Romney didn't build companies, he made money for investors
February 7, 2012
By Tom Maertens
Mankato Free Press
Recent opinion polls show that less than one-third of Americans have a favorable opinion of Mitt Romney, and almost half, 49 percent, have an unfavorable opinion — a number that skyrocketed 15 percentage points in one month, according to a January ABC News/Washington Post poll.
The cause of this problem is Mitt’s connection to Bain Capital, a private equity firm that he ran for 15 years, and which still pays him the equivalent of $60,000 per day — $22 million per year. Romney claims his firm created jobs and he cites this business experience as his principal qualification to be president, citing companies that survived Bain’s corporate looting such as Staples, as evidence of jobs created.
Private equity firms are not in business to create jobs, however. They buy weak corporations and then pick them clean for a quick profit, after which they walk away rich as the firms and their employees frequently sink into bankruptcy. Their goal is to make money which, in fact, they do by redistributing wealth, not creating it.
Not coincidently, Romney’s proposed tax plan would also redistribute wealth upward by cutting estate taxes along with capital gains and corporate taxes — the way the wealthy get their money — at a cost of $2 trillion, according to the Tax Policy Center.
Lawrence Summers and Andrei Shleifer found back in 1988 that much of the gains for buyout specialists like Bain come from breaking contracts with workers, suppliers and other corporate stakeholders. When they flip companies via leveraged buyouts, they basically take out all the money, throw the workers’ pensions onto a federal agency (the Pension Benefit Guaranty Corporation) and “stiff” the creditors. Their specialty is deal-breaking, not job creation.
As James Surowiecki recounted in the New Yorker recently: Private equity firms pile the target companies high with debt in order to buy them, then use those companies’ equity to borrow even more money, which they use to pay themselves huge management fees and “special dividends.”
The new owner then engages in asset stripping, selling off profitable portions and cutting costs, as Bain did with GS Technologies. Among the cost cutting measures Bain imposed was to cut the hourly rate of employees’ profit-sharing plan from $5.60 an hour to $1.25 per hour. Eventually, they eliminated profit-sharing completely.
These practices allow them to recoup their initial investment while keeping ownership control. Between 2003 and 2007 private-equity funds took more than $70 billion out of their companies. These dividends create no economic value — they just redistribute money from the company to the private-equity investors, while placing the companies, which have been looted and loaded down with debt, in jeopardy of failing.
The Charleston Gazette explained the process: “Bain bought control of Worldwide Grinding Systems, changed its name to GS Technologies, caused the firm to borrow $125 million — then used the borrowed money to give $36 million in dividends to Bain’s owners. The debt helped force GS into bankruptcy and 750 workers lost their jobs. Bain reneged on their medical and pension costs, and the federal government suffered a $44 million loss to cover their pensions.”
As usual when companies are facing bankruptcy, top managers continued to pay themselves bonuses while workers were losing jobs, pensions and medical benefits. The “profit-sharing” all went to the corporate looters.
The Charleston Gazette cited another case: “Bain and Goldman Sachs bought control of a Baxter International medical testing division that was renamed Dade Behring. The new owners slashed research spending and had the firm borrow $421 million — then used $365 million of the borrowed money to buy back Dade shares from Bain owners, quadrupling their investment in them. Bain put a mere $30 million into Dade but got $100 million in ‘management fees.’ Dade was saddled with $1.5 billion debt, went bankrupt, and wiped out 1,500 jobs.”
Bain did even better when it bought American Pad & Paper (AmPad) and Stage Stores. In each case, Bain invested $5 million and collected $100 million in dividends.
The New York Post reported that Bain made $578 million from just five deals: GS; Baxter; Details, Inc.; Stage Stores; and AmPad; all five companies subsequently went bankrupt.
As Warren Buffett has pointed out, there is a real difference between investing and building a company that makes something or provides a service that adds value to the economy, and predatory capitalism that loots and strips to make millions for its executives.
Bain’s approach under Romney was the latter, hardly a recommendation for making Romney president.
By Tom Maertens
Mankato Free Press
Recent opinion polls show that less than one-third of Americans have a favorable opinion of Mitt Romney, and almost half, 49 percent, have an unfavorable opinion — a number that skyrocketed 15 percentage points in one month, according to a January ABC News/Washington Post poll.
The cause of this problem is Mitt’s connection to Bain Capital, a private equity firm that he ran for 15 years, and which still pays him the equivalent of $60,000 per day — $22 million per year. Romney claims his firm created jobs and he cites this business experience as his principal qualification to be president, citing companies that survived Bain’s corporate looting such as Staples, as evidence of jobs created.
Private equity firms are not in business to create jobs, however. They buy weak corporations and then pick them clean for a quick profit, after which they walk away rich as the firms and their employees frequently sink into bankruptcy. Their goal is to make money which, in fact, they do by redistributing wealth, not creating it.
Not coincidently, Romney’s proposed tax plan would also redistribute wealth upward by cutting estate taxes along with capital gains and corporate taxes — the way the wealthy get their money — at a cost of $2 trillion, according to the Tax Policy Center.
