, and see if we’d be allowed to continue as usual. By 2009, it was clear that the lessons of the market collapse had brought no new direction to the world of finance and had instilled no new values.


pages: 247 words: 74,612

For the Love of Money: A Memoir by Sam Polk

carried interest, Credit Default Swap, fixed income, hiring and firing, Northern Rock, nuclear winter, Rosa Parks

Maybe what I’d thought was talent was simply being in the right place at the right time. Wall Street started to look less like a bunch of smartest-guys-in-the-room and more like a group of men who’d secured a seat in a ring of chairs surrounding a huge pile of money, a pile that was growing not because of their skill, but because that’s what money did. The system was structured—through monetary policy, carried interest deductions, corporate tax breaks, and industry lobbyists—to ensure it. That might not sound like a crushing realization, but for me it was. I knew Wall Street wasn’t about doing something meaningful with your life, but I had seen it as a great coliseum for my young ambitions. Now it looked less like a meritocracy than an oligarchy. People were referred to not by their accomplishments but by the size of their bank accounts.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

As the market is largely outside governmental control, it can prove a potent weapon for destabilizing a currency. SYNDICATED LOANS Having begun with short-term deposits, the Euromarket was quickly adapted to serve the needs of longer-term borrowers by the development of the syndicated loan. This is merely a large, long-term bank loan which a syndicate of banks club together to provide because no one bank wants to commit that much capital to any one borrower. Usually, these loans carry interest rates at a margin relating to LIBOR or EURIBOR, the equivalent measure for the Eurozone. Companies, countries or institutions with a good credit rating can sometimes borrow below LIBOR or even the London Interbank Bid Rate (LIBID), but borrowers whose financial position is not so healthy can expect to pay a considerable margin over LIBOR. The syndicated loan market gives borrowers access to large sources of long-term funds (loans can extend to billions of dollars) in a short space of time.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

It also makes sense to insist that firms receiving aid issue senior debt to the government with rights over all other bonds, etc., they have outstanding. That’s to make sure some money comes back right from the start and that managements cannot keep all the earnings for themselves by reducing accounting profits and paying themselves more. To recapture some of the broader market gains flowing from the injection of public money, one could place a modest new tax on interest, dividends, capital gains. “Carried interest,” the ludicrous special tax break for private equity and hedge funds that not only Republicans but Senator Schumer and other Democratic Congressional leaders continue to defend, should go as part of any political deal on a bailout. It is beyond crazy to ask American workers to subsidize firms that will soon be back trying to break up their firms and throw their rescuers out of work. And finally, obviously, it is necessary to re-regulate.


Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

banking crisis, banks create money, barriers to entry, business cycle, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

Ecuador: Quarterly Performance of the Main Components of the Current Account of the Balance of Payments (US$ million), 1998.1–2001.4 US$ million 113 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 –200 –400 –600 –800 –1,000 –1,200 –1,400 –1,600 –1,800 Dollarization announcement 1 2 3 4 1998 1 2 3 4 1 2 1999 3 4 2000 Quarterly, 1998–2001 Oil exports Other merchandise exports Other current-account items Source: Central Bank of Ecuador. Merchandise imports Interest due 1 2 3 2001 4 114 CRISIS AND DOLLARIZATION IN ECUADOR new commercial-bank loans). Moreover, in November 2000 the banking authorities eliminated a ceiling on fees that banks could change borrowers in lieu of interest, and removed a requirement that banks make provisions on loans carrying interest rates higher than 18 percent. In December 2000 the government transferred US$137 million to the Deposit Insurance Agency to enable it to make payments to insured depositors. In January 2001 the Central Government on-lent funds from the CAF to augment the resources of the bank liquidity fund, and made the Central Bank’s liquidity recycling facility fully operational. These changes persuaded the banks to increase lending in early 2001, contributing to the recovery.


pages: 261 words: 81,802

The Trouble With Billionaires by Linda McQuaig

"Robert Solow", battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, British Empire, Build a better mousetrap, carried interest, collateralized debt obligation, computer age, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Douglas Engelbart, Douglas Engelbart, employer provided health coverage, financial deregulation, fixed income, full employment, George Akerlof, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invention of the wheel, invisible hand, Isaac Newton, Jacquard loom, Joseph-Marie Jacquard, laissez-faire capitalism, land tenure, lateral thinking, Mark Zuckerberg, market bubble, Martin Wolf, mega-rich, minimum wage unemployment, Mont Pelerin Society, Naomi Klein, neoliberal agenda, Northern Rock, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, pre–internet, price mechanism, purchasing power parity, RAND corporation, rent-seeking, rising living standards, road to serfdom, Ronald Reagan, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, trickle-down economics, Vanguard fund, very high income, wealth creators, women in the workforce

