Dirty Rotten Scoundrel?

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?

Bain Capital is a private equity fund. From Sic Semper Tyrannus:

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.

Kevin Drum:

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.

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36 Responses to Dirty Rotten Scoundrel?

  1. myiq2xu says:

    If you think this post is boring don’t blame me, blame Mitt Romney.

    He’s boring.

  2. votermom says:

    The parallel is too delicious to ignore though. The Big Man came in to save a struggling entity and used OPM to profit but left it in debt/bankrupt and with no jobs.
    We could be talking about either Obama or Mitt.

    • Lulu says:

      But Mitt knows that he has had more success doing it (during Bill Clinton’s peace and prosperity) than O has during his terms as education challenge chair, state rep, US senator, or President. This is why the Obama supporters and press is picking though Bain and Romney just smilingly says Chicago education system, Illinois state budget, and Solyndra. If they want to pick though things it will be done in return this time around and Obama has a lot of stuff to pick though. Romney actually smiles when he talks about Dept of Energy stimulous loans. It is down right creepy how confident he seems.

  3. WMCB says:

    Romney’s job was to make money for the investors. As far as I can tell, he did that. As far as I can tell, he did it legally. He leveraged and used the existing system and made a bundle.

    A lot of the people squawking about Bain Capital don’t just take issue with Romney, they take issue with the way our stock market and investment dynamic is set up, They object to the rules themselves, not really whether or not Mittens followed them.

    I may actually agree with them on that. But how is that Romney’s fault? It’s like someone who really hates the caucus system, and thinks it is entirely unfair, getting pissed off at people who attend the caucuses. You’re right, it’s a shitty system that needs reform. But that’s a separate issue from whether or not the caucus-goers abiding by the current system did anything wrong.

    The sob stories and railing against venture capitalism and asset-shifting and stock-price goosing as a whole really have not much to do with Romney – they may be valid concerns about the rules themselves, but have little to do with Mitt. He didn’t lay the sod or draw the lines or write the rulebook – he just played on that field.

    All the hysteria doesn’t move me until someone with a brain can come up with criticisms that are not actively trying to confuse those two things and make him a scapegoat for the whole shebang. Romney may make a half- decent president or a really really REALLY crappy one, but he is not personally responsible for all the ills and failings of our investment system, just because he participated.

    What did he specifically do that was wrong? No one has come up with anything yet.

    • myiq2xu says:

      I haven’t found a single article that alleges that Romney broke any laws or did anything unethical.

      If you own a business that’s about to go belly-up you try to salvage as much as you can. But Romney didn’t buy businesses to break them up, he bought them with hopes of making them profitable.

      • myiq2xu says:

        I should add – no allegations of crony capitalism either.

        • votermom says:

          Not with Bain, but I am highly suspicious of Romneycare being crony-capitalist driven.

        • WMCB says:

          Yup. As I’ve often said, both left and right in this country merely argue over who’s on top, not stopping the orgy.

          The Left yells “Capitalists are bad! You need bureaucrats on top!” The Right yells “Big Govt is bad! You need business on top!”

          Neither of them for one minute will entertain the idea that the problem isn’t either. The problem is that they are in bed together in a big slippery tangle of grossness. But NO ONE in power makes a serious case for govt and business getting out of bed with each other – only who’s the dominant one.

          It’s only us know-nothing peons out here, both right and left, who keep screaming “I don’t think either is bad. The issue is that YOU’VE ALL GOT YOUR DICKS IN EACH OTHERS MOUTHS!!!”

      • Lulu says:

        This is why I think OWS was an AstroTurf outfit to lay the groundwork that anyone who makes money (not just Treasury/FED entwined mega banks) in the private sector as being the bad guy and the public sector types the good guys. It was the lead off in a set piece of propaganda.

        • votermom says:

          I think you’re right. By that standard, the more money you lose, the more virtuous you are. That makes Obama a candidate for sainthood.

        • Lulu says:

          Obama does not loose. Everyone else does. He still get his salary, perks, book royalties, and campaign donations. Post White House he is looking forward to speaking fees, royalties, corporate board and consulting fees for he and Mrs. Think of the Rezko house.

        • DandyTiger says:

          It was set up just for that purpose with the assumption that Romney would be the guy. Bold move. Brilliantly designed as a cult to pull in idiots as well as Obama supporters. Time will tell if the effort will pay off, but I suspect it will indeed help Obama.

  4. WMCB says:

    Nevertheless, Bain profited on the deal, receiving $12 million on its $8 million initial investment and at least $4.5 million in consulting fees.

    Oooooo, sounds so damning!! The article states that this took almost a decade. People do realize that that comes out to a return on investment of only around 5% annually, right? That’s hardly gouging and bubble-making.

