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COPYRIGHT 2008 All rights reserved. Reproduced by permission of The Condé Nast Publications Inc.
On June 18, 2007, Stephen A. Schwarzman, the chairman and chief executive of the Blackstone Group, and his driver approached the Fifth Avenue entrance of the New York Public Library. Schwarzman, a member of the library's board, was being honored that night. To his dismay, television reporters and cameramen were milling on the steps and the sidewalk. He evaded them by using a side entrance. A TV cameraman managed to penetrate the cocktail party that preceded the ceremony, and Schwarzman was startled when the glare of a camera-mounted spotlight hit him in the face.
In the previous few weeks, he had become the designated villain of an era on Wall Street--an era of rapacious capitalists and heedless self-indulgence that had driven the Dow Jones Industrial Average to new highs, along with the prices of luxury real estate and contemporary art, while the incomes of ordinary Americans stagnated or fell. Blackstone, the partnership that Schwarzman founded, in 1985, with Peter G. Peterson, Secretary of Commerce under Richard Nixon and a former chairman and C.E.O. of Lehman Brothers, was a new type of financial institution: a manager of so-called alternative assets, such as private-equity, real-estate, and hedge funds--esoteric vehicles that barely existed when Blackstone began but now accounted for trillions in assets. Most of the investments came from corporate and public pension funds, endowments of universities and other nonprofit institutions, insurance companies, and rich people. Blackstone was the world's largest manager of these alternative assets, with $88 billion. Its investors included Dartmouth College, Indiana University, the University of Texas, the University of Illinois, Memorial Sloan-Kettering Cancer Center, and the Ohio Public Employee Retirement System. It had taken control of a hundred and twelve companies, with a combined value of nearly $200 billion. It had just completed what was at the time the largest private-equity buyout ever, the purchase, for $39 billion, of Equity Office Properties, and was on the verge of acquiring Hilton Hotels.
Blackstone was also about to become the largest private-equity firm to offer shares to the public. A week before the library tribute, the company disclosed, as required by the Securities and Exchange Commission, that Schwarzman would receive $677.2 million in cash from the public offering and that he would retain shares worth an estimated $7.8 billion, making him one of the richest men in the country. Coming soon after the lavish and widely chronicled sixtieth-birthday party that Schwarzman had given himself in February, an unflattering profile on the front page of the Wall Street Journal, and strident calls from Congress to raise taxes on private-equity funds like Blackstone's, the disclosures could only tarnish the public offering.
Nevertheless, investors were eager to buy shares. On June 21st, a heavily oversubscribed public offering was priced at thirty-one dollars a share, at the top of the projected range, causing Blackstone to be valued at $31 billion--not far behind the venerable Lehman Brothers. The next day, Blackstone shares, trading under the symbol BX, opened at $36.45 and closed slightly lower, at $35.06. Schwarzman's friend James B. (Jimmy) Lee, Jr., a vice-chairman at J. P. Morgan Chase, sent him a congratulatory e-mail:
You were like Indiana Jones over the last few weeks. . . . They rolled giant boulders at you . . . fired poison darts at you . . . threw you into that giant snake pit . . . and yet you still found the grail, and got the blonde. . . . Bravo.
Schwarzman had demonstrated extraordinary timing. Just days before, two Bear Stearns hedge funds holding mortgage-backed securities collapsed--the first tremors of what became a full-blown credit crisis. By the end of the year, major financial institutions had recorded losses on mortgages and related financial instruments of more than a hundred billion dollars. The chiefs of Merrill Lynch and Citigroup lost their jobs. Citigroup, Merrill, Bear Stearns, Morgan Stanley, and UBS turned in near-desperation to sovereign wealth funds (funds held by governments) and rich investors in the Middle East and Asia for capital infusions.
In this chaotic environment, Blackstone had managed to avoid nearly all the pitfalls of subprime mortgages and mortgage-backed securities. It specializes in commercial, not residential, real estate. Indeed, its hedge funds are designed to profit from market turmoil, and the enormous assets that it manages deliver steady fees in good markets and bad. The stock peaked on its first day of trading, however; by mid-January, its value had been cut almost in half.
Schwarzman still had his cash from the offering, which turned out to be $684 million, but his Blackstone stake, worth $8.83 billion after the first day, was worth just $4.62 billion.
