Wednesday, July 18, 2012

A Romney Says What?: Bain Edition


I've been fighting with myself about whether to write about Bain Capital and Mitt Romney.

There is little I hate delving into more than the intricacies of American corporate finance and taxes.  It's complex, it's full of people contorting their corporate behavior to edge around and avoid legal limitations and taxation, and I don't enjoy it.

Soapbox moment:  The thing that has made me the saddest about the whole world of corporate business is that we could change a lot of it, if we didn't have the corporate legal system that we have.  You know how our government was set up to be based on a series of checks and balances?  Yeah, that's not how our corporate law was set up.  The corporate cultural preferences - as derived largely from the corporate legal duties we have created - are towards higher share prices and profit at all costs.  That's not good for American workers, whose very salaries and benefits reduce share prices and profit.  It's not good for the long-term planning and stability of companies.  And it's not good for businesses' relationship with the government - as it sets up serious incentives to get around the law rather than faithfully follow it, to the letter as well as the spirit. In short, American corporate law doesn't serve America very well at all.  And because of that, the actors in the system spend inordinate amounts of time and money just spinning stupid-but-cunning ways to cat-and-mouse the American Government to make more money.  And those share prices and that profit - no matter what your conservative friends may have told you - really are never going to trickle down to you and yours in a way that is anywhere near as meaningful as the way they flow to the people who spend all their time furiously ginning them up.

Okay.  I'm now getting off my soap box to say that I finally decided that I need to write about Bain, because this stuff is actually important.  Boring, frustrating, needlessly complex, costing untold amounts of money... and important.

1. What is Bain Capital?  What does the company do?

Bain Capital was created in 1984 by Mitt Romney and two other partners who all worked together at Bain & Company, a business consulting firm.  The company started out with $37 million in seed money from private investors (partners at Bain & Co), and began hunting for venture capital opportunities.  Venture capital is a term used to describe people/companies who have money and are looking for ways to maximize investment opportunities by getting in on the ground or close to the ground floor on good ideas other people have (people without enough money) and leveraging that investment into "start-ups" or large expansions of those seemingly good ideas.  It is a risky form of investment (and one that is a step removed from the day-to-day management of the underlying company).  But Bain did well enough in the beginning, with Staples and a couple of other deals, to start looking for a slightly different form of investment opportunity starting in the 1990s.

In the 1990s, Bain started doing "leveraged buyouts" (sometimes now called "private equity"), which essentially means the kind of thing you think about when you think about corporate raiders from the 1980s:

  • You raise money from banks.
  • You find a weak or underperforming company. 
  • You acquire it.
  • You "mine value" by: 
    • getting loans on the company's assets and then taking a bunch of the money for yourself as dividends, 
    • quickly turning to sell, 
    • while reducing "costs" using techniques like "downsizing" through layoffs, taking the company through bankruptcy as a strategy to reduce debts (for example, by turning the pension obligations over to the federal government, which will then only guarantee a fraction of the pension, and results in a loss to the workers), and then... 
  • You go along your merry way, the richer for the "investment."

Here's the best, more-detailed explanation I found, that includes the many little ways that Bain added to its profits.

2. How did Bain Capital intersect with Mitt Romney?

Romney co-created the firm, and was its CEO and/or Managing Director, with the exception of two leaves of absence (to save Bain & Co from 1/1991-12/1992, and to run for Senate from 11/1993-11/1994).  Romney has been claiming that he left to "save the Olympics" in February, 1999, and that that effectively became a "retroactive retirement" when he never returned full-time, even though he kept taking a 6-figure salary and kept signing documents past that time, as well as saying to the SEC when he filed to run for Governor of Massachusetts in 2000 and 2001 that he was still at Bain.  Then in August of 2001, Romney says he "finally resigned and reduced his role at the company to that of a passive investor in 2001 when it became clear that he was going to run for Massachusetts governor after the Olympics."  It's a moving target, and the evidence is muddy.

3. Why does Romney want so badly to be split from association with running Bain in February, 1999? 

Because Bain did its borrow-and-dividend thing to KB Toys right about then.  KB then went under, closing 600 stores and laying off a bunch of people.  As long as Romney's claims of not being involved in Bain about that time hold up, he can distance himself from these layoffs, at a well-known company, that arguably happened because of Bain's usual debt-and-dividend game.

4. Why should I care?

Because what you believe about how the economy should run has a profound impact on the policy choices you would make as president... and so I give you RomneyWorld:

5. Omelet-Making and Economics.  When I looked into Romney's personality, I talked about how this quote from a Vanity Fair piece on Romney was the most interesting thing I have read about him:
Romney described himself as driven by a core economic credo, that capitalism is a form of “creative destruction.” This theory, espoused in the 1940s by the economist Joseph Schumpeter and later touted by former Federal Reserve Board chairman Alan Greenspan, holds that business must exist in a state of ceaseless revolution. A thriving economy changes from within, Schumpeter wrote in his landmark book, Capitalism, Socialism and Democracy, “incessantly destroying the old one, incessantly creating a new one.” But as even the theory’s proponents acknowledged, such destruction could bankrupt companies, upending lives and communities, and raise questions about society’s role in softening some of the harsher consequences.

I then referred to this as the "you can't make an omelet without breaking eggs" theory of economics.  I still believe that this is by far the most telling thing I have learned about Romney.  And it fits right in with his experience. His experience is that a fair number of deals fail, but that the 10 percent that succeed have both made him very rich and make him considered to be a very successful businessman.