    I think people should have some basic understanding of how compound interest works, and the concept of being paid for one’s risk, before they spout off with ill-informed coffee-house quasi-Marxist tropes about how the moneybags get paid for nothing, and the only input that matters or has any intrinsic value is the poor worker.

    Capitalism is a flawed and sucky system. It has some damn rough edges and inequalities. It is also better, in actual prosperity and higher standard of living for the greatest number of people, than any other system ever tried. Hands down. Like democracy, it is frustrating and has evident downsides – but they are less downside than the alternatives.

    • myiq2xu says:

      The OWS types claim that you get rich by stealing from the workers.

      Paying them a salary is “exploitation” if you get rich off their labor.


      • WMCB says:

        Exploit my ass. Any system that ignores, denies, and goes against human nature, rather than working with and taking advantage of man’s natural (selfish) inclinations, is a recipe for failure.

        This is why communism fails, and inevitably has to be enforced with more and more draconian methods. It’s also, incidentally, why most religious cults fail. And why utopian political causes always smack of the same wild-eyed zealotry as the cults.

        Don’t fight human nature. Find ways to channel natural profit motive and self-interest in ways that are most beneficial and least harmful. When did facing practical reality become such a radical concept?

    • WMCB says:

      I don’t want to see capitalism destroyed. I want government to be the tool that softens the edges and cushions the blows of its admitted failings.

      That used to be what Democrats were about. Now they seem to be all about “tear it all down and give us ours! Not fair that you have more!”

      Morons. If they get their wish, we will all be “equal” in our dreary poverty. But the former CEOs will be standing on the breadline, too, so doesn’t that make you feel so much better? (The political animals won’t be – they will be fat and happy in their cushy homes. The only thing tearing down capitalism does is replace the CEO upper class with a political apparatchik upper class, with generally less opportunity and prosperity for all the rest of us.)

      • yttik says:

        Yes, those former CEO’s don’t stand in the bread line, they just get jobs in government and run the breadline.

      • DandyTiger says:

        I think the new Dems make noise like they’re about “tearing it all down..” but in reality they’re for wall street and bankers getting more power just like the Repubs. They make different noises, but their policies end up the same. At least the party machines. What the suckers that are members of these two parties think is irrelevant (see for example: Obama and Romney).

    • Lulu says:

      They want to define good or deserving business vs bad undeserving of profit. Green tech, health care insurance, etc vs everyone else. It really looks like Obama supporting business vs the world. It reminds me of the old Republican trick of scapegoating the poor because they did not donate to them.

  5. WMCB says:

    Gah. I have to go shower and off to get a fucking root canal. Happy Tuesday.

  6. DeniseVB says:

    Didn’t Team Obama shut down all those GM dealerships, some profitable, many jobs lost …. for what? Sort of got swept under the rug when people started noticing dealerships saved where owned by big donors? Oh well, Bain doesn’t bother me, big business is cutthroat and a lot of mistakes are made. It’s those CEOs who learn from mistakes that make them stronger (and richer). Obama’s done nothing leading up to his election, so he made no mistakes, right? How’s that Vote for the Blank Slate working for us? 😉

  7. DeniseVB says:

    MOTUS asks the question, who do we want running our country….

    The Captain of the Costa Concordia or a Captain Sully (Miracle on the Hudson)


  8. Three Wickets says:

    On paper at least, there’s not that much difference between Corzine and Romney. Both got rich in big finance, didn’t break any laws, then became governors to build a foundation for their presidential aspirations. In fact, a firm like GS where Corzine was CEO had proprietary private equity and hedge fund operations which are essentially no different from Bain Capital. Anyway, I wouldn’t want John Corzine, John Paulson, Steve Schwartsman anywhere near the White House. I’m still trying to figure out why I should feel differently about Romney.

    That said, I think Romney may have a bigger issue with his personal income tax returns. A very rich guy who made his fortune “restructuring” companies paying an effective personal tax rate of 14% after his accountant got done working the tax code while the rest of America and the middle class are paying a top marginal rate of 35% and an effective rate closer to 30%. Doesn’t look good for someone running for potus.

  9. yttik says:

    I think this is an ideological debate and Mitt is “bad” not because he did anything wrong, but because capitalism is bad, making money is bad, and business is evil. That’s why Obama was raised poor by a single mother on food stamps on the South side of Chicago.Except that’s a lie, but it was a lie with a purpose, to try and create an image of Obama not being tainted by money. He’s poor and ideologically pure.

    I also think this has a lot do with what’s wrong with our economy right now. We have an anti business, anti capitalism, attitude going on. The people in charge are raking in bucks, crony capitalism is thriving, and the rich are getting richer, but the policies and attitude being promoted is that business is evil and people don’t have a right to profit because they’re stealing it from everybody else. Capitalism is bad and people who benefit from it should be punished. Not our friends of course, but YOU people.

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