Nel's New Day

October 29, 2012

Bain Capital, Romney – Part One

Filed under: Uncategorized — trp2011 @ 6:39 PM

When Rick Perry called Mitt Romney a “vulture capitalist,” he was right on target. Even Ronald Reagan’s budget director, David Stockman, agrees, so much so that he has published a book about Romney’s “business acumen.” In an excerpt from the book in Newsweek, his first paragraph gets right to the point: “Bain Capital is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise.”

What Romney did with his company would be of less interest to people across the United States if he had not bragged that he is qualified to be president because of his 15 years of business experience at Bain. Supposedly Bain’s returns averaged over 50 percent annually during his time there. Romney, however, is not a businessman: he is a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.

Stockman explains, “We have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.” He bases his belief on 17 years of experience leveraging buyouts at first Blackstone and then his own business. “The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest-profit exit possible… Without cheap debt and deep tax subsidies, most deals would not make economic sense.”

Agreeing with the “vulture” description, Stockmen explains that “LBOs are capitalism’s natural undertakers—vulture investors who feed on failing businesses. Due to bad policy, however, they have now become monsters of the financial midway that strip-mine cash from healthy businesses and recycle it mostly to the top 1 percent.”

Because the country’s bubbles and recessions are correlated with the artificially swollen LBO business, Romney can look good: he made money during the first Greenspan bubble and had then bailed out of the business by the stock-market crash of 2000-02. During rising markets and abundant credit, the portfolio outcomes looks great.

Romney is totally unprepared to deal with a nation that is not riding at the top because bringing back the country will require sacrifice. Romney knows nothing about sacrifice.

When Romney started Bain Capital in 1984, the S&P 500 stood at 160. In 1999 when he said he quit the company, it was 1270, an annual return of 17 percent. Romney did even better because he just set up the deals; the lenders who provide 80 to 90 percent of the money to buy a business lose if the deal is bad. Bain Capital doesn’t. Really good deals make up for the losing ones.

Of the 77 significant deals during Romney’s time, Bain generated an impressive $2.5 billion in investor gains on $1.1 billion in investments, according to The Wall Street Journal. That’s what Romney is bragging about. But 10 of Bain’s deals accounted for 75 percent of the investor profits. Bain’s returns on the other 67 deals were actually lower than what a passive S&P 500 indexer would have earned even without the risk of leverage or paying all the private-equity fees.

In addition, four of the 10 money-makers, weighed down by the massive load of debt Bain had bequeathed them, ended up in bankruptcy because Bain got its money out at the top of the Greenspan boom in the late 1990s before the companies hit the wall during the 2000-02 downturn. In fact, nearly $600 million, or one third of the profits earned by the home-run companies, had been extracted from the hide of these four eventual debt zombies.

One of these deals was a group of department stores and apparel chains suffering from the growth of Wal-Mart and other big-box retailers. This deal limped along for almost ten years before Greenspan allowed them to raise $300 million in new junk bonds to buy another faltering clothing store chain. With lots of hype, the company’s stock price doubled, and Bain and partner Goldman Sachs dumped their shares right before the stores filed for bankruptcy. Bain accused them of “operating problems,” probably true because of the bad inventory and vastly overstated assets that Bain caused. The company had nothing left because Bain borrowed on everything and took the money, leaving it with $1.3 billion debt and 5,000 lost jobs.

Staples is another Romney bragging point. Bain gave $5 million in seed money and took out $15 million profit after it destroyed tens of thousands of Main Street stationery and office-supplies stores and other traditional distributors. My small town saw three small businesses closed after Staples arrived. Staples also caused job losses, shrinking to 40,000 part-time employees from an approximate 90,000 total head count.

The job losses go on. American Pad and Paper made $95 million for Bain, but Ampad workers and shareholders were left holding the bag, resulting in bankruptcy after massive debt. Bain made its money because it announced fantastic growth but didn’t explain that 90 percent of this came from debt-funded acquisitions.

According to Stockman, the lesson of all Bain’s losses is that “LBO’s would be rare in an honest free market—it’s only cheap debt, interest deductions, and ludicrously low capital-gains taxes that artificially fuel them.” He doesn’t blame Romney for how he runs his business but explains that this isn’t the way to run a country. “The Romney campaign’s feckless narrative that private equity generates real economic efficiency and societal wealth is dead wrong.”

Stockman explains other “deals” from Bain Capital, somewhat incomprehensible to many readers—including me! This is how Romney can succeed: no one wants to admit that they don’t understand what he is saying or what he has done. His followers just stick with his “trust me” approach. “I know what it takes” was a common statement in all three of his recent debates.

How hard did Romney work to get his money that he pays less than 14 percent tax on? On a deal with Italian Yellow Pages that made a profit of $375 for a $17 million investment, he appeared during a due-diligence session. The company’s CEO said, “He came into the room, asked a couple of very sharp questions immediately, shook hands and left.” Twenty-eight months later, in February 2000, he got a reputed $50 million.

Tomorrow is Part Two of the Bain Capital tragedy from other sources.

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