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Steve Schwarzman Is Not Above Shuffling A Few Pieces Of Paper To Keep Nosy Regulators In The Dark About His Personal Fortune

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Unlike some private equity famewhores, Steve Schwarzman is a modest, retiring type who shuns all ostentation and just wants to be left alone with his crabs. So it's not surprising that he doesn't want those gossip hounds at the Fed all up in his personal finances, and that he's willing to go to extreme lengths to avoid just that. How extreme? Check this out:

Blackstone is converting part of its 14.1% stake in BankUnited Inc. to nonvoting preferred stock, these people said. The deal will shrink its voting stake to less than 10%, pushing the New York firm below the level at which the Fed requires personal financial data from the Florida bank's owners.

It isn't clear why Mr. Schwarzman is sensitive about providing such information. The longstanding Fed rule is in place to allow the regulator to gauge the safety of banks by evaluating the financial resources of their owners. The financial information gathered about a bank's owners isn't available to the public, even if requested under the Freedom of Information Act, according to people familiar with Fed policies. ...

The matter of Mr. Schwarzman's personal financial information is tied to BankUnited's plans to convert from a savings-and-loan institution to a national bank. ... As part of the conversion, the Fed requires detailed financial information from "principals" of entities that own more than 10% of the bank's stock.

So ... not that extreme? Two obvious things:

(1) The Fed doesn't need to know about Schwarzman's personal finances to gauge the safety of any banks. Not just because he's really quite rich, but because there's no realistically conceivable scenario in which a bank runs out of money and the Fed goes looking for that money in the personal account of the CEO of the general partner of the limited partnership that is the general partner of a limited partnership that is a 14% shareholder of a holding company that owns the bank.*

(2) Blackstone shrinking its voting stake from 14.1% to 9.9% by converting some of its shares into nonvoting preferred stock (which has the economics of common and converts to common if they sell it to anyone else) doesn't actually matter for anything, since it will have the same economics and the same board representation as it had before.

So here is a non-solution to a non-problem. Which is fine. This is why lawyers can afford Manhattan apartments.

One day all this Volcker Rule and bank capital and ratings-agency-purge stuff is going to end, and financial regulatory developments will be fun again, and they will be about this. Everywhere U.S. law tries to figure out and regulate how much power a shareholder has over a company, it ends up hopelessly confused, and you get creepy formalisms like Blackstone's nonvoting not-quite-common-stock in BankUnited.

This confusion comes from, on the one hand, a deep devotion to the (debatable!) idea that public company shareholders are owners and should have a say in the company, and that their say is proportional to their number of formally voting shares. Thus you get the BankUnited paper shuffling - as well as shocking amounts of attention devoted to things like say-on-pay and shareholder nomination of directors, and sterile debates about how sad bank shareholders should or should not be because the employees are stealing all the money or something. But you also get real restrictions on the capital markets. Try selling equity in a casino company sometime. Or a REIT. Or a shipping company.** Or a ... well, a bank, for instance. All sorts of companies are subjected to - ever-so-slightly different, often ambiguous - legal restrictions on who can own their stock, and how much of it they can own, and what reports and permissions they need to own it.

On the other hand, that devotion is often under-analyzed and formalized enough that you can structure around these restrictions without giving up the control that you actually wanted. Again, Blackstone will keep 14% of the economics of BankUnited, and will keep its one director, and Schwarzman will remain that director's boss. It's hard to see how Schwarzman will have less control, whatever that is, after the conversion of the shares than he did before. Similarly, if you are an activist hedge fund - y'know, someone who actually does have the desire and sophistication and resources to influence the policy of the companies you invest in - and you are worried about ownership restrictions and filing requirements, you can look into something with the lovely name of hidden morphable ownership and maybe get around them. Or maybe not, often because those restrictions are so vague that you can't predict what formalism will work.

The BankUnited example is a salacious one because "STEVE SCHWARZMAN ENJOYS EATING EXPENSIVE CRABS" but the broader area of regulation is interesting, important, and a godawful mess. I doubt that will change in the near future - we have prop trading to ban! - but it's nice that this story, trivial in itself, is keeping it on the radar.

Schwarzman: None of Your Business [WSJ]

* Unless he stole it. Could happen.

** I have done all of these things and, let me tell you, GAAAAH.


By Lishabai Yi (Middle Kingdom Media Ltd.) [CC BY-SA 4.0], via Wikimedia Commons

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