I think our brilliant readers are right to call this The Cootie Theory of Politics.* When you stand for nothing and have nothing to campaign on or for, just convince the voters that the other side has cooties.
Sarah Palin points out the sliminess of Newseek’s writer source in a tweet:
@Newsweek: know what’s truly “dumb”? Giving a cover story to the TrigTruther conspiracy kook writer who thinks I didn’t give birth to my son
Any guesses on what Newsweek’s next cover will be?
Maybe “Your mama is trash if you don’t vote Obama.”
Since it’s Tuesday, feel free to share your latest tin-foil theory.
For what is a man profited, if he shall gain the whole world, and lose his own soul?
I’ve been trying to get a handle on Mitt Romney and Bain Capital.
Let’s start with Romney and a little Wikipedia:
Willard Mitt Romney (born March 12, 1947) is an American businessman and politician. He was the 70th Governor of Massachusetts from 2003 to 2007 and is a candidate for the 2012 Republican Party presidential nomination.
The son of George W. Romney (the former Governor of Michigan) and Lenore Romney, Mitt Romney was raised in Bloomfield Hills, Michigan and later served as a Mormon missionary in France. He received his undergraduate degree from Brigham Young University, and thereafter earned Juris Doctor/Master of Business Administration joint degrees from Harvard’s law and business schools. Romney entered the management consulting business, which led to a position at Bain & Company, where he eventually served as CEO and brought the company out of crisis. He was co-founder and head of the spin-off company Bain Capital, a private equity investment firm that became highly profitable and one of the largest such firms in the nation. The wealth Romney accumulated there would help fund his future political campaigns. Very active in his church, he served as ward bishop and later stake president in his area. He ran as the Republican candidate in the 1994 U.S. Senate election in Massachusetts, losing to incumbent Ted Kennedy. Romney organized and steered the 2002 Winter Olympics as head of the Salt Lake Organizing Committee, and helped turn the troubled games into a financial success.
Yeah, it’s Wiki, but as far as I can tell that part is fairly accurate. Mitt did pretty good as an executive at Bain & Company, then started Bain Capital where he got rich. So what’s the deal with Bain Capital?
The business goal of private equity companies is to make profits for investors in the equity funds they manage. The greater the profits for the investors, the larger the take of the fund managers, who typically receive a base management fee of about 2% plus a portion of the fund profits, generally around 20%. If the fund manager is very successful then the manager’s participation in profits may run as high as 30%, which investors may be prepared to accept just to be able to invest with that manager. We’re told that Bain was very successful in creating very high returns on investment for its investors, said to be an astounding 88% per year, to the point where it could get 30% participation in profits. One tax advantage of the fund mangers is that although their business is to get paid by creating values, unlike other payment for services, which is taxed as ordinary income, their return for their services is treated as capital gain and taxed at the lower capital gains rate.
What the private equity firms do to earn those returns is to seek out opportunities to acquire companies where by adding their efforts and talents they will be able to increase the value of the company to the point where they can realize the increased value by selling the company or its assets. A sale can be made to another company, frequently a much larger one in a related field, to another private equity fund which believes it can create even more value for its own investors, or in a public offering to a broad group of shareholders. Most often, in order to increase the return on capital invested by the fund, the fund will borrow a significant portion of the purchase price of the business. And sometimes, if it can, the fund will take back as a distribution immediately upon closing the purchase of the business, a portion of its investment in the purchase price, reducing its own investment and enhancing its return on the investment left in the business. This distribution may come from the company’s existing cashable assets or from money that the company is caused to borrow. This additional leverage also creates additional risk; if things don’t go right the business will not be able to pay the carrying costs of the debt, the lender will take over the business and the fund will lose its investment. Sometimes, that results in the acquired company placed in bankruptcy proceedings either to liquidate its assets to pay off the debt or to restructure, a process Bain also experienced.
Ever watch “Flip This House” or “Flip That House?” The concept in both shows was similar – buy an older “fixer-upper,” fix it up, then sell it for a quick profit. That’s pretty much what Bain did, only they bought businesses instead of houses, and Romney mostly used OPM – “other people’s money.”
Romney would find rich investors and promise them a really high return. In exchange they would agree to pay Romney a really high share of the profits he made with their money. One thing doesn’t seem to be in dispute – Romney was pretty good at making money. While he was running Bain they were averaging a 113% return on investment.
Now the details of how he did it are more complex than that, and many of them can be spun to look dishonest.
