Saturday, January 14, 2012

Romney's Bain

Rich Lowry tries valiantly to find a line of defense:
After Bain’s $8 million takeover, the mill announced plans for a $98 million modernization. It merged with another operation “to form one of the largest mini-mill steel producers in the U.S.” Bain re-invested another $16.5 million. When an industry competitor tried to buy the new steel company, Bain declined. These weren’t the acts of a scavenger picking at a carcass. [IT: Starts off well. Hey, maybe this the "creative destruction" we keep hearing about]

Still, it didn’t end well, as Reuters relates. Management performed poorly. Cheap imports from Asia drove down prices. Energy costs rose. The financial crisis in Asia diminished demand. A unionized work force hampered its productivity. Are we to believe that if Mitt Romney had simply been a nicer guy, it would have worked out differently? [IT: Still making progress. Hey, Lowry says, it was on fire when Romney lay down upon it.]

Bain made money on the deal anyway, since the doomed steel company took on debt to pay dividends. [BOOM! Self-inflicted headshot.] But Bain clearly didn’t want to bankrupt its own enterprise. It did want to get a return as soon as possible. Otherwise, why bother taking on such a tenuous proposition? This thinking certainly doesn’t shock the conscience of all the institutional investors in private equity — the public pension plans, the charities, the university endowments — who get on board expecting precisely such returns.
Oh, it's a good line of patter, right up to the point where it all falls apart.Yes, businesses sometimes need restructuring, jobs are sometimes lost, but value is sometimes created, too. I'll even follow Lowry up to the point that the dismal reek of failed businesses and crushed lives that Bain Capital exudes may be in part the result of a "Buy low, sell high" philosophy that associated Bain disproportionately with companies already in trouble.

But here's the problem: Bain Capital was not prepared to wait and take their chance that they could sell high: they wanted their money whatever happened, so they used the companies to borrow heavily to pay dividends to themselves. They forced these multiple companies to go deep in debt, feeding the borrowed money to themselves, the investors. Then the companies eventually went bankrupt, and the money Bain had borrowed and turned into their personal wealth did not have to be paid back. Pace Lowry, that IS the act of a scavenger picking at a carcass, except that in these cases the victim was still alive when Bain Capital started ripping out chunks of flesh.

To buy control of a company, use its good name to borrow heavily, and funnel that money to you as profit, ensuring bankruptcy, is loathsome. That is not "creative destruction"; it's Bernie Madoff with better legal advice.

The "capitalist at work" story only scans if Bain Capital rises or falls with the fortunes of the companies it invests in. That is supposed to be how the invisible hand turns greed to society's good; the things we own, we are supposed to care for, because if they are hurt, we lose too. This is not what Bain Capital did; instead, they ran a con in which the acquired businesses became effectively shell companies through which Bain could steal from lenders. If a skin-picking meth addict did this with credit cards, he or she would net a few thousand or tens of thousands of dollars, and "identity theft" would send them to prision for decades. Romney & friends went to Harvard and wore expensive suits; Romney made a quarter of a billion dollars. So they're not going to jail.

In the coming days, lots of defenders of Bain are going to point out that not every business they bought took on huge debts to funnel profits to Bain, before going bankrupt (Sports Authority! Staples!). But that, of course, is the beauty of the scam. Bain buys a cheap company. They look at making it more cost efficient and profitable. If they have a company on their hands that will quickly become successful (or is already rising like a rocket), they enjoy its success. On the other hand, if a business like KB Toys or AmPad looks to have a long, difficult road to profitability, they bleed it with the borrow-and-dividend strategy, hire themselves and pay themselves millions of dollars a year in "management fees," and/or pump and dump the stock. It's a heads-we-win, tails-we-win strategy, and that is what is wrong with it.


  1. But some of the companies Bain worked with, like Staples, now employ workers (albeit, at low paying jobs that fail to lift people out of povery and leave those employees unable to afford healthcare for their children) even as they have created wealth in our economy (that is disproportionately concentrated in the bank accounts of executives who make hundreds of times more than their hardworking colleagues lower down on the corporate ladder).

  2. Piggybacking on Joshua's point: Bain proves that taxing wealth is not the same as discouraging job creation, and that the 0.01% would be horrified if their favorable tax rate depended on jobs added to the US economy.

  3. The notion that we need massively wealthy plutocrats in order to create jobs is a fallacy. We have had joint-stock corporations for four hundred years (Virgina was settled by one of the first ones) and as long as you have that, you can do anything in business requiring great wealth even if your individual investors do not have a single investor among them.

    Of course, if you bleed rich people dry, you will have a capital-flight problem, like the one the UK had in the 60s-70s. But, as you can tell from the fact that Britain is still a rich, successful country and not a smoldering ruin, there are ways to address capital flight; it's a problem, not a death sentence. And you need a relatively more attractive place to flee to; the US, with some of the lowest overall tax rates in the developed world, is a long way from taxing rich peole so heavily that they move to Europe.

    But Bain's problem is deeper than this. They cheated. Seizing control of a company and forcing it to borrow money and turn it over to you, or pay millions to you in management fees as it goes bankrupt, is theft, not capitalism. It should be illegal. And it should disqualify the participants from any position of public trust.

  4. Single rich investor, I meant to say.

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