This favourable tax treatment leads high-income taxpayers to try to convert their earned income into capital gains. Those who have been most successful at this ploy are private equity, venture capital and hedge fund managers. Typically, the managers of these funds are paid an annual management fee of 2 per cent of the fund’s net assets, plus a 20 per cent performance fee based on the fund’s profits for the year. This performance fee, or ‘carried interest’ as it is sometimes called, can amount to millions of pounds. The managers of these funds have persuaded the government to allow them to classify this performance fee as a capital gain, even though it is simply income earned for a job performed and should be taxed as regular earned income. The ostensible purpose of the lower capital gains rate is to compensate investors for the risk they take in investing their capital.


pages: 1,009 words: 329,520

The Last Tycoons: The Secret History of Lazard Frères & Co. by William D. Cohan

activist fund / activist shareholder / activist investor, bank run, carried interest, cognitive dissonance, commoditize, computer age, corporate governance, corporate raider, creative destruction, credit crunch, diversification, Donald Trump, East Village, fear of failure, fixed income, G4S, hiring and firing, interest rate swap, intermodal, Joseph Schumpeter, late fees, Long Term Capital Management, Marc Andreessen, market bubble, offshore financial centre, Ponzi scheme, Ralph Nader, Ralph Waldo Emerson, rolodex, Ronald Reagan, shareholder value, The Nature of the Firm, the new new thing, Yogi Berra

When the US West Media Group bought Continental in 1997, the fund made nearly a $600 million profit. In total, over its initial twelve-year existence, Corporate Partners invested $1.35 billion in nine companies and received in return $2.99 billion, for a profit before fees and carried interest of $1.64 billion. Private-equity funds are judged on how well their investments perform over time, a calculation known as the internal rate of return, or IRR. Corporate Partners' IRR during its existence was 15 percent, net of fees and carried interest; investors received an annualized return of 15 percent per year. That placed its performance in the top quartile of such funds. BILL CLINTON'S VICTORY in the 1992 presidential election handed Lazard another unexpected problem: a glum and cranky Felix Rohatyn. After twelve years of Republican Party rule, Felix rejoiced in the election of a Democrat to the White House.

Lazard invested $7 million in the new fund, to be called Providence Media Partners, along with Jonathan Nelson and Greg Barber, two partners of Narragansett Capital, who together invested $10 million. Steve also negotiated for himself and for Lazard one of the sweetest fee arrangements in capital-raising history. Since some of the Providence fund had been committed at the outset, Lazard was to raise only $175 million. For that work, the firm was to be paid a 1 percent placement fee, or $1.75 million, plus--and highly unusually--one-third of the General Partner's carried interest, or profits. Since the fund was enormously successful--returning to investors four times the amount of money invested--Steve figured the General Partner made $100 million, of which Lazard took around $33 million. But Steve had a side arrangement with Michel that gave him 8.25 percent of the firm's take, amounting to some $2.72 million for Steve alone, leaving the Lazard New York partners with around $30 million.


Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, buy and hold, carried interest, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, money market fund, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

The thinking here was that in the early eighties, with so many baby boomers now in their prime earning years, the Reagan administration would hike payments to build up a surplus that could in twenty or thirty years be used to pay out benefits when those same baby boomers reached retirement age. The administration accepted those proposals, and the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent by 1990. Two things about this. One, Social Security taxes are very regressive, among other things because they only apply to wage income (if you’re a hedge fund manager or a Wall Street investor and you make all your money in carried interest or capital gains, you don’t pay) and they are also capped, at this writing at around $106,000, meaning that wages above a certain level are not taxed at all. That means that a married couple earning $100,000 total will pay roughly the same amount of Social Security taxes that Lloyd Blankfein or Bill Gates will (if not more, depending on how the latter two structure their compensation). So if you ignore the notion that Social Security taxes come back as benefits later on, and just think of them as a revenue source for the government, it’s a way for the state to take money from working- and middle-class taxpayers at a highly disproportional rate.


Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Edward Thorp, family office, fixed income, high net worth, index fund, John von Neumann, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, transaction costs, zero-sum game

That was reality.”32 He had 138 Concentrated Investing sensed in Zapata’s chief executive how ardently the Zapata man wanted to do a deal, and knew that he was going to buy. Siem sold the rig, which had cost $24.8 million just two years earlier, for $34.5 million. In the two years Siem’s syndicate had owned it, it had remained operating the whole time and generating income for the group. The almost $10 million capital gain represented a fantastic return on the $7 million that Siem’s group invested. Siem, who received a carried interest on the rig, and had also invested, made several million dollars personally. As he had predicted, the drilling market soon collapsed completely, and remained depressed for 10 years, but not before Siem got one more deal done. Diamond M Dragon and Common Brothers In 1981, Siem found the deal that would be key to his foray into the shipping world. The Diamond M Dragon, a drill ship, was up for sale.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

By contrast, today’s super-rich are “moaning moguls,” to use James Surowiecki’s evocative term.27 Exhibit A for Surowiecki is Stephen Schwarzman, the chairman and CEO of the private equity firm the Blackstone Group, whose wealth exceeds $10 billion. Schwarzman acts as if “he’s beset by a meddlesome, tax-happy government and a whiny, envious populace.” He has suggested that “it might be good to raise income taxes on the poor so they had ‘skin in the game,’ and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland.” Other examples from Surowiecki, “the venture capitalist Tom Perkins and Kenneth Langone, the cofounder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.” Surowiecki thinks that the change in attitudes has much to do with globalization. Large American corporations and banks now roam the globe freely, and are no longer so dependent on the US consumer.


pages: 443 words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay by Guy Standing

3D printing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Bernie Sanders, Big bang: deregulation of the City of London, bilateral investment treaty, Bonfire of the Vanities, Boris Johnson, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, cashless society, central bank independence, centre right, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, credit crunch, crony capitalism, crowdsourcing, debt deflation, declining real wages, deindustrialization, disruptive innovation, Doha Development Round, Donald Trump, Double Irish / Dutch Sandwich, ending welfare as we know it, eurozone crisis, falling living standards, financial deregulation, financial innovation, Firefox, first-past-the-post, future of work, gig economy, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, income inequality, information retrieval, intangible asset, invention of the steam engine, investor state dispute settlement, James Watt: steam engine, job automation, John Maynard Keynes: technological unemployment, labour market flexibility, light touch regulation, Long Term Capital Management, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, means of production, mini-job, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, nudge unit, Occupy movement, offshore financial centre, oil shale / tar sands, open economy, openstreetmap, patent troll, payday loans, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, precariat, quantitative easing, remote working, rent control, rent-seeking, ride hailing / ride sharing, Right to Buy, Robert Gordon, Ronald Coase, Ronald Reagan, Sam Altman, savings glut, Second Machine Age, secular stagnation, sharing economy, Silicon Valley, Silicon Valley startup, Simon Kuznets, sovereign wealth fund, Stephen Hawking, Steve Ballmer, structural adjustment programs, TaskRabbit, The Chicago School, The Future of Employment, the payments system, The Rise and Fall of American Growth, Thomas Malthus, Thorstein Veblen, too big to fail, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, Y Combinator, zero-sum game, Zipcar

Mitt Romney, who ran for US President as the Republican candidate in 2012, paid a tax rate of only 14 per cent on his $22 million income in 2010, because most of it came from investments. The US advocacy group Citizens for Tax Justice has calculated that removing this subsidy to capital would raise $533 billion over a decade. Wealthy US hedge fund managers, four of whom paid themselves over $1 billion in 2015, also benefit from having their earnings treated as ‘carried interest’ and taxed at capital gains rates. Another selective tax rate that privileges the rich is the low or zero inheritance tax in many countries. US inheritance tax only kicks in on estates over $5 million. In the UK, the government has raised the threshold for such tax to £1 million for wealthy, home-owning couples (and there are ways of minimising the tax through trusts and the like). In Australia and New Zealand, there is no inheritance tax at all, while in many European countries the tax is minimal for family members.


