Romney’s AmericaBy David Biespiel
February 16, 2012
Mitt Romney is staking his presidential candidacy on his long business career and the values reflected in the photograph below, taken from a Bain Capital Christmas card in the 1980s. If recent polls are any indication, a majority of American voters might be ready to buy in.
But what does Romney’s career in private equity—a career that earned him an estimated $250 million, plus hundreds of millions more for his associates—signal about a possible Romney presidency?
Bain Capital made its money via leveraged buyouts and recapitalizations. Romney and his associates would seek out struggling companies and bid to restructure them. They would borrow tens of millions of dollars at high interest rates, purchase the stock of the companies they estimated to be undervalued, then load them with debt from borrowed bonds or bank notes. Next, they would cut the payrolls of those companies by laying people off, sell off the assets, and, on occasion, subdivide the firms.
Bain then resold the raided company to the public at a higher share price and made massive profits—profits that went directly to the firm and its private investors. It was never in the business of job destruction, per se. But it wasn’t especially interested in job creation, either.
According to the Wall Street Journal, of the 77 companies that Bain Capital invested in under Romney’s leadership, 22 percent either shuttered their doors within a decade or else filed for bankruptcy. The more severe the restructuring, the bigger the profit Bain was apt make. And since the profits were paid in the form of capital gains for Bain’s partners, they were taxed at a low rate of 15 percent – as opposed to the 35 percent payroll tax rate paid by most Americans.
Of all the means that Bain uses to generate profit, overextending a company with debt and increasing the risk on its success is by far the worst practice. It’s also a leading indicator of what a Romney White House might look like. According to John Surowiecki of The New Yorker, the principal means for Bain Capital to leverage a company and earn money for investors and managers is as follows:
Leveraged-buyout firms like Bain Capital, which Mitt Romney ran between 1984 and 1999, routinely borrow massive sums in order to make their acquisitions, leaving companies with debt loads equal to twice their annual sales or more. (Last year, for instance, the L.B.O. firm Apex Capital borrowed five billion dollars to acquire the medical-technology firm Kinetic Concepts, a company with annual revenues of around two billion dollars.) And they do so while borrowing at much higher interest rates than the federal government has to pay.
Surowiecki adds this ironic point: The “same party that loves to inveigh against the dangers of excessive borrowing is now likely to nominate for President a man whose entire career, and entire fortune, was built on debt.”
Benefiting the privileged is the goal of Romney’s proposed tax policy as well. Compared to Ronald Reagan’s 1981 tax cuts and George W. Bush’s 2001 tax cuts, Romney’s proposed cut is the most regressive. He not only would raise taxes on working Americans, he would eliminate the estate tax and the corporate tax, as well as extend the Bush tax cuts for the wealthiest Americans.
How does Romney propose to pay for this tax cut, which, according to the International Monetary Fund, might equal 3 percent of GDP? According to Romney, it won’t come from cutting defense or raising other revenue. He proposes to pay for it the Bain way: “reducing payroll” by laying off federal workers, “selling off assets” in the form of cuts to services for seniors and low-income Americans, and “subdividing the firm” by privatizing essential government services. Romney argues that “We’re going to eliminate or cut programs that are not absolutely essential — even when we like them.” The result would be an increase in the deficit of over $500 billion and cuts in domestic programs that could exceed 20 percent across the board.
A president must be able to balance the needs of both free enterprise and public enterprise. Are a majority of Americans ready to elect a candidate who believes that the government should be run like a business—say, a private equity business that earned hundreds of millions of dollars through hostile leveraging? Are a majority of Americans ready to accept Romney’s notion that every activity can be mined for private financial gain, and that all public activity is open for private business?
It may be ungenerous to say that if you support Romney’s idea of an America run like a private business then you must be in love with bloated greed. But it is fair to say that an America run like a private equity business would be antithetical to democracy and progressive governance.
Consider the recent news about Freddie Mac. Last month Pro Publica and NPR News reported that Freddie Mac earned profits by betting against homeowners who were attempting to refinance their mortgages at today’s lower interest rates. One arm of the independent federal agency was making it almost impossible for those homeowners to secure lower interest loans while the other arm was investing and profiting off the failure.
Freddie Mac’s profiteering looks a lot like the private equity ethos Romney used at Bain Capital, an ethos he plans to establish in Washington, D.C. His promises – to extend the Bush tax cuts, cut taxes on wealthy investors and corporations, while at the same time letting tax breaks for the poor expire – would bring the Bain way to the federal government through aggregation, debt, leveraging, and profiteering. He would align the interests of the country with protecting, preserving, and defending the wealthy at the expense of middle and working class Americans. In this kind of America, the national motto might cease to be e pluribus unum – out of the many, one – and will instead become its polar opposite, paucos ex multis ad utilitatem – taken from the many for the benefit of the few.
Thanks for this sharp dissection of the Romney MO. The ironies are indeed monstrous when it comes to this candidate and his presumptive front-runner status. I never know whether to laugh or shudder at the absurdity that the GOP doubles-down on a platform whose flaws have been so well-proven and whose corruption is so plain. Though now it appears, just to take the absurdity to eleven, the GOP is tacking toward the bright new future of Santorum.
