Audit Notes: Deleveraging, Schwarzman Serves Up a Softball, PE

Bloomberg has some excellent coverage of the bond market, reporting that despite the flood of U.S. government borrowing, overall bond issues are actually tumbling.

While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at Bank of America Merrill Lynch in New York.

Less competition for Treasury bonds, lower rates. Makes sense.

And that whole argument about government spending crowding out private investment? Yeah, not so much—at least these days:

“It would seem there’s room for the federal government to raise more debt,” said John Lonski, the chief economist at Moody’s Capital Markets Group in New York.

It’s good news for the budget deficit—lower rates mean lower interest payments—and it’s good news for the long-term health of the economy: It shows that we are deleveraging. Whether the economy can take that right now is another question.

— Private-equity kingpin Stephen Schwarzman of Blackstone Group (eight times a billionaire), is comparing the Obama administration’s half-hearted attempt to tax PE fairly to “when Hilter invaded Poland in 1939,” reports Newsweek’s Jonathan Alter.

Felix Salmon says, “Steve Schwarzman, FTL, by Godwin’s Law” (links are mine).

Alter summarizes the issue well:

Schwarzman’s original beef with Obama grew out of a 2008 campaign promise that “carried interest”—the compensation structure of private-equity-fund managers—would be taxed as ordinary income (35 percent) instead of capital gains (15 percent). Obama and many Democrats have argued that it’s unfair for people like Schwarzman, with a net worth of about $8 billion, to pay taxes at a lower rate than their secretaries and chauffeurs. More substantively, the commissions and fees that hedge-fund managers reap (20 percent of their clients’ profits) are not, strictly speaking, capital gains because the managers themselves never held the stocks.

What’s the Obama White House’s reponse when presented with this political goldmine?

No comment.

What do they think they’re going to lose votes by going to battle with Steve Schwarzman, he of the $400 crab claws and the $3 million birthday bash replete with a huge replica of a painting of himself?

— Speaking of PE, the FT’s Alphaville is frustrated by the lack of clarity in private-equity’s reported returns.

And it can’t come up with the answer. So it does what few journalists will do: Admit it doesn’t know:

Depending on the study under consideration, the asset class overall either performed in line with public markets or significantly outperformed. Still, the studies did seem to reinforce the notion that the best private equity firms tend to remain the top performers over time.

…the question of whether private equity outperforms the public markets to an extent that justifies the illiquidity and other aspects is one that this correspondent really can’t answer, so we would be especially keen to hear what our commenters think about this.

A couple of recent studies have shown lackluster returns for private equity relative to other investments, but the PE industry disputes that.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.