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Character not Capitalism

January 13, 2012

This issue at hand is neither about Bain Capital, private equity firms, nor about capitalism. It is about Mitt Romney’s judgment, morality and character. It was Romney’s decision to base his candidacy, in large part, on his background as a portfolio manager. Thus, it is entirely legitimate to ask questions about whether he is accurately presenting how he conducted himself during that career. This is of particular note considering Romney likes to wrap himself in the free market flag when his whole political career has been as an anti-business Progressive.

Bain is in the profit making business. They are not in the job creation business. Reports by the Wall Street Journal and others contradict Romney’s claims that it was his goal at Bain Capital to make companies more successful. Instead of accepting the responsibility to answer questions about his business background, the Romney campaign is throwing up a smokescreen about an attack on capitalism. Can someone explain to me how RomneyCare is free-market capitalism?

There is a huge difference between capitalism and ‘predatory capitalism’ or ‘corporate raiding’. The latter is more of a chop-shop mentality of ‘creative destruction.’ It is still a form of capitalism, sure, even if not held in high regard. That is not the issue. And, I agree most capitalism is moral… the problem is that people defend ALL OF IT equally. You cannot. But, the court of public opinion doesn’t do nuance very well.

No rational person would defend ALL matters of transportation equally; drunk driving, car hijackings, exploits of TSA agents in airports; are abusive or exploitative practices. As is a car salesman who knowingly sells you a lemon where the car will predictably break down 6 months later. Hereto, it is a free market transaction, right? It is capitalism, too. Yet, most people can’t bring themselves to parse their defense of capitalism to stop supporting predatory sectors like banking, fashion, or chemicals.

Mitt Romney has been a rank opportunist throughout his political career. Mitt Romney was a clever money-making opportunist throughout his business career. The leveraged buyout business, which does not have to be an evil business, is a business that is ripe for heartless exploitation of vulnerable companies and individuals. Lets not forget Private Equity and Hedge Funds monetized and helped destroy the housing market 2000-2008. There are unsightly elements to capitalism. And, those that played the game walked away making millions.

But, like many capitalistic sectors, Romney’s business had ugly elements in it. A business practice known as ‘getting back your bait’ or “Plunder and profit” is distasteful, yet it is still capitalism. What is not capitalism is when Romney likens work at Bain Capital to Obama’s auto industry bailout. Does this mean that Romney thinks his tenure at Bain involved crony capitalism of the sort Obama practiced with GM? Or, can we not ask that?

What about Romney benefiting from a $10 million federal bailout and pocketing $4 million dollars directly? It’s not difficult to understand why Romney is not against federal bailouts, having been the beneficiary of them. Perhaps Romney should explain to us how TARP and federal bailouts are free-market capitalism? Romney’s main accomplishment in his one term as governor was RomneyCare, which openly funded abortions for a $50 co-pay. Do Romney supporters call that capitalism too?

Bain defunded pension funds and kept the money – when companies went bankrupt, the pensions had to be paid out of ERISA – government insurance – paid for by those of us who pay taxes. A federal government insurance agency ponied up $44 million to bailout one of Bain 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.

While at Bain, and as Governor, Romney showed an example of the government stepping into the marketplace, picking winners and losers, providing profits to business owners and leaving taxpayers stuck with the bill. Romney’s Bain made avid use of public-private partnerships, something that many conservatives consider being “corporate welfare.” It is a commitment that carried over into his term as governor. Bain Capital has been a corporate welfare hog under Romney’s tenure and beyond. If one can make millions of dollars whether a company succeeds or fails then where is the risk-taking Romney speaks of so fondly?

Bain, at times, pursued a practice of socializing their losses to banks and pension insurers while privatizing their gains in the same kind of Wall Street practice that led to the mortgage crisis. They leveraged government assistance to boost profits. Is it anti-capitalist to ask if an average worker is an expendable line on a spreadsheet as that worker’s tax dollars were needed to bailout Bain and financiers? And let’s note; as a supporter of the TARP Wall Street bailout, Romney’s “creative destruction” applied only to Main Street, not Wall Street.

Corporate restructurings are not the same as the predatory practices of some corporate raiders. Romney’s rhetoric ignores the fact that private-equity [PE] companies like Bain are equally known for destroying jobs as they are for creating them. Corporate raiders are known for their “turn and burn” quick buckaroo artistry; pirates whose company’s business model use exploitation, asset-strips, debt-compounding, fee-generation, and jobs-outsourcing. Romney’s job at Bain was not to create jobs – it was to make money.

And, asset stripping is NOT especially an intrinsic feature of jobs growth, as it leaves a flood of human distress in its wake. “Predatory capitalist” pursuits are legal and part of capitalism, but it is not necessarily the type of business experience or character that makes one worthy of the White House, or as a ‘jobs creator’ or helpful to electability. Romney helped create this leveraged buyout business model; the technique was to take over a company, load it up with debt and then pay themselves a huge dividend and fee, leaving the company without much cash and burdened with debt.