pages: 296 words: 98,018

Winners Take All: The Elite Charade of Changing the World by Anand Giridharadas

"side hustle", activist lawyer, affirmative action, Airbnb, Bernie Sanders, bitcoin, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, carried interest, cognitive dissonance, collective bargaining, corporate raider, corporate social responsibility, crowdsourcing, David Brooks, David Heinemeier Hansson, deindustrialization, disintermediation, Donald Trump, Edward Snowden, Elon Musk, friendly fire, global pandemic, high net worth, hiring and firing, housing crisis, Hyperloop, income inequality, invisible hand, Jeff Bezos, Kibera, Kickstarter, land reform, Lyft, Marc Andreessen, Mark Zuckerberg, new economy, Occupy movement, offshore financial centre, Panopticon Jeremy Bentham, Parag Khanna, Paul Graham, Peter Thiel, plutocrats, Plutocrats, profit maximization, risk tolerance, rolodex, Ronald Reagan, shareholder value, sharing economy, side project, Silicon Valley, Silicon Valley startup, Skype, Social Responsibility of Business Is to Increase Its Profits, Steven Pinker, technoutopianism, The Chicago School, The Fortune at the Bottom of the Pyramid, the High Line, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Travis Kalanick, trickle-down economics, Uber and Lyft, uber lyft, Upton Sinclair, Vilfredo Pareto, working poor, zero-sum game

Then, between performances, older white men are brought up to praise them and to talk about, and be applauded for, their generosity to the program. Most of the men work in finance. They include the corporate raiders who, seeking to raise profits by cutting costs, have helped to do away with stable employment. They are the gentrifiers who have pushed real estate prices through the roof and made it harder for families like those of the young dancers to maintain a livelihood in the city. They are the beneficiaries of tax laws that give carried interest a major break and help to keep the public coffers low and the schools attended by the city’s poor underfunded, thus driving them into the streets and occasionally, when they are lucky, into the charity’s arms. But these men have been generous, and in exchange for their generosity, these issues will not come up. No one will say what could be said: that these precarious lives could be made less precarious if the kind of men who donated to this program made investments differently, operated companies differently, managed wealth differently, donated to politicians differently, lobbied differently, thought differently about pretending to live in Florida to avoid a minor New York City tax—if, in other words, they were willing to let go of anything dear.


pages: 307 words: 96,543

Tightrope: Americans Reaching for Hope by Nicholas D. Kristof, Sheryl Wudunn

Affordable Care Act / Obamacare, basic income, Bernie Sanders, carried interest, correlation does not imply causation, creative destruction, David Brooks, Donald Trump, dumpster diving, Edward Glaeser, Elon Musk, epigenetics, full employment, Home mortgage interest deduction, housing crisis, impulse control, income inequality, Jeff Bezos, job automation, jobless men, knowledge economy, labor-force participation, low skilled workers, mandatory minimum, Martin Wolf, mass incarceration, Mikhail Gorbachev, offshore financial centre, randomized controlled trial, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Shai Danziger, single-payer health, Steven Pinker, The Spirit Level, universal basic income, upwardly mobile, Vanguard fund, War on Poverty, working poor

Only one-fifth of 1 percent of American venture capital goes to companies founded by African-American women. Facebook, Google and Amazon soared partly because they were built by hard-driving, brilliant visionaries, and partly because those visionaries were white men who had access to capital. The old feudal aristocracy kept its wealth through a combination of rules and norms, and so does today’s new aristocracy. There are the subsidies to the wealthy, like the carried interest tax loophole or the mortgage subsidy for yachts. By some calculations, corporate subsidies, credits and loopholes are 50 percent higher than entitlements to the poor (not including Medicare and Medicaid). Some of the other subsidies are outlandish: put a few goats on your golf course and you can classify it as farmland, as President Trump did, and save large sums in taxes. The tax code has come to serve the interests of the wealthy in myriad other ways.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

asset allocation, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, stocks for the long run, stocks for the long term, survivorship bias, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Treasuries can be bought at auction directly from the government without a fee, allowing you to manufacture your own “Treasury Fund” at no expense. (You can reach Treasury Direct at 1-800-722-2678 and www.publicdebt.treas.gov/sec/sectrdir.htm.) Even if you are purchasing a Treasury at auction through a brokerage firm, the fee is nominal—typically about $25. For a five-year note worth $10,000, this equals an annual expense of 0.05%. • High-quality corporate bonds and commercial paper. Corporates not only carry interest rate risk, but also credit risk. Even the highest-rated companies occasionally default. How often does this happen? Very rarely. According to bond-rating service Moody’s, since 1920 the rate of default for the highest-rated AAA bonds was zero, 0.04% per year for AA-rated, 0.09% for A-rated, and 0.25% for BBB-rated. BBB is the lowest of the four “investment-grade” categories. These categories are a tad deceptive, since, for example, it is highly unlikely that an AAA-rated bond would suddenly default—it would likely undergo successive downgradings first.


