DealBook Briefing: Carlyle’s Founders Give Outsiders More Power

July 31, 2019

Good Wednesday morning. On today’s agenda: the Fed’s big announcement on interest rates. More on what to expect below. (Was this email forwarded to you? Sign up here.)

The Carlyle Group founders, from left, David Rubenstein, Bill Conway and Dan D'Aniello. David Scull for The New York Times

Carlyle is moving to a ‘one share, one vote’ model

The investment giant announced this morning that it is converting to a corporation from a publicly traded partnership, following peers in making the move. The company also made another huge change: It is giving shareholders more say in how it’s run.

Carlyle converted into a “C corporation,” the standard model for publicly traded companies. Private equity firms that have gone public have typically done so as partnerships, which saved on taxes but prevented them from being included in major stock indexes.

Rivals like KKR and Blackstone have already made the transition, which has helped bolster their stock prices.

But Carlyle is also moving to a “one share, one vote” model, meaning that each investor has a proportional say in how the company is run. That is a change from private equity firms’ preference to be controlled by their own executives, preventing outsiders from gaining too much power.

There’s a financial motive at work here, too. Two of the biggest stock index operators, S&P Dow Jones and FTSE Russell, have moved to exclude companies with several classes of stock from their major indexes (though companies like Facebook would be grandfathered in). Carlyle is betting that it could be included in those indexes and have a bigger market for its shares.

“The path we’ve chosen is differentiated and positions us in the best way to drive long-term value,” Kewsong Lee and Glenn Youngkin, Carlyle’s co-C.E.O.s, said in today’s announcement.

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Today’s DealBook Briefing was written by Andrew Ross Sorkin in New York and Michael J. de la Merced in London.

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Fed chairman Jay Powell Leah Millis/Reuters

What to watch for in the Fed’s big announcement

This afternoon, Federal Reserve policymakers will end a two-day meeting with a widely anticipated announcement of a cut in the benchmark interest rate. Jeanna Smialek of the NYT highlights what to pay attention to.

• How much it cuts rates. The Fed’s chairman, Jay Powell, and others have signaled that early signs of an economic slowdown argue for lower interest rates — but not too much lower. A reduction of half a percentage point would be called for in a crisis, and there isn’t one right now. Most investors expect a cut of a quarter of a percentage point.

• Any statements on inflation. The Fed delayed cutting rates because it worried about prices shooting up after rates had been kept low for so long. That hasn’t happened, so if officials say they want inflation to rise, take that as a sign that another cut could be in the offing.

• What President Trump says afterward. He has repeatedly criticized the Fed for not cutting rates sooner. Mr. Trump tweeted this week that “a small rate cut is not enough,” and there’s a good chance he’ll keep calling for another one later this year.

Game time is at 2 p.m. Eastern, when the Fed announces its decision. Mr. Powell will hold a news conference at 2:30 p.m.

Justin Sullivan/Getty Images

Health care takes center stage at the Democratic debate

Much of last night’s debate — the first of two this week of Democratic presidential candidates — centered on clashing visions of American health care: progressives’ desire for a “Medicare for all” system versus the call from moderates for combining an expanded Medicare with the existing private insurance industry.

A question about Medicare for all “set off a half-hour brawl that drew in almost every one of the 10 candidates on the stage,” Abby Goodnough of the NYT writes. It highlighted the battle within the Democratic Party over how to handle one of the most important issues of the 2020 campaign.

Some centrists echoed Republican attacks on Obamacare, saying that progressive candidates like Senators Bernie Sanders and Elizabeth Warren wanted to strip away voters’ preferred plans by mandating government-provided insurance. Chief among them was John Delaney, who emerged as the main foil to the two.

And moderators asked Ms. Warren and Mr. Sanders how they would pay for Medicare for all. Both have proposed raising taxes, particularly on wealthy Americans, which centrist candidates said could alienate voters.

The liberals fought back. Ms. Warren said big ideas like overhauling health care were how Democrats could defeat Mr. Trump, and accused critics onstage of sounding like Republicans. Mr. Sanders pointed to how many Americans are currently uninsured or underinsured.

Expect Medicare to remain a big topic at tonight’s debate, which will feature Joe Biden and Senator Kamala Harris. It starts at 8 p.m. Eastern.

Zinger of the night: When Representative Tim Ryan accused Mr. Sanders of not knowing whether medical benefits would improve under Medicare for all, the senator shot back: “I know that. I wrote the damn bill.”

Capital One’s breach is banks’ ongoing nightmare

The theft of over 100 million people’s personal data from Capital One’s systems is one of the worst ever for a major financial institution. But dealing with intrusions by hackers is now a frustrating part of daily life for the banking industry, Stacy Cowley and Nicole Perlroth of the NYT write.

• “Already this year, there have been 3,494 successful cyberattacks against financial institutions, according to reports filed with the Treasury Department’s Financial Crimes Enforcement Network,” Ms. Cowley and Ms. Perlroth write.

• “In some cases, the hackers have taken advantage of weak passwords or sent fake emails loaded with malicious computer code that helped them get inside the network. In others, they have scanned for software that hasn’t been kept up-to-date with the latest security fixes.”

• Though Paige Thompson, who is accused of breaking into Capital One’s systems, seemed to have a wide range of technical skills, “it did not appear that the breach of the bank’s computer systems was particularly sophisticated.”

• “Cybersecurity experts wondered why the company’s security defenses did not pick up Ms. Thompson’s intrusion. Most financial institutions use technology that can detect unusual patterns of behavior indicating that a user could be trying to rob the bank.”

• “Cybersecurity ‘may very well be the biggest threat to the U.S. financial system,’ Jamie Dimon, JPMorgan’s chief executive, said in an April letter to shareholders.”

