Looking Back: Congressional Oversight, Part I

Following a 20-year hiatus from the public consciousness, leveraged buyouts are back in the spotlight. As with the flurry of deal-making two decades ago, this recent round of private equity mega-mergers has drawn scrutiny from lawmakers in Washington, D.C.

And, once again, they’re concerned the tax code is too generous to buyout shops.

In 2007, the debate is centering on the tax treatment of carried interest, the 20 percent chunk that general partners take from investment profit. Rumblings on Capitol Hill suggest legislators want to tax carried interest as ordinary income—and therefore at a rate of 35 percent for high-income folks—rather than the current policy of taxing carried interest as capital gain, which is assessed at 15 percent.

In February 1989, around the same time Kohlberg Kravis Roberts & Co. was completing its epic buyout of RJR Nabisco, Congress considered whether the nation’s Treasury was bankrolling these so-called “bootstrap” deals by making debt interest tax-deductible. The Feb. 29, 1989, issue of Buyouts chronicled how “legislative aides are scurrying” in support of bills to limit the tax deductions, and also how Washington was wringing its hands over the thought that the rash of LBOs might have left banks holding a precarious amount of leverage.

By fall 1989, the bills had withered, however, amid heavy opposition from Wall Street and after Federal Reserve chief Alan Greenspan opined that the LBO market was cooling off. In fact, the slowdown in buyouts was probably the most potent ingredient against anti-LBO legislation.

As the Sept. 27, 1989, issue of Buyouts noted: “The LBO industry’s toughest challenges, however, come not from Washington, but from the most appropriate corner: the marketplace itself. Banks, appropriately, are declining questionable credits. Bond investors, appropriately, are demanding yields commensurate with risks.”