eBoys by Randall E. Stross

barriers to entry, business cycle, call centre, carried interest, cognitive dissonance, disintermediation, edge city, high net worth, hiring and firing, Jeff Bezos, job-hopping, knowledge worker, late capitalism, market bubble, Menlo Park, new economy, old-boy network, passive investing, performance metric, pez dispenser, railway mania, rolodex, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, Y2K

When talking about their work with the public, venture guys did not go out of their way to correct a misunderstanding that theirs was a job involving personal financial risk of the most extreme sort. In fact, they had the best of all worlds: a claim on a percentage of future investment gains, as well as a steady, guaranteed income that the limited partners paid as an annual management fee, usually 2 percent of all capital under management. The fee income, however, was pocket change. The real money came in the form of “the carried interest,” a quaint, confusing term that was shortened colloquially to “the carry,” which was 20 to 25 percent of the profits to be made investing Other People’s Money. If a starting kitty of $500 million became a portfolio of investments worth $5 billion, then a 20 percent carry would mean the venture guys would get, after repaying the original $500 million, a fifth of the $4.5 billion in profits, or $900 million, to divide among themselves, and their limited partners would get the remainder.


pages: 538 words: 121,670

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig

asset-backed security, banking crisis, carried interest, circulation of elites, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, invisible hand, jimmy wales, Martin Wolf, meta analysis, meta-analysis, Mikhail Gorbachev, moral hazard, Pareto efficiency, place-making, profit maximization, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Sam Peltzman, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, WikiLeaks, Zipcar

People working within this system can thus believe—and do believe—that they’re doing nothing wrong by going along with how things work. Sometimes this going-along produces benefits that seem venally corrupt. Because of a loophole in the tax system (one that has existed since the 1960s), managers of hedge funds don’t pay ordinary income tax on the money they earn from hedge funds. Instead, their “carried interest” gets taxed at 15 percent.32 Thus, though the top ten hedge fund managers in 2009 made, on average, $1.87 billion, they paid a lower tax rate on that income than their secretaries.33 Obama promised to change this. But that change was blocked. Its very hard not to understand the very richest in our society enjoying the same tax rate as individuals earning between $8,000 and $34,000 as anything other than a kind of venal corruption.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

Income that you earn by actually doing a job is taxed at a much higher rate than income you earn from your investments. Warren Buffett famously took on this issue in 2011 in a New York Times piece, noting that while the taxes he paid the previous year amounted to 17.4 percent of his income—or $6,938,744 total—the tax burden on other people in his office averaged 36 percent.32 (For his assistant Debbie Bosanek it was 35.8 percent.)33 That’s because Buffett makes money from things like “carried interest” on investments, capital gains from selling stocks, and so on. Like most billionaires and many millionaires, he declares very little “earned” income but a lot of asset wealth gains. As Buffett says, “these and other blessings are showered upon us [meaning, the rich] much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.”34 Most of us, however, make money from the pay we get working day jobs, which is taxed at a far higher rate (most middle-class people fall into a 15–25 percent income tax bracket and then pay high payroll taxes to boot).


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

CHAPTER 30 Garrett Hardin Hardin, Garrett, “The Tragedy of the Commons,” Science, Vol. 162, No. 3859 December 13, 1968, pp. 1243–48. protects my neighbors Vaccination is a positive externality as it protects others from contracting a disease from the recipient. collection of insights Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Foreward by Warren Buffett, edited by Peter Kaufman. Expanded third edition, 2008. much of their income Read the evolving discussion of the taxation of so-called carried interest in Wikipedia and elsewhere on the Internet. The 2012 Republican presidential candidate, Mitt Romney, was a substantial beneficiary. of national income The top 1 percent have about a third of taxable income, the next 9 percent have another third, and the bottom 90 percent have the remaining third. 20 percent or so To get a simplistic feel for the numbers, government received $3.25 trillion in income in 2015 and GNP was $18 trillion.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