The actions of Romney’s firm are detailed in the 2009 book by financial reporter Josh Kosman, The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy. The chapter that focuses on Romney and Bain Capital is aptly titled “Plunder and Profit.” The record shows that Romney did well at making a lot of money for himself and his partners and investors but not always so well by way of any of the other stakeholders, including employees, in the companies he was involved with.

Bain is Romney’s entire claim to business experience, and business experience is Romney’s primary claim to the White House. It should be noted that none of Romney’s business experience translated to job creation while he was Governor. Over 3.5% of the adult working population within MA left the state during his tenure due to no jobs. He was rated 47 of 50 Governors in job creation and the economy. And this chart illustrates his pathetic performance. Yet, Romney touts his executive, CEO, job-creating experience.

This manufactured claim from the Romney camp and GOP Establishment, which many have fallen prey to, is neither about Bain Capital, private equity firms, nor about capitalism. Nor was it when Romney strategist attacked Meg Whitman as a “vulture” capitalist. It is about Mitt Romney’s judgment and character. It is not anti-capitalist to say that some types of business experience are negatives in a presidential candidate. To claim so, goes to the heart of fitness to Romney’s character.

Job losses and bankruptcies are an inevitable byproduct of the capitalist system. But, Romney’s Bain argument does not translate to knowing how to create jobs on the national scale. By any small measure, his job creation record was an undeniable failure as Governor. At some point, Romney needs to show the facts rather than just make claims. Romney claims that he will be able to create jobs better than Obama because of his experience in the private sector (Bain). How so?

What specifically about Romney’s Bain business experience prepares him for the presidency? Did Romney’s vaunted business experience translate to economic/job growth in Massachusetts? The record shows NO. If Romney’s going to claim he created 100,000 jobs, why is it unfair to say a presidential candidate should have to meet their claim? This is a smokescreen from Romney who is afraid to be accountable for his business experience that he himself touts. In turn, Romney prefers to hide and downplay the private equity side of Bain. Corporate raiders only seek conditions where a corporate raider recoups all expenses, acquires early payouts and makes huge profits.

And, where is Romney’s tax return? Why won’t he release it, like Obama hasn’t? Romney won’t release his tax returns because most of his income is unearned. Thus, he pays less tax than Warren Buffett. It’s foolish to think a man’s career isn’t fair game. If a predatory debt collector, who used abusive business practices, were running for President, should that narrative not be openly discussed? Ethical capitalism depends on individual morality. This is about character and judgment. Romney’s business model, the one he’ll be known for in this coming election, is a form of capitalism and legal, but it is not held in very high regard.

Romney and Bain Capital is a ready-made target for the brand of “class warfare” that Obama has been warming up for the past year or so. I don’t need to envision the upcoming Bain attacks in a general election to be hyper skeptical of Romney and his chances of success. Romney is unelectable. Obama and his billion-dollar campaign will go after Romney with the “Capitalism is bad” mantra with vengeance. It already started. That is what the OWS 99% versus 1% is all about. And yet, we are falling into the same trap as John McCain’s “there is nothing to fear from Barack Obama” mantra.

Take a look and listen to the 2012 Obama narrative:

Romney’s Bain took government bailouts. They shorted the pensions so that they had to be reimbursed by US taxpayers. Romneys Bain purposefully dumped toxic assets into companies they “deemed” as sacrificial for building their own wealth and the wealth of other companies they held. They would use one company’s assets to back further loans to buy out other companies until they had sucked the original company dry and walked away with the profits – as the original company was forced to declare bankruptcy. They used money from Foreign countries to do this and exported some jobs to those countries. But this is what corporate raiders do, legally.

There were success stories; Staples and Steel Dynamics. But Romney’s rhetoric ignores the fact that private-equity companies like Bain are better known for destroying jobs than for creating them. This is why the issue is about character and judgment. There’s legitimate reasons to critique Romney. If Mitt doesn’t care what happens to people because of his business decisions, how do I know he’ll care what happens to people because of his political decisions? The vary nature of a corporate raider is cutting jobs. Pundits upset over attacks on Romney’s Bain days; reveals the true nature of the predatory, but legal side of capitalism.

In late 1979, during an economic strategy meeting, Ronald Reagan was talking about his upcoming presidential campaign. At one point, somebody expressed concern that John Connally, the former governor of Texas and another presidential candidate, was gaining support among corporate chief executive officers, with all the financial support and credibility that that entailed.

Reagan said this didn’t bother him at all.

“Let him have the Fortune 500,” he said. “I want our campaign to stand for Main Street, not Wall Street. I want us to stand for the worker, the shopkeeper, the entrepreneur, and the small businessman.”

