Shares of Blackstone (BX), the king of Wall Street’s kingdom, can now fairly be described as being in free fall. At $26, they are off 16% from their $31 offering price. The stock is down 5% today alone. (The Chinese government is under water too. Ouch.) Why? Let’s just say it’s got nothing to do with Google’s (GOOG) earnings miss. No, Blackstone’s hurting for plenty of other reasons, like ongoing fears about the cycle turning in the private-equity business.

There’s a concrete indicator as well. Last night the chip company Freescale Semiconductor reported a horrendous quarter. Sales were down 14% from the year-earlier quarter, primarily because of weakness at Freescale’s largest customer, Motorola (MOT). Operating earnings are way down.

All of this has to be more than a little distressing to Blackstone, which bought Freescale in December after beating out a group led by KKR in a bidding war. As I’ve written before, it’s a near certainty that Freescale is worth far less today than what Blackstone and its partners paid for it eight months ago. Motorola’s shares are off 18% since Blackstone bought Freescale.

The private equity guys aren’t perfect. They were able to do extensive due diligence on Freescale and they still missed that Motorola’s woes were going to hurt it. Ordinarily, Blackstone would have plenty of time to make things right at Freesscale and for its portfolio. But now Blackstone has its own public-market investors to deal with. They get to vote every day, as opposed to institutional investors in Blackstone’s funds, which are committed for years. Retail investors seem to be voting with their feet for now.

In a contentious debate the fun begins when one side or the other starts slinging mud to confuse people. It has started in the battle over taxation of “carried interest,” otherwise cast as whether partners in investment partnerships ought to be paying a higher tax rate. (In an earlier post, Tax the Rich, I provide links to a handful of other articles that review the “Blackstone (BX) tax” fairly thoroughly.)

The obfuscation began this week in response to a bill filed last week in the House by Rep. Sander Levin that would remove the capital-gains treatment for carried interest, which is the portion of profits that private-equity partnerships take when they distribute winnings to their investors. Opponents of this proposal cleverly, but disingenuously, are trying to frame the debate as Congress trying to raise the rates on ALL capital gains. The Wall Street Journal has a good round-up today, and here are the money quotes, deep in the article:

In the House, bill opponents are being marshaled by Rep. Eric Cantor (R., Va.), a member of Mr. Rangel’s tax-writing committee and a big recipient of campaign support from the financial-services industry. He hopes to portray the legislation as the first step by Democrats toward repealing the 15% rates on capital gains and dividends.

“I don’t think people realize how much this has become a proxy fight for the 15% capital-gains rate itself,” said David Hirschmann, the president of the capital-markets division of the U.S. Chamber of Commerce.

Mr. Cantor, who is the top vote-counter for Republicans in the House, could win votes from most Republican lawmakers if he successfully defines the issue as a fight over the capital-gains rate, which the Republican-controlled Congress approved and Mr. Bush signed into law in 2003.

See, the interesting thing here is that neither Levin nor anyone else who is looking at this issue has said anything about changing the capital gains rate. They’re only looking at changing how carried interest is taxed.

Economist and TV personality Larry Kudlow posted a similarly dishonest article at the National Review Online in which he said that raising the tax rate on “risk capital” is just the first step toward eliminating the preferential treatment for capital gains altogether.

In his efforts at confusing people, Kudlow at least has put his finger on the issue with the expression he has fabricated, risk capital. Private equity shops, which include venture capital firms, argue that the profits their partners make years after they make an investment should be considered a capital gain because they’ve taken a risk. In fact, the risk is in reputation and time only, not capital. (If they do invest capital, nobody is arguing that shouldn’t be subject to capital-gains treatment.) At issue is how to tax the money they make if their investments — with other people’s money — pan out. The obvious answer: the same tax rate other rich people pay when they make money, 35%.

In an editorial this week, the New York Times summed up the reasoning for this change:

With income inequality surging along with the need for tax revenue, the bills’ supporters rightly conclude that it is untenable for the most highly paid Americans to enjoy tax rates that are lower than those of all but the lowest-income workers.

Confusing sloganeering aside, the issue is really that simple.

Soon-to-be-public private-equity firm Blackstone clearly hopes it can thwart Congress’s efforts to force it to pay corporate income taxes. Turns out Blackstone also wishes it could dodge the taxman on some property sales in San Francisco. An odd and fascinating article in Tuesday’s San Francisco Chronicle explains that Blackstone is disputing an $11.7-million payment regarding its sale of 10 buildings in the city. (Read the full text here.) Blackstone acquired the buildings when it bought Sam Zell’s Equity Office Properties and then quickly re-sold them to Morgan Stanley (MS). According to the Chron, Blackstone made two tax payments, but it is disputing the second one without explaining why.

