"Mitt Romney and Bain Capital: Understanding the Reality" By: Robert K. Lifton

In support of his run for the Republican nomination, Mitt Romney has cited his experience at Bain Capital, the private equity firm he founded and led for many years. He has argued that that experience in which he “created 100,000 jobs” demonstrates his capabilities at job creation for the nation and is a qualification for the position of President.  Some Romney supporters have gone further. Thus, Utah Governor Gary Herbert, appearing on CNBC’s Squawk Box, argued that Romney’s experience at Bain in “turning around” companies demonstrates that he can “turn around” the United States. Romney’s claims of job creation opened the door to attacks from other Republican candidates. Newt Gingrich and a “super PAC” supporting him, financed by Las Vegas mogul Sheldon Adelson, are claiming in emotion laden ads that Romney’s activities at Bain actually reduced jobs and harmed employees.  And Texas Governor RIck Perry  has characterized private equity companies like Bain as “vultures” that destroy worker’s lives. 

Now, Republican leaders of all stripes, including former Arkansas Governor Mike Huckabee and New York Mayor Rudy Giuliani are rushing to the defense of Romney, arguing that attacks on his business record are antithetical to the Republican Party’s support of business and free market capitalism.

The reality is both more simple and more complex than all those allegations would have one believe. It is simple because the function of Bain and other private equity funds has no planned relation to job creation or job losses. It is more complex, because the activities of Bain do tell us something about Mitt Romney – having nothing to do with jobs. Let’s look at how Bain and other private equity companies actually operate. 

The business goal of private equity companies is to make profits for investors in the equity funds they manage. The greater the profits for the investors, the larger the take of the fund managers, who typically receive a base management fee of about 2% plus a portion of the fund profits, generally around 20%. If the fund manager is very successful then the manager’s participation in profits may run as high as 30%, which investors may be prepared to accept just to be able to invest with that manager. We’re told that Bain was very successful in creating very high returns on investment for its investors, said to be an astounding 88% per year, to the point where it could get 30% participation in profits. One tax advantage of the fund mangers is that although their business is to get paid by creating values, unlike other payment for services, which is taxed as ordinary income, their return for their services is treated as capital gain and taxed at the lower capital gains rate. 

What the private equity firms do to earn those returns is to seek out opportunities to acquire companies where by adding their efforts and talents they will be able to increase the value of the company to the point where they can realize the increased value by selling the company or its assets. A sale can be made to another company, frequently a much larger one in a related field, to another private equity fund which believes it can create even more value for its own investors, or in a public offering to a broad group of shareholders.  Most often, in order to increase the return on capital invested by the fund, the fund will borrow a significant portion of the purchase price of the business. And sometimes, if it can, the fund will take back as a distribution immediately upon closing the purchase of the business, a portion of its investment in the purchase price, reducing its own investment and enhancing its return on the investment left in the business. This distribution may come from the company’s existing cashable assets or from money that the company is caused to borrow. This additional leverage also creates additional risk; if things don’t go right the business will not be able to pay the carrying costs of the debt, the lender will take over the business and the fund will lose its investment. Sometimes, that results in the acquired company placed in bankruptcy proceedings either to liquidate its assets to pay off the debt or to restructure, a process Bain also experienced. 

It should be evident in understanding the function of Bain and other equity funds that job creation or job loss is ancillary to the investment goals and activities. To increase the profits of the acquired company, the fund may reduce the number of employees, reduce pay levels or curtail work time. In that case the fund could face worker anger and union pressure. If the company happens to become very successful, as Staples did after Bain acquired it, it may expand its business requiring that it increase hiring and work time. 