Is Mitt Romney really the Gordon Gekko of presidential candidates thanks to his years of running Bain Capital? Newt Gingrich and Rick Perry sure seem to think so, accusing him of making his millions by wreaking wholesale devastation on innocent companies and hardworking laborers. This is, as you might expect, just a wee bit over the top. Still, before we dismiss the comparison entirely, Dean Baker lists a few of the Gekko-like behaviors that real-life private equity firms sometimes engage in:
It is standard practice for private equity to load firms with debt. This means that taxable profits are turned into tax-deductible interest payments. The difference can be a gain to Bain and other private equity firms, but it is coming at the expense of taxpayers.
In the same vein, private equity companies often engage in complex asset shifting. This can leave a heavily indebted firm with few valuable assets. If it eventually goes bankrupt, the creditors collect little money because the private equity company has transferred the assets with value into an independent company. This can also mean big profits for Bain and other private equity companies, but this is not a gain to the economy.
Another frequent game of private equity companies is to dump pension obligations on the Pension Benefit Guaranty Corporation. The reduction in liabilities can mean big profits for Bain and other private equity companies, but does not provide any benefit to the economy.
This, then, is the assignment for some enterprising reporter. Did Bain Capital do this kind of thing during Romney’s stint there? Or did they really and truly just work hard to try and turn failing companies around by applying state-of-the-art management techniques?
Not all of Bain’s investments worked out quite so well. This brings us to GS Technologies.
The young men in business suits, gingerly picking their way among the millwrights, machinists and pipefitters at Kansas City’s Worldwide Grinding Systems steel mill. Gaping up at the cranes that swung 10-foot cast iron buckets through the air. Jumping at the thunder from the melt shop’s electric-arc furnace as it turned scrap metal into lava.
“They looked like a bunch of high school kids to me. A bunch of Wall Street preppies,” says Jim Linson, an electronics repairman who worked at the plant for 40 years. “They came in, they were in awe.”
Apparently they liked what they saw. Soon after, in October 1993, Bain Capital, co-founded by Mitt Romney, became majority shareholder in a steel mill that had been operating since 1888.
It was a gamble. The old mill, renamed GS Technologies, needed expensive updating, and demand for its products was susceptible to cycles in the mining industry and commodities markets.
Less than a decade later, the mill was padlocked and some 750 people lost their jobs. Workers were denied the severance pay and health insurance they’d been promised, and their pension benefits were cut by as much as $400 a month.
What’s more, a federal government insurance agency had to pony up $44 million to bail out the company’s underfunded pension plan. Nevertheless, Bain profited on the deal, receiving $12 million on its $8 million initial investment and at least $4.5 million in consulting fees.
It’s a long article and you should read the whole thing. But it is also heavily slanted to provoke an emotional response:
For Joe Soptic, who worked at the plant for 28 years, that meant a loss of $283 per month, about 22 percent of his pension. Others lost up to $400 per month, according to documents supplied by the union.
Comparatively, the GS bailout was one of the pension guarantor’s smaller hits. The federal fund swung from a $7.7 billion surplus to a $3.6 billion deficit that year as it struggled to cover bankruptcies in the steel and transportation industries. The failure of LTV Steel, for example, cost the agency $1.9 billion.
The agency’s woes prompted Congress in 2006 to require companies to contribute more toward their pensions. Press accounts said this change accelerated the shift away from pension plans toward 401(k)s and other defined-contribution retirement plans that offer less security for workers.
Many of the older workers at the Kansas City mill were just a few years away from Social Security and Medicare, but younger workers didn’t have that safety net. Even with $600,000 earmarked by the U.S. Labor Department for job retraining, many had trouble finding work.
“They give you a year’s worth of training, you’re 50-something years old, nobody wants to hire you,” said Steve Morrow, who retrained in the field of heating and air conditioning.
After nearly 30 years as a steelworker, Joe Soptic found a job as a school custodian. The $24,000 salary was roughly one-third of his former pay, and the health plan did not cover his wife, Ranae.
When Ranae started losing weight, “I tried to get her to the doctor and she wouldn’t go,” Soptic said. She ended up in the county hospital with pneumonia, where doctors discovered her advanced lung cancer. She died two weeks later.
Soptic was left with nearly $30,000 in medical bills. He drained a $12,000 savings account and the hospital wrote off the balance.
“I worked hard all my life and played by the rules, and they allowed this to happen,” Soptic said.
While my sympathies are with Mr. Soptic and his fellow ex-employees of GS Technologies, the story does not show how Mitt Romney and/or Bain Capital caused their misfortune. The steel industry in the United States was undergoing hard times, and the mill may well have closed sooner rather than later without Bain’s efforts.
I am not vouching for Romney’s character, but sometimes shit happens. What I haven’t seen is any evidence against Mitt for “vulture capitalism” or insider trading. He just made a lot of money during the boom times of the Clinton administration.
Does this qualify him to be president? No.
But it doesn’t disqualify him either. The qualities necessary to be successful running a private equity firm are not the same as those necessary to run a government.