Looks like Blackstone is dotting its Is and crossing its Ts before the IPO. Better to not be in arrears and face a penalty and give the SEC something to complain about.

We’re all becoming tax experts now. You can’t pick up a paper these days without wading into the arcane topic of how corporations and partnerships pay their taxes. I waded into this a couple months ago when I was researching an article on the spat between venture capitalists and buyout barons, both of whom typically structure their firms as private equity partnerships. Last week Congress proposed a law (already known as the “Blackstone tax”) that would no longer allow publicly traded private-equity firms to avoid paying corporate taxes. In a new piece on Fortune.com, the one and only Shawn Tully analyzes all this, coming to the conclusion that none of it is very promising for the continuation of the so-called golden age of private equity.

My favorite snippet of all, though, is a quote in the New York Times last week by Robert Rubin, the Citigroup (C) official and former Treasury secretary, who basically said all his rich guy pals should be taxed more. He said:

“It seems to me what is happening is people are performing a service, managing peoples’ money in a private equity form, and fees for that service would ordinarily be thought of as ordinary income,” Mr. Rubin said. He made clear that he was not a tax expert but said the issue should be looked at “with great seriousness” by the appropriate tax committees in Congress.

What I loved about this quote is how Rubin captured the spirit of what’s going on. If you spend too much time talking to tax experts you learn that there’s at least a logical consistency to the rule that allows partners to claim long-term gains on their partnership profits. But common sense, the guideline being used by as august a figure as Rubin, simply suggests otherwise: These guys are investing other people’s money and when they do it well they pay a lower tax rate than you and I (and Bob Rubin) do. Something’s got to give. Tax the rich!

It’s tough to be the top dog. Goldman Sachs (GS) probably will learn this over and over. Far and away the leader of the new investment banking/private equity/hedge fund hybrid category, Goldman is an easy mark for anyone who wants to criticize any of the above sub-species of financial animals. I’ve taken my shots, highlighting Goldman’s multiple roles in a entry called No conflict, no interest.

Now short-seller superstar James Chanos has slammed the whole firm with a dig at Goldman over a dispute he’s having with one managing director, Marc Spilker. Chanos is mad at Spilker over some allegedly despoiled shrubbery between their vacation homes in East Hampton, N.Y. Basically accusing Spilker of playing fast and loose with the rules, Chanos wrote in an email published by Conde Nast Portfolio.com: “I hope this is not a harbinger of how other Goldman senior executives may act when the markets become ‘just not lucrative enough for us!’” Ouch. Another account appears in today’s New York Post.

Last month I wrote an item called How the private equity boom will end that laid out the barest of details on how the great 2002-2007 era of leveraged buyouts will eventually come tumbling down. The post generated passionate comments, which told me that plenty of folks have plenty of thoughts on private equity.

Since then, the drumbeat has gotten louder. A succinct column by Dennis Berman this week made similar points, as did a front-page story in the Wall Street Journal today. The Web site breakingviews.com weighed in today with an article arguing that overly ambitious buyout firms, like Blackstone, will usher in the fall. A snippet:

Sure, Blackstone has hired more people to watch over day-to-day operations at their portfolio companies. But the founder Steve Schwarzman is said to be the man with the magic touch, who oversees all its investments. With Blackstone’s IPO around the corner and the firm rapidly raising new funds, there’s a danger of investment overstretch.

There’s more. The Financial Times published a great interview with short-seller James Chanos. Here’s his synopsis:

What’s driving it is easy credit availability and, as importantly, the boom in structured finance, whereby lenders are parcelling out the loans in various collateralised obligations and investors are buying small pieces as they see it. It’s diffused the risk but the risk has not been eliminated. (emphasis added.)

I love that last line. People always assume that diversification alone mitigates risk. But if you’re diversified among different securities in the same market, you’re going to get hit when the market gets hit. Chanos is saying that just because lots of entities own pieces of the buyout risk doesn’t mean it isn’t risky.

The fever pitch is building. Typically the end doesn’t come until the fever recedes – a head fake, if you will. Stay tuned.

I’ve read about GOP presidential candidate Mitt Romney’s flip-flops on important social issues like gay marriage and gun control. But it was more than a little amusing to see the businessman’s candidate squirming under questioning on a subject in which he is deeply knowledgeable: private equity.