So what does all of that tell us about Mitt Romney. Certainly, his success in founding the Bain equity fund and operating it very successfully for a number of years speaks to his initiative and intelligence, his commitment to hard work, his ability to pull together a team of talented people and work closely with them. It also tells us that he is willing to take risks and to take action required to achieve his goals irrespective of whether that action helps or hurts people affected by it – in this case employees of the acquired companies. It also tells us that he is flexible – he could not accomplish what he did without being adaptable, willing to “go with the flow” and accommodate his views to his business interests and those of his investors and lenders. We have already seen much of that flexibility in his willingness as a candidate to change his political positions to accommodate the demands of the constituency whose support he is seeking. It also tells us that what he says now on the stump is not necessarily what he will do if he is elected president to accomplish his goals. 

It also should be evident that “turning around” a business has little relationship with trying to change the direction of a country. The objectives of Bain were clear-cut: increase the profits from the business at whatever cost to employees or suppliers. The objectives of a nation are rarely clear-cut and reflect the balancing of interests  of different constituencies with different, often conflicting, desires and aims. The ability to change an acquired company’s direction lay within the power of Bain management. By contrast, the power of a President is diffuse and depends on political circumstances beyond the President’s control, like which party is in power in which branch of government. Leading a nation in a particular direction in those circumstances is very difficult if not impossible, and requires political talents of the highest order to bring the nation with him.    

And therein lies the rub. Mitt Romney of Bain Capital was a good businessman.  The selection process of choosing the Republican candidate and later the President calls for a different valuation based on other criteria: choosing a political leader whose values conform to those of the voter making the choice. A person whose emotional make-up allows him to handle the crushing burdens of office and gut wrenching decisions such as sending troops off to war. Mitt Romney’s business activities at Bain tell us very little about those important values and what he would seek to do as President.  And unfortunately, Mitt Romney’s career as a politician and now as a candidate tell us little more than that he can be all things to all people.  We have to look elsewhere than Bain Capital to make a well-reasoned decision about Romney’s qualifications for the job of President. 

Mr. Lifton, a business man and political activist is writing a book entitled "Life's Lessons and Stories from a Member of the "Greatest Generation.'"

Comments

[jdledell]

Robert - Once again I am going to disagree with part of your post. In my prior life I was Senior VP of a $700 billion Financial company. I ran a number of their divisions and participated in a number of LBO's and private equity deals that the company implemented. First and foremost the objective is to maximize the profit extracted from the acquisition. It mattered not one iota what happened to the company, suppliers, communities or its employees. We learned that stripping the company was usually the quickest and most fruitful way to maximize the return.

When looking for a potential target, we never looked for undervalued companies that potential for future growth. Instead we looked for undervalued companies that sat on piles of cash, had over-funded pension plans that could be terminated and the excess funding stripped out. We looked for hard assets, buildings and equipment, that could be mortgaged to the hilt to provide "dividends" to our investors. I could go on and on about the tricks that were employed but you get the idea.

So by your definition I was a successful businessman however that is only if you look at the results with a short term perspective. It is this short term perspective that drove our investors. One year returns were the expectation, the investors had no patience for 5 year returns. Money is too hot not to yield to investor impatience.

For every Staples that Bain nurtured, there were probably a dozen strip jobs. I know because we were in competition with Bain for some of the deals. If you wonder how the American economy got in such bad shape just look at what Bain etc. has done to American businesses and what stock market investors are pulling most American businesses to focus only on the short term results - not the future possibilities for growth.

On another note I completely agree with your premise that business and government are two different animals and require different skill sets. America's problems are long term and people like Romney, looking for the quick, dirty and short term solution are dangerous in charge of the government. I know that this successful businessman would make a terrible President.

[GeorgeNYC]

Calling Mitt Romney a businessperson is like calling a guy betting at the track an equestrian.

[steve]

"We have to look elsewhere than Bain Capital to make a well-reasoned decision about Romney’s qualifications for the job of President."

While I understand that the realities and goals of running a business and running a nation are quite different, I'm not sure that Romney does. Moreover, while each requires different management skills, being president also requires a set of values and principles.

Personally, I do not at all have to look elsewhere than Bain Capital to see what Romney's values are: the celebration of the financialization of the American economy with its subsequent deindustrialization. I have no problem using Bain Capital as my "test".