Trump keeps taunting China on trade

American and Chinese negotiators are meeting in Shanghai this week to keep working on a trade deal. But President Trump tried to turn up the heat by warning of dire consequences if there’s no agreement — even if there’s no enthusiasm for reaching one.

Mr. Trump tweeted that China appeared to be running out the clock until the 2020 elections, and said that Beijing would prefer to strike a deal with Democrats. He warned that if he won re-election, he would be even tougher in trade talks, and was prepared to not reach a deal at all.

He also noted that China’s economy is weakening. A manufacturing activity index rose only slightly in July from June, and remained below the level that separates economic expansion from contraction.

Beijing has shown belligerence as well. A spokeswoman for China’s Ministry of Foreign Affairs called the U.S. “capricious, arrogant and selfish” this week amid continuing skirmishes in the trade fight.

Little progress is expected in the talks. American and Chinese negotiators appear to still have significant differences of opinion on issues like protection of American intellectual property and how many more U.S. goods China will agree to import.

Even Trump allies think his latest threats are empty. Senator Chuck Grassley, Republican of Iowa, told reporters yesterday, “I don’t think you ought to make anything out of it except to forget the tweet.”

More: Huawei’s financial results yesterday show that the Chinese tech giant is weathering the trade war fairly well.

Tim Cook of Apple Brittany Hosea-Small/Agence France-Presse — Getty Images

Apple finds new life beyond the iPhone

Sales of the smartphone kept falling in the most recent quarter, leading to another decline in profit for the tech giant. But analysts and investors seized on a glimmer of positive news: The iPhone is becoming less central to Apple’s fortunes.

Net income dropped 13 percent from a year ago, to $10 billion, while revenue rose just 1 percent, to $53.8 billion. Revenue from the iPhone fell almost 12 percent, to $26 billion. It was the first time since 2013 that iPhone sales did not constitute at least half of Apple’s revenue.

Revenue from other divisions is rising. Sales of services — subscriptions to music streaming, product insurance and more — increased 12 percent, to $11.5 billion. And sales of wearable items like Airpods and the Apple Watch jumped nearly 64 percent, to $5.5 billion.

That “highlights the company’s progress in diversifying and reducing its reliance on the iconic device,” John Butler, an analyst at Bloomberg Intelligence, wrote in a research note.

Troubles with smartphone sales extend beyond Apple. Samsung reported a 53 percent drop in quarterly profit today, in large part because of lower demand for new smartphones. About three-quarters of its profit now comes from memory chip sales, and those could be hurt by a trade fight between South Korea and Japan.

Revolving door

The Swiss asset manager GAM announced its new C.E.O.: Peter Sanderson, BlackRock’s head of financial services consulting for Europe, the Middle East and Africa.

Jim Momtazee has stepped down as KKR’s head of Americas health care investing.

The speed read

Deals

• Shari Redstone is reportedly considering having a combined CBS and Viacom buy more media companies, like Sony Pictures Entertainment or Discovery Communications. (NBC News)

• Deutsche Bank has set September as a deadline for selling off a huge portfolio of equity derivatives as part of its financial reorganization. (FT)

• Compass, an online real estate brokerage, has raised $370 million in new funds at a $6.4 billion valuation — and is reportedly considering an I.P.O. (WSJ)

• MYbank, a Chinese online lender tied to the Alibaba Group, plans to raise about $871 million in its first official fund-raising round. (Reuters)

• Hollywood’s two biggest public relations agencies, PMK-BNC and Rogers & Cowan, agreed to merge. (NYT)

Politics and policy

• The Trump administration is divided over a plan to cut taxes for investors ahead of the 2020 elections. (NYT)

• The Senate majority leader, Mitch McConnell, told Republican senators that they can’t leave Washington until they vote for the two-year deal on the federal budget. (Politico)

• California passed a law requiring presidential candidates to release their tax returns to qualify for the state’s primary ballots. Guess who it’s targeting. (NYT)

• A federal judge dismissed the Democratic National Committee’s lawsuit against Russia, the Trump campaign, WikiLeaks and others, which had argued that the defendants illegally interfered in the 2016 elections. (NYT)

• How the Trump re-election campaign is collecting millions through politically themed merchandise. (Politico)

Brexit

• The British pound continues to slide amid uncertainty over how Prime Minister Boris Johnson intends to withdraw the country from the E.U. (NYT)

Tech

• Have “battle royale” online games like Fortnite peaked in popularity? (NYT)

• Facebook has implied that its Libra cryptocurrency could be valuable to law enforcement because of the user data it collects. (WSJ)

• Senator Josh Hawley, Republican of Missouri, proposed banning “infinite scrolling” on social media sites like Facebook and YouTube that keep adding new content to users’ feeds as they scroll down. (Bloomberg)

• Amazon is pushing vendors on its platform to reduce the amount of packaging they use. (WSJ)

• Google employees say they’re donating to Democratic presidential candidates who want to break up tech giants because that might be good for their company. (Recode)

Best of the rest

• German prosecutors have charged the former C.E.O. of Audi, Rupert Stadler, over his role in Volkswagen’s emissions-cheating scandal. (NYT)

• How some wealthy parents have been helping their children qualify for college financial aid: transferring legal guardianship to relatives or friends. (WSJ)

• The public relations firm Edelman dropped GEO Group, which runs immigration detention centers, as a client after employees objected to the assignment. (NYT)

• Britain’s accounting watchdog has tripled fines for violations. (FT)

• An effort to reboot Gawker has been put on hold. (NYT)

Thanks for reading! We’ll see you tomorrow.

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