But here's the deal:  The dirty little secret about the whole "they're attacking people for succeeding" complaint that Republicans whine about when Democrats want to tax the rich some more... is that the success - or at the very least the size of the success - of rich people is dependent on things that affect other people.  Why do you think rich Republicans are against unions? Because unions by their very existence reduce the bottom line for companies.  That's it.  Period.

In RomneyWorld, if a company can make a bigger profit by outsourcing, cutting benefits, or generally undermining its workers, it should.  Here's how Allan Sloan from Fortune Magazine puts it:

Despite buyouts being a numbers-intense business, there are no reliable statistics about jobs created or destroyed by private equity; no one in Buyout Land knows or wants to know about it. Bain and its fellow buyout barons don't care in the slightest about whether they create jobs or destroy them. All they care about is making money for their investors and themselves, not necessarily in that order...  If the managers think there's money to be made by expanding and improving a business that they've bought, they will try to expand and improve it. If they think they can make more money by loading additional debt onto the company and sucking out the proceeds in dividends and fees, they'll load and suck. If they think there's more money to be made by firing all the U.S. employees and moving operations to China, they'll do so in a heartbeat. They're neither moral nor immoral when it comes to U.S. jobs and U.S. society. They're amoral—they don't care one way or the other, as long as what they're doing isn't illegal.

And that's the way we've structured our corporate law: to encourage that kind if thinking and behavior. You can hear it in the way Ed Gillespie (as Romney surrogate) replies to questions about American Olympic uniforms being made (by an "American Company") in China:

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... so, the problem is policies that make it a good business decision to outsource (I like this, now we're calling it "subcontracting," euphemistically?).  He blames Obama, and specifically about Chinese currency manipulation (which is just not the main problem by a long shot, though it is an issue - one that Romney would be hard-pressed to be "tougher" on than Obama has been without creating a trade war with a country that holds many of our debt markers)... but what kind of policies would create an environment in which it doesn't pay to outsource?

Well, there are two basic tactics that I can see:

  • Either we could redo all our trade treaties to add in labor and environmental regulations and create tax incentives to "in-source" and/or  tax penalties for outsourcing; OR

  • We could remove all of our own labor and environmental protections, while changing our tax policies to equal-or-better the rest of the world in "competitiveness" (low taxes) - essentially just accepting that our workers have to race to whatever level Chinese, Indian, and Bangladeshi workers will accept as payment (tempered, of course, by whatever it costs to move goods from those countries to wherever they will be sold - so, marginally better than the starvation wages in third-world and second-world countries), and our corporate taxes have to be as low as the Cayman Islands.

I'm going to let you guess which way is Romney's way.

6. Experience Matters.  Now, I'm not Justice Sotomayor, but I do believe that experience can inform one's parameters in life.  Life experience - as with book learning - can provide depth, breadth, and quality to one's decision-making process.  

Mitt Romney doesn't seem to know or interact with any poor or working-class people.

He's never been poor or working-class.

He doesn't seem to have the slightest idea how to speak with people who are anything less than well-off, let alone truly understand their lives and challenges.

What's more, he doesn't seem remotely interested in learning about those things, because he thinks he knows everything he needs to know, from his business experience.

But his business experience gives him zero insight into how to help an economy work for people who work for a living.  Unless they work for starvation wages in third- or second-world countries.

Romney's point of view is the rich, business-investor point of view.  That point of view seems fairly entrenched, and with good reason: that's pretty much all Romney has done.  And what that means is that he is not viewing the economy the same way that you or I do, because he simply does not have the skin in the game.  No downturn, no poor investment choice, no bad deal has ever made that big a difference in Romney's life.  He hasn't been fired or laid off, he hasn't had to worry about making any payment to anybody, and he doesn't seem to fully comprehend how that Omelet-Making credo actually affects real people.  How else could he go make fun of his father closing a plant and having to run for governor afterward?  

After all...


  1. Thank you for doing the research so I didn't have to, and thank you for depressing me this morning. As always, I want to know how we can ever change this, given the political power people like Romney and companies like Bain have (yet another reason why Citizens United sucks so much). Dave has spent an inordinate amount of time persuading or pressuring some of his clients to comply with the law. Why do so many people implicitly or explicitly think morality has no place in the economic sphere?

    On a lighter note, did you hear of Limbaugh's latest trolling effort, re Bain/Bane?

  2. That's great to hear, that's what I wanted to do: put all the info in one easy place for people. I wasn't trying to depress you, though :-) I actually think the fact that the news and people are paying attention to this story even though it is so complex and so, well, financial, is a good sign that people want to know more and are worried about Romney's ties to private equity. And I think, as I do with government, that you have to build in reasons to act well when you are creating institutions. I do believe that most people are good people, but it is all too easy for people in their work environment to resist accountability. That's why whistle-blowing is so rare and needs to be so protected. If we added into corporate duties the duty to build a long-term business plan, or we added a labor rep on boards (as they do in Germany), for example, there might be some tempering of the priorities.

    My understanding was that the Christopher Nolan movies all have a distinctly libertarian, pro-capitalist bent, so it's a strange charge to me. I guess Rush has to come up with something to say every day, though, and that's seemingly low-hanging fruit...

  3. And now I've gone and blogged about the nun controversy :-) I'd love to hear what you think, J.

  4. And I've obliged :>

    Rush's comments are especially funny because the two guys who created Bane (20 years ago -- they were psychic about the 2012 election!) are staunch Republicans.