Addendum

Leverage Buy-out Background

Bain has a venture-capital [VC] arm — where investments in fledgling start-ups are made, and a private-equity [PE] arm — where corporate buyouts are pursued. In some cases, not all, Romney was a ‘predatory capitalist’ or ‘corporate raider’ who overtly bankrupted companies. That was his PE career. It was neither the unmitigated success that he sometimes claims, nor was it ’always’ the heartless “vulture capitalist” firm that his critics portray. But, Romney helped create this leveraged buyout business model. And, it is this model that is not necessarily the type of business experience that makes one worthy of the White House – nor for jobs creation.

Here is how it works:

Private equity [PE] firms operate through leveraged buyouts. They buy companies, then they burden the companies with debt while trying to make the balance sheets look good, often by cutting costs – workers and pension benefits – to flip the companies for a profit. They put a small amount down, say, 20%, and the companies they’re buying borrow the rest from banks making them responsible for 80% repayment. Suddenly, a company that had a reasonable debt load, if any, is subjected to crushing repayment obligations.

What makes this work is a tax loophole that allows the interest on the loans to be tax deductible. Government encourages investment by making interest tax deductible for businesses who want to borrow money for capital equipment or expansion. But here, the debt exists so investors can cleverly buy a company without much risk to themselves. By deducting the interest on the debt, the company reduces its tax liabilities and can use that money to make its debt payments.

Got it so far? Spend little, borrow big, evade taxes and get control of a lucrative asset.

Now the fun starts. To make a company look more valuable to a potential buyer, the companies are managed for short-term gains. PE firms make “deep cuts in spending’— just the opposite of expanding job and economic growth – then have the companies borrow even more money and use it to pay the owners (themselves) distributions and dividends, on top of management fees.

When companies managed by PE firms do go bankrupt, as many do, crippled by debt and gouging, the PE firms have already made a tidy profit from high transaction fees, management fees and dividend payments. It’s the employees and creditors who lose big. So, the technique was to take over a company, load it up with debt, and collect nice fees and huge dividends, leaving the company without much cash and lots of debt.

Romney was a corporate raider while at Bain Capital. Most raiders are not interested in building companies. They are interested in making money for their investors, even if that means hurting the stakeholders of companies. Chop shop. That is what they do. That is how they make money. Newt is doing us all a favor by clearly showing us now how Romney will be rendered unelectable in the general. The issue is one of values, character and judgment and whether Romney is fit to be our President.

In the movie Pretty Woman the character Edward Lewis, [played by Richard Gere] a corporate raider was working on a hostile take over of a ship building company; bust the company, up sell it’s parts, and make a huge profit. In the end though, after being influenced by his paid escort he decided that his investment in the ship building company would be used to help the company grow, succeed and prosper. Is asking Romney, which was his mode of operation at Bain Capital really anti-business?

7 Comments leave one →
  1. January 14, 2012 11:21 am

    Absolutely brilliant overview.

    I try to be as fair and objective as possible. Up until this week I DID believe Romney was good at being ELECTABLE against Obama, but would be near worthless in reforming government, structuring entitlements and protecting the Constitution.

    Now i am convinced on a FACTUAL basis, that he is far weaker against what Obama will do (much less Ted Kennedy) than ANY of our candidates including Paul and Santorum.

  2. donb permalink
    January 16, 2012 9:33 am

    Excellent piece, and congrats for being selected for Post of the Day by Prof. Jacobson at LegalInsurrection!

    I wholeheartedly agree with PolitiJim that Romney will be our *least* electable candidate against Obama.

  3. February 7, 2012 2:36 am

    You make the case to expel the patsy Romney. Santorum can be likened to Bush 3.0, although I doubt he would get the analogy. Newt on the other hand is a more difficult case. Newt has all the aura of a president, incredibly articulate, with depth of knowledge for political and historical insight – a presidential version of Karl Rove. Therein lies the problem. The calculating and scheming that might otherwise enable Newt to navigate the political landscape today only reminds the average voter how much he is sick of the tired old politicians, and their baggage.

    Enter Ron Paul – the oldest and most tired of the bunch… or is he? Where is the baggage? the flip-flopping? Across America this 76 year old man is attracting huge crowds of young Independents, Democrats, Libertarians, and yes – Republicans. Still it seems the Grand Old Party is reluctant to embrace their strict Constitutionalist who is changing the face of American politics. Whether or not Republicans figure out what to do with Ron Paul one thing is certain – they do NOT want to alienate his passionate and very American band of devoted followers.

    tweet @mikedonahue1

  4. March 11, 2012 7:04 pm

    Raw-money is just another cog in the machinery that is going to break soon…

  5. March 29, 2012 11:02 pm

    What a great extensive review.

    • klsouth permalink*
      March 30, 2012 11:40 am

      Thank you very much!

Trackbacks

  1. Newt vs. Romney – the facts « Trying Times

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