The big difference between the two episodes is that at the peak of the tech boom, brokerage houses and investment banks did not hold large quantities of speculative stocks whose price was set to plummet. This is because investment firms had sold off virtually all their risky technology holdings to investors before the dot-com bubble burst. In sharp contrast, at the peak of the real estate market, Wall Street was up to its ears in housing-related debt. As noted earlier, in a declining interest rate environment, investors were hungry for yield, and these mortgage-based securities carried interest rates that were higher than comparably rated corporate and government debt. This tempted investment banks, such as Bear Stearns, to sell these bonds to investors with the promise of higher yield with comparable safety.24 Although many investment banks held these bonds for their own account, their holdings of subprime debt grew substantially when they were forced to take back the faltering subprime funds they sold to investors because of complaints that investors were not fully informed of their risks.25 Risks to the financial system were compounded when AIG, the world’s largest insurance company, offered to insure hundreds of billions of dollars of these mortgages against default through an instrument called the credit default swap.


pages: 495 words: 136,714

Money for Nothing by Thomas Levenson

Albert Einstein, asset-backed security, bank run, British Empire, carried interest, clockwork universe, credit crunch, Edmond Halley, Edward Lloyd's coffeehouse, experimental subject, failed state, Fellow of the Royal Society, fiat currency, financial innovation, Fractional reserve banking, income inequality, Isaac Newton, joint-stock company, market bubble, open economy, price mechanism, quantitative easing, Republic of Letters, risk/return, side project, South Sea Bubble, The Wealth of Nations by Adam Smith

The tangle of official obligations stretched back at least forty years to the bad behavior of the Stuart king Charles II, whose “stop” of the payments from the Exchequer lingered as an obligation of more than half a million pounds still due from the Treasury. The long-term loans from the 1690s remained on the books. That money, the price of the Nine Years’ War, had grown into over £12 million due, carrying interest rates of up to 10 percent over terms that extended for up to a hundred years. These were the “irredeemables,” so called because they could not simply be paid off during their run. More than £11 million more in long-term debt had piled on during the Tory years—much of it in redeemable lottery loans that could be paid off whenever the government could find the funds. And then there was another £16 million in floating debt that had been absorbed by the Bank of England, the East India Company (each holding just over £3 million), and the South Sea Company itself, which owned £9 million of government paper—a sum that made it the largest financial company in the world.


pages: 535 words: 158,863

Superclass: The Global Power Elite and the World They Are Making by David Rothkopf

airport security, anti-communist, asset allocation, Ayatollah Khomeini, bank run, barriers to entry, Berlin Wall, Bob Geldof, Branko Milanovic, Bretton Woods, BRICs, business cycle, carried interest, clean water, corporate governance, creative destruction, crony capitalism, David Brooks, Doha Development Round, Donald Trump, financial innovation, fixed income, Francis Fukuyama: the end of history, Gini coefficient, global village, high net worth, income inequality, industrial cluster, informal economy, Internet Archive, Jeff Bezos, jimmy wales, joint-stock company, knowledge economy, liberal capitalism, Live Aid, Long Term Capital Management, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Martin Wolf, mass immigration, means of production, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, Nelson Mandela, old-boy network, open borders, plutocrats, Plutocrats, Ponzi scheme, price mechanism, shareholder value, Skype, special economic zone, Steve Jobs, Thorstein Veblen, too big to fail, trade liberalization, trickle-down economics, upwardly mobile, Vilfredo Pareto, Washington Consensus, William Langewiesche

This, then, is among the forces that fill the void created by the ignorance of the American public and many of its elected representatives. And it produces direct results, one of which is legislation that is overly favorable to financial institutions. To choose one example that was controversial at the time of this book’s writing, private equity firms managed to persuade Congress to treat their “carried interest” in companies as capital gains rather than ordinary income, resulting in a substantial tax break (15 percent instead of up to 45 percent). Many, even a few financial leaders such as Warren Buffett, viewed this as so egregiously inequitable that an opposition movement has formed against it. Because of America’s international reach and power, the revolving door to the financial community is a phenomenon with global consequences.


Bleeding Edge by Pynchon, Thomas

addicted to oil, AltaVista, anti-communist, Anton Chekhov, Bernie Madoff, big-box store, Burning Man, carried interest, Donald Trump, double entry bookkeeping, East Village, Hacker Ethic, index card, invisible hand, jitney, late capitalism, margin call, Network effects, Ponzi scheme, prediction markets, pre–internet, QWERTY keyboard, RAND corporation, rent control, rolodex, Ronald Reagan, Sand Hill Road, Silicon Valley, telemarketer, Y2K