Schwarzman has made himself an easy target for critics of Wall Street greed and conspicuous consumption. He lives in splendor in Manhattan, and he has an expanding collection of trophy residences that are lavish even by the current standards of Wall Street. In May, 2000, Schwarzman paid $37 million--reportedly a record sum at the time for a Manhattan co-op--for a thirty-five-room triplex on Park Avenue that was once owned by John D. Rockefeller, Jr. In 2003, he paid $20.5 million for Four Winds, the former E. F. Hutton estate in Florida, which occupies a choice spit of land between the ocean and the Intracoastal waterway. Designed by the Palm Beach architect Maurice Fatio, the thirteen-thousand-square-foot, British-colonial-style estate was a designated historic landmark; local residents were startled when Schwarzman had the house razed. The ensuing fourteen-month wrangle between Schwarzman and his New York architects and the Landmarks Preservation Commission filled countless pages of testimony. It turned out that Schwarzman had got approval for a proposed expansion, and, as the house was dismantled, workers had numbered and stored everything so that it could be rebuilt in an expanded form. In 2006, he paid $34 million for a Federal-style house, on eight acres on Mecox Bay, in the Hamptons, that was previously owned by the Vanderbilt heir Carter Burden.
Schwarzman also owns a coastal estate in Saint-Tropez and a beachfront property in Jamaica. He typically spends summer weekends and August in East Hampton; July in Saint-Tropez; and winter weekends in Palm Beach. His children use the house in Jamaica; he rarely goes there. The five properties and their renovations appear to have cost Schwarzman at least a hundred and twenty-five million dollars. "I love houses," he told me recently. "I'm not sure why."
Whatever his indulgences, Schwarzman has always drawn a strict line between personal expenses and Blackstone's business operations; colleagues say that he keeps a close watch on office spending. The company's offices, on Park Avenue, are furnished with slightly threadbare traditional rugs and furniture and a mixture of modest prints and photographs. (The offices are scheduled to be renovated later this year.) Blackstone does not own a corporate jet. Instead, it uses Schwarzman's private jet. (In 2006, the company paid him $1.54 million for the privilege.) Schwarzman must approve any other chartered flights. Partners pay for their own lunches; there is a twenty-five-dollar limit on dinner expenses for employees working at night. Even subscriptions to the Wall Street Journal are deemed personal expenses, and all the partners pay for their own. One exception has always been company events; Blackstone has a long history of opulent anniversary and closing dinners, often at the Four Seasons, which is referred to by some as the Blackstone cafeteria. Still, until recently Schwarzman had trouble getting a prime table in the Grill Room at lunch. According to a friend of both men, when Schwarzman asked Peterson why, his co-founder replied, "It takes more than just money."
Another traditional measure of wealth is charitable activities and donations, and Schwarzman's philanthropic activities have received wide notice. With a hundred and fifty million dollars from the public-offering proceeds, Blackstone established the Blackstone Foundation. Schwarzman has contributed to or raised money for a long list of nonprofit institutions, including the Frick Collection, the Whitney Museum, Phoenix House, the Red Cross, the Inner-City Scholarship Fund, the American Museum of Natural History, New York City Outward Bound, the Asia Society, and the Central Park Conservancy. His competitive instincts are as keen here as in business; he told me that every fund-raiser that he has chaired or at which he has been the honoree has set a new record. He is on the board not only of the New York Public Library but of the Frick and of New York City Ballet. Jimmy Lee jokes that his friend has received more accolades and raised more money for the Catholic Archdiocese of New York than any other Jew; Edward Cardinal Egan is a close friend. (Schwarzman has also raised money for the American Jewish Committee.) As chairman of the board of trustees of the Kennedy Center, in Washington, he shares a box every year with the President and the center's honorees.
In America, board memberships and contributions to worthy causes in the arts and education have traditionally helped cleanse a man of any taint of new money and can temper populist resentment of great wealth. For someone of Schwarzman's wealth and business prominence, affiliations with boards--which are stocked with the lawyers, bankers, and business executives who are Blackstone's clients, potential clients, or advisers to them--are all but essential. A board member is expected to make contributions that roughly correlate to the size of his personal fortune. In Schwarzman's case, this aspect of the pact has generated considerable controversy and ill will, especially given his overt displays of wealth.
Schwarzman pledged ten million dollars to the Kennedy Center, but the pledge...
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