Lawrence Summers and Andrei Shleifer found back in 1988 that much of the gains for buyout specialists like Bain come from breaking contracts with workers, suppliers and other corporate stakeholders. When they flip companies via leveraged buyouts, they basically take out all the money, throw the workers’ pensions onto a federal agency (the Pension Benefit Guaranty Corporation) and “stiff” the creditors. Their specialty is deal-breaking, not job creation.
As James Surowiecki recounted in the New Yorker recently: Private equity firms pile the target companies high with debt in order to buy them, then use those companies’ equity to borrow even more money, which they use to pay themselves huge management fees and “special dividends.”
The new owner then engages in asset stripping, selling off profitable portions and cutting costs, as Bain did with GS Technologies. Among the cost cutting measures Bain imposed was to cut the hourly rate of employees’ profit-sharing plan from $5.60 an hour to $1.25 per hour. Eventually, they eliminated profit-sharing completely.
These practices allow them to recoup their initial investment while keeping ownership control. Between 2003 and 2007 private-equity funds took more than $70 billion out of their companies. These dividends create no economic value — they just redistribute money from the company to the private-equity investors, while placing the companies, which have been looted and loaded down with debt, in jeopardy of failing.
The Charleston Gazette explained the process: “Bain bought control of Worldwide Grinding Systems, changed its name to GS Technologies, caused the firm to borrow $125 million — then used the borrowed money to give $36 million in dividends to Bain’s owners. The debt helped force GS into bankruptcy and 750 workers lost their jobs. Bain reneged on their medical and pension costs, and the federal government suffered a $44 million loss to cover their pensions.”
As usual when companies are facing bankruptcy, top managers continued to pay themselves bonuses while workers were losing jobs, pensions and medical benefits. The “profit-sharing” all went to the corporate looters.
The Charleston Gazette cited another case: “Bain and Goldman Sachs bought control of a Baxter International medical testing division that was renamed Dade Behring. The new owners slashed research spending and had the firm borrow $421 million — then used $365 million of the borrowed money to buy back Dade shares from Bain owners, quadrupling their investment in them. Bain put a mere $30 million into Dade but got $100 million in ‘management fees.’ Dade was saddled with $1.5 billion debt, went bankrupt, and wiped out 1,500 jobs.”
Bain did even better when it bought American Pad & Paper (AmPad) and Stage Stores. In each case, Bain invested $5 million and collected $100 million in dividends.
The New York Post reported that Bain made $578 million from just five deals: GS; Baxter; Details, Inc.; Stage Stores; and AmPad; all five companies subsequently went bankrupt.
As Warren Buffett has pointed out, there is a real difference between investing and building a company that makes something or provides a service that adds value to the economy, and predatory capitalism that loots and strips to make millions for its executives.
Bain’s approach under Romney was the latter, hardly a recommendation for making Romney president.
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2 Comments:
So, if I understand Mr. Martens correctly, if Romeny would have lost money for investors he would have been a success? What contorted logic is this? One would have to be well educated just to be confused about this...
If you not done so already, read The Real Romney by Michael Kranish and Scott Helman - two Boston Globe writers who invested years going deep into the Romney family. It is available through the North Mankato Taylor library.
The book does not focus that much on the Bain acquisitions but instead how he operated Bain Capital and his work at Bain Group ... there, he did create, and save jobs when Bain faced bankruptcy ... what he did at some of acquired companies were pretty normal for venture capitalists ... their goal was to create wealth for themselves and not create jobs ... there are quotes from him acknowledging that he really wasn't that much involved in many of the companies management decisions. He talks about "creating jobs" but it appears he was more of a "bus driver" going whereever the road took his passengers.
Most insightful though is his Mormon involvement ... counseling expectant Mothers to give up their child to adoption rather than having it raised by a single mother (Peggie Hayes) or counseling women not to have abortions -- such as a one women whose doctor recommended it because of risk to the mother's life (the woman proceeded to have the abortion recounting Romney's involvement "at a time when I would have appreciated nurturing and support from spiritual leaders and friends. I got judgment, criticism, prejudicial advice, and rejection."
Of course, that was before his he got the "political bug".
It's pretty clear that he is a staunch Conservative but that he will alter his positions to appease the audience ... Gingrich may call him a Massachusetts Moderate ... but he is a died-in-the-wool Conservative.
The concern should not be what he did at Bain, but that he will not tell the voters what programs he will cut. Ezra Klein has a must-read column on Romney's Math problem ... The sort of specific program cuts required to match these numbers would seem incredibly draconian if put to paper. If you assume the cuts are distributed equally across all domestic spending programs, Romney’s numbers imply cutting more than $500 billion from food stamps and related programs for the poorest Americans, cutting $2.3 trillion from Social Security, cutting $174 billion from veteran’s benefits and so forth. These cuts are so deep in part because they are paying for trillions of dollars in relatively regressive tax cuts. So he’s not simply proposing to cut spending. He’s proposing to transfer resources from those who rely on government programs — namely, the poor and seniors — to those who will benefit from his tax cuts. That, too, would be hard to explain if laid out in sufficient detail. Imagine a budget that explicitly cut spending on food stamps even as it cut taxes on the wealthiest Americans.
Add that to his lack of foreign policy exposure and he is an extremely weak candidate ... sadly, the debates revealed that both Bachmann and Santorum exhibited more knowledge than Romney.
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