You arranged things so that you and your friends would come out nicely, you behaved professionally, above all you put in the work and took the money only after you’d earned it. Well, the party, I fear, has fallen on evil days. This generation—it’s almost a religious thing now. The millennium, the end days, no need to be responsible anymore to the future. A burden has been lifted from them. The Baby Jesus is managing the portfolio of earthly affairs, and nobody begrudges Him the carried interest . . .” Suddenly, and from the cookie’s point of view, rudely, chomping into it and scattering crumbs. “Sure you won’t have one, they’re quite . . . No? All right, thanks, don’t mind if I . . .” Grabbing another, two or three actually, “I just spoke with some people. A most puzzling conversation, I have to say. At least they picked up.” “Not the standard corporate chitchat, then.” “No, something else, something . . . peculiar.


pages: 604 words: 165,488

Mr Five Per Cent: The Many Lives of Calouste Gulbenkian, the World's Richest Man by Jonathan Conlin

accounting loophole / creative accounting, anti-communist, banking crisis, British Empire, carried interest, Ernest Rutherford, estate planning, Fellow of the Royal Society, light touch regulation, MITM: man-in-the-middle, Network effects, Pierre-Simon Laplace, rent-seeking, stakhanovite, Yom Kippur War

For Articles of Association and board minutes, see LDN00149. 42. This participation rested on a letter from Deterding. Exactly what kind is unclear because the letter was lost or stolen from Gulbenkian’s secretary, D. H. Young, in February 1920, resulting in an explosion of temper that left Gulbenkian with ‘no heart for business’. CSG to NSG, 6 February 1920. LDN02574. An earlier letter refers to a 15 per cent carried interest in Royal Dutch-Shell’s 60 per cent SEP shareholding; CSG refers to ‘5% which you had ceded and the 10% which I got from the French’. CSG to Deterding, 17 July 1919. SHA, 195/175b. Of course, CSG enjoyed carried shareholdings and overall sales commissions in tandem in many Royal Dutch-Shell subsidiaries, so perhaps he had both. 43. CSG to Kessler, 31 March 1920. LDN00175. 44. This was the Directeur du Mouvement des Fonds, and the meeting was held on 30 May 1919.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Managers used privileged access to information about a company’s activities to lower the price, paving the way for a LBO that might benefit them. Where they were part of the LBO, existing management claimed to know how to fix or improve the business—but only if given a large equity interest. It was legal blackmail. Buyout firms collected a fee, typically 1 percent of each purchase. In addition, the buyout firm charged an annual management fee, around 1–2 percent, on the investors’ funds, managed plus 20 percent carried interest, receiving a share of any investment gains on disposition. They charged annual monitoring and director’s fees. During negotiations, Gerald Saltarelli, chairman of Houdaille, argued that KKR should not be entitled to any fee for buying the company. Kohlberg argued he was entitled to a fee: “I’m an investment banker.”17 Lenders got high interest rates as well as substantial fees. When junk bonds started to be used for financing LBOs, Drexel Burnham Lambert (Drexel) received a fixed fee (0.50–1 percent) of the amount raised, a commitment fee, an underwriting fee, an advisory fee, warrants over the stock, and expenses.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, plutocrats, Plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

The ATO is demanding that the Luxembourg and Cayman Island shell companies pay taxes, interest, and penalties due Australia.76 The lesson for the United States is this: The ATO’s Texas Pacific tax bill presumes logically that the proceeds of the Myer transaction be taxed as ordinary income, rather than as capital gains, as lobbied by Texas Pacific. In December 2010, the ATO determined that since buying and selling firms is the main activity of enterprises such as Texas Pacific, proceeds on such transactions are taxable as ordinary business income, not as capital gains.77 This is the same logic involved in the carried-interest debate in the US Congress, where reform is presently gridlocked by Congressional Republicans. Restore Financial Market Discipline by Eliminating Red Queens The American economy needs to be protected from the baker’s dozen Red Queens that have emerged in recent decades of willful neglect of antitrust laws. The goal of that protection was spelled out by Walter Bagehot a century and a half ago: “The business of banking ought to be simple.