In a front-page article Monday in The New York Times, Romney owns up to the fact that somtimes buyout firms need to fire people at the companies they buy. But listen to his backtracking:

“The experience of the last eight years, running the Olympics and being a governor, would make me take an even more sensitive look at the impact of business decisions on the lives of suppliers and employees and others who are involved,” he said.

Sure, Mitt. Or this, when asked about the practice of private-equity firms taking dividends out of acquired companies long before they are successful investments, and putting the companies more deeply in debt in the process:

“It is one thing that if I had a chance to go back I would be more sensitive to,” Mr. Romney said. “It is always a balance. Great care has got to be taken not to take a dividend or a distribution from a company that puts that company at risk.” He added that taking a big payment from a company that later failed “would make me sick, sick at heart.”

This is why buyout firms do best, of course: make money for themselves and their investors. That’s a story line that admittedly wouldn’t play well on the hustings.

Another fun nugget in the piece is the writer’s assertion that Romney likes to refer to Bain Capital, which he founded, as a “venture-capital” firm. (The journalist I like to call their David Kirkpatrick wrote the article; Here’s ours.) Bain Capital did start out doing VC investments, but it quickly became a buyout shop, which, like most others, stayed away from hostile deals. Romney understands the distinction and how it might play with voters. VCs build businesses; buyout guys strip assets and fire people. (It’s a point the VC crowd is making, as I wrote here, in trying to distance itself from a potential tax-code revision aimed at buyout firms.)

Incidentally, the article – essentially a political piece in the front section of the nation’s newspaper of record – raises the taxation issue by pointing out that dealmakers like Romney typically pay taxes at a lower rate on the majority of their income than most Americans. (A recent Go West post covers this topic in more depth.) Curiously, the article doesn’t say if Romney would support a move to raise taxes on VCs and the PE crowd. One thing seems likely: Whatever answer Romney gives might well be different than the one he would have given 10 years ago.

The management buyout of Kinder Morgan (KMI) finally closed Wednesday, almost exactly one year after CEO Rich Kinder announced the deal to the public. Kinder and his partners at Goldman Sachs (GS) have had a year to think about their plans. It will be extremely interesting to watch what actions they take now to recoup their massive investment of equity — nearly $8 billion in cash and the existing stakes of management — and giant borrowing: $7 billion in new debt. If you want to read up on this transaction, here’s a good place to start.

What’s fun about reporting on a company that actively shuns the spotlight is that it’s possible to discover what the company might really be about, as opposed to the line of BS most companies typically work overtime to sell. An example is the reporting Katie Benner and I did for our article in the current issue of Fortune, The dog that ate Detroit, about the private-equity/hedge-fund firm Cerberus Capital Management.

This is hardly the definitive take on Cerberus. (BusinessWeek made as good an attempt as any publication in 2005.) But there are fascinating nuggets, like our account of how Cerberus has made itself a friend of labor in several situations, before cozying up to the United Autoworkers and Canadian Autoworkers in its planned buyout of DaimlerChrysler (DCX).

And here’s a nugget that didn’t make it into the article: Cerberus’s mystique has grown to the point where it fuels rumors even when it fails. For instance, Vanessa Castagna, an ex-J C Penney (JCP) executive whom Cerberus installed to run Mervyn’s department stores, which Cerberus controls, recently left both Mervyn’s and Cerberus. That turnaround apparently is still in process. Because Mervyn’s is private and Cerberus operates so quietly, Castagna’s departure didn’t get a lot of general attention. But it was noted intensely in the retail industry, where a rumor began to circulate that Castagna had left Mervyn’s because Cerberus was preparing to buy Gap (GPS), which sorta, kinda has put itself up for sale. Nothing has come of the rumors. Not yet, anyway.

The California Public Utilities Comission today issued an order that allows the $15.2 billion management buyout of pipeline operator Kinder Morgan (KMI) to proceed. Kinder Morgan didn’t get everything it wanted in the ruling, which resulted from an ongoing fight it is having with several big oil companies, including ExxonMobil (XOM) and Valero (VLO). But it does mean it can now complete a deal whose existence was first announced almost exactly one year ago. The state regulator’s approval was the last of many hurdles the deal needed to close.

When the deal was announced last year, it was the second-largest private equity deal in history. Some shareholders have complained about the seemingly conflicting roles played by Goldman Sachs (GS); you can read a fuller account of the deal’s twists and turns here.

Kinder Morgan has yet to announce the California ruling. Its spokesman, who gave a comment this afternoon to Reuters, says the deal is still scheduled to close “in the second quarter.”