Their rise is nicely assisted, of course, by engaged dialogue that responds with “Yawn.”
Thanks, Nat Missildine. If only flaws and corruption were disqualifying. Maybe there is too much yawning going on. For now: Hold the elevator, my friend, we’re running to catch up to you. ~ DB
Getting rid of tax breaks for the poor? What are those tax breaks, exactly? Roughly 48-51% of all wage earners pay no fed’l income tax at all. Doesn’t Obama repeatedly say that he justs want EVERYONE to pay their fare share? The US has the highest corporate tax rate of all industrial nations and why the left thinks it is okay to continue to tax people beyond their earthly lives in the form of a death tax, after an entire adult lifetime of endless taxes for endless purposes, is distressing. This article fails to mention the successes of Bain Capital and only highlights its failures. Would you like to run the same sort of narrow-minded article the Obama Administrations use of all taxpayers’ dollars to fund now defunct green companies like Solyandra? Is this Crony Capitalism that President Obama is becoming infamous for how you envision the next four years should he win reelection? Let’s be clear: Of the 77 companies the Journal article highlights, Bain Capitol investors profited 2.5 billion total out of 1.1 Billion invested. The investors and Bain Capital were willing investors who took the risk with their investment. Capitalism is not without great risk but people who invest do so with open eyes, unlike the behind the back investments of this administration where we the tax paying public had no say in how our monies were being used to invest in one too many green energy companies that have now gone belly-up. And one more impt aspect of the Solyandra gov’t investment: the Obama administration subordinated the loans so Solyandra’s investors were the first in line to collect their returns rather than the hard working tax-paying public, a practice unheard of before. I would suggest that this President is doing one lousy job of balancing, as you write, the concerns of public and private enterprise. Finally, most of us understand that the Bush tax cuts did not simply benefit the wealthy as you and your cronies continually write, but instead benefitted all working people paying a federal income tax. Get the facts straight without the gross distortions, please! –FIRSTHAND INVESTOR
Oh and I forgot to mention that between three of the many companies that Bane rescued,Staples, Dominos and Sports Authority, 100,000 jobs were created. (I was a major investor in one of those companies.) How many jobs did the Green Energy companies create, while stealing the folks’ money? How many can the gov’t create without the use of our tax-dollars?Answer: 0.
“Are a majority of Americans ready to elect a candidate who believes that the government should be run like a business”
Hmmm. Did we not elect a candidate that believes that the government should be run like a family of drunks with ten maxed out credit cards? Should we re-elect said candidate? Hell yeah! I mean, we want to get ‘free stuff,’ right?
This piece is based on several fallacious assumptions that defeat its premise. Most obviously, it assumes all debt is created equal, and therefore should be equally valued by investors (or, as the piece argues, judged equally by voters, who are really just a different kind of investor). But public and private debt operate according to different rules. First, private debt is capital borrowed from banks (sometimes government) for investment or consumption. In contrast, the government borrows from the public to recapture spending. Second, individual securities must be redeemed as they mature. But Treasury can roll over its maturing debt indefinitely, by selling new securities to pay for the redemption of maturing securities (and yes, that’s pretty much how a Ponzi Scheme works, but that’s a different discussion). Third, a private entity, or an individual, cannot take on debt indefinitely, while the federal government can vote to raise the debt ceiling. As a consequence, private debt is under pressure to provide a return, while public debt is not.
Given these differences, the assertion that the “same party that loves to inveigh against the dangers of excessive borrowing is now likely to nominate for President a man whose entire career, and entire fortune, was built on debt” is misleading at best, outright disingenuous at worst. Government debt ties up capital; private debt puts capital to work.
A related fallacy is the implicit assumption that, because Bain Capital isn’t “interested” in job creation, its motives are inimical to progressive society. I would defy the author to name an entity – private or public – that makes “hire as many people as possible” a central part of its mission statement. The best businesses hire only as many people as are required to do the job. As governments and auto companies are discovering to their dismay, overhiring is a recipe for disaster.
Then there’s this knee-slapper: “Freddie Mac’s profiteering looks a lot like the private equity ethos Romney used at Bain Capital, an ethos he plans to establish in Washington, D.C.” Apparently the author doesn’t realize that Freddie was “established” in Washington, D.C. in 1970 for the specific purpose of competing with another GSE, Fannie Mae, created as part of the New Deal.
Or this one: “Are a majority of Americans ready to accept Romney’s notion that every activity can be mined for private financial gain, and that all public activity is open for private business?” Again, I’d defy the author to find a government activity that isn’t open for private business. Where does the government get its materials? Where does HUD buy its computers? Where does the EPA get its paper? Where does the DoD buy jet fighters? For that matter, who provides the paint on the White House, the granite on the Capitol steps, the landscaping for the Supreme Court? Private businesses, all.
The point of all this is, that it’s easy to inveigh against someone because he’s wealthy, or because he “fired people.” But it’s intellectually lazy. You don’t have to like Mitt Romney, but at least make informed arguments against him.