The Code: Silicon Valley and the Remaking of America by Margaret O'Mara

"side hustle", A Declaration of the Independence of Cyberspace, accounting loophole / creative accounting, affirmative action, Airbnb, AltaVista, Amazon Web Services, Apple II, Apple's 1984 Super Bowl advert, autonomous vehicles, back-to-the-land, barriers to entry, Ben Horowitz, Berlin Wall, Bob Noyce, Buckminster Fuller, Burning Man, business climate, Byte Shop, California gold rush, carried interest, clean water, cleantech, cloud computing, cognitive dissonance, commoditize, computer age, continuous integration, cuban missile crisis, Danny Hillis, DARPA: Urban Challenge, deindustrialization, different worldview, don't be evil, Donald Trump, Doomsday Clock, Douglas Engelbart, Dynabook, Edward Snowden, El Camino Real, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Frank Gehry, George Gilder, gig economy, Googley, Hacker Ethic, high net worth, Hush-A-Phone, immigration reform, income inequality, informal economy, information retrieval, invention of movable type, invisible hand, Isaac Newton, Jeff Bezos, Joan Didion, job automation, job-hopping, John Markoff, Julian Assange, Kitchen Debate, knowledge economy, knowledge worker, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, mass immigration, means of production, mega-rich, Menlo Park, Mikhail Gorbachev, millennium bug, Mitch Kapor, Mother of all demos, move fast and break things, move fast and break things, mutually assured destruction, new economy, Norbert Wiener, old-boy network, pattern recognition, Paul Graham, Paul Terrell, paypal mafia, Peter Thiel, pets.com, pirate software, popular electronics, pre–internet, Ralph Nader, RAND corporation, Richard Florida, ride hailing / ride sharing, risk tolerance, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Second Machine Age, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, skunkworks, Snapchat, social graph, software is eating the world, speech recognition, Steve Ballmer, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, supercomputer in your pocket, technoutopianism, Ted Nelson, the market place, the new new thing, There's no reason for any individual to have a computer in his home - Ken Olsen, Thomas L Friedman, Tim Cook: Apple, transcontinental railway, Uber and Lyft, uber lyft, Unsafe at Any Speed, upwardly mobile, Vannevar Bush, War on Poverty, We wanted flying cars, instead we got 140 characters, Whole Earth Catalog, WikiLeaks, William Shockley: the traitorous eight, Y Combinator, Y2K

The Russian also made a large investment in Twitter.11 Lurking behind all of this cash, domestic and foreign, was the angel that had been there since the very beginning: the U.S. government. American financiers had so much to invest because of a U.S. tax code that—thanks to five decades of sustained lobbying—strongly advantaged those who made money from money. The capital gains tax stood at 15 percent. The carried-interest deduction stood firm, despite periodic attempts to abolish it. VCs, hedge fund managers, and private equity funds alike were able to rake in billions for managing other people’s investments, and call all of it their “capital gains.” Then there were the taxes on corporate revenue. For more than fifty years, the U.S. had allowed American corporations operating overseas to defer taxation on profits earned in non-U.S. markets.


pages: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, commoditize, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, fixed income, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Right to Buy, Ronald Reagan, seigniorage, sexual politics, short selling, Silicon Valley, South Sea Bubble, Thales of Miletus, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor, zero-sum game

He argued that the fact that Deuteronomy allows usury under any circumstances demonstrates that this could not have been a universal “spiritual law,” but was a political law created for the specific ancient Israeli situation, and therefore, that it could be considered irrelevant in different ones. 29. And in fact, this is what “capital” originally meant. The term itself goes back to Latin capitale, which meant “funds, stock of merchandise, sum of money, or money carrying interest” (Braudel 1992:232). It appears in English in the mid–sixteenth century largely as a term borrowed from Italian bookkeeping techniques (Cannan 1921, Richard 1926) for what remained when one squared property, credits, and debts; though until the nineteenth century, English sources generally preferred the word “stock”—in part, one suspects, because “capital” was so closely associated with usury. 30.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, business cycle, buy and hold, capital asset pricing model, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fear of failure, financial innovation, fixed income, full employment, index fund, intangible asset, invisible hand, Joseph Schumpeter, locking in a profit, Long Term Capital Management, low cost airline, low cost carrier, moral hazard, mortgage debt, Myron Scholes, Right to Buy, risk-adjusted returns, risk/return, secular stagnation, shareholder value, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, zero-coupon bond

By the way, the previous approach to accounting for stock options was even odder: options granted with a strike price equal to the market price had no expense impact, but those granted below market would, in some cases, result in an expense every year thereafter that the underlying stock rose. There is equal confusion to be found in the FASB approach to accounting for derivatives, hedging, pensions, leases, and recognition of profits for carried interests, to name a few. Now companies can even record a profit if their debt gets downgraded. Sometimes accounting rules seem designed to carry us very far from economic reality, and some managers are quite amenable to taking investors on such a journey. Having analyzed the historical record, the second and far greater challenge is to determine “the utility of this past record as an indication of future earnings.”