And furthering one's nest at taxpayer expense, while extolling the virtues of the "free market" and bad-mouthing government, is just another example of his "values":

"Bain put $18.2 million into Steel Dynamics, making it the largest domestic equity holder. It sold its stake five years later for $104 million, a return of more than $85 million.

As Bain made its investment, the state and county pledged $37 million in subsidies and grants for the $385-million plant project."

http://www.latimes.com/news/nationworld/nation/la-na-bain-subsidies-20120113,0,1268299.story

In fairness, in my book Obama is no better. While small potatoes compared to the financial industry bailouts, under the current administration, the SBA has expanded its small business investment company and lent out the sum of $2.6 billion to, yep, private equity companies.

Yes, the federal government subsidizes the same sort of slash and burn financial predators for which Obama will no doubt self-righteously condemn Romney for heading.

http://www.reuters.com/article/2011/12/07/buyouts-privateequity-idUSN1E7B60V720111207

[JohnH]

One of the ways that vultures turn around companies is by looking for companies with excess, unused cash, including pensions. So Romney might well decided to "turn around" the US by looting pensions (including military) and Social Security...

"Romney’s critics point to Bain Capital’s purchase of GS Technologies as an example ... Bain made 12 million in profit and over 4 million in consulting fees while being awarded three million in tax breaks from the state of Kansas. GS Technologies went bankrupt, its 750 employees lost their jobs and the federal Pension Benefits Guarantee Corporation was forced pay 44 million towards the company’s pension plan when Bain refused to honor its agreement with workers."
http://austin.culturemap.com/newsdetail/01-13-12-08-48-mitt-romney-raked-over-coals-in-south-carolina/

[johnf]

Why is Sheldon Adelson - an uber-Likudnik and financial capitalist - allowing his money to be used to attack other candidates who are all, presumably, the recipients of AIPAC money and funded big time by financial capitalists?

I know he was reportedly pleased when Gingrich declared the Palestinians to be non-people, but presumably all the other candidates are equally willing to make such statements.

Is there a rift? Is Romney's Likudism less pure than other candidates? Are the tectonic plates shifting?

[William R. Cumming]

Great post and interesting comments. My personal belief is that the Republicans are asset strippers in their view of capitalism not builders. They in general want to exploit the commons for personal gain and never want to protect or expand the commons. That stated, and I think there are merits to capitalism as an economic engine, I note that both the Scots Adam Smith and David Hume, both in favor of capitalism, worried that left to its own devices would fail because of greed and corruption. Obviously that conclusion and in particular greed and corruption is in the eye of the beholder. Marx had his own take on the future of capitalism and saw its self inflicted decline.

My take on the DEMS however is not all that rosy either. Why? They like the Republicans seems largely to control public policy for self dealing purposes meaning that they intend to use the public purse not to strengthen the nation in the long run but to see that their interest groups benefit from their public positions.

Washington long ago ended its policy debates as to what policies were needed or necessary. Now it is all about choosing sides. Let your opponent pick a position on which to stand and whatever its merits oppose it. Thus, the position of the legal profession of advocacy and opposition is now public policy and we are left with no honorable judges to rule on the disputes. Certainly SCOTUS has undercut the political system with its rulings. And by the way the MARSHALL court would have had no truck with Citizens United and corporations as people. In their rulings that court understood that the corporate form was simply to limit personal liability.

One potential cure is to federalize the chartering of corporations, not to reduce flexibility, but to make understandable the corporate form in the 21st Century.

And it fascinates me that the key issue in this election goes undiscussed. Domestically it is how you design a USA that competes in a globalized world. Internationally it is how you maintain democracy in a globalized world. This is not a new dichotomy. Perhaps its difficulty has grown.

What is clear is that secrecy and the national security state have undermined democracy. And globalization has undermined the notion of the corporate form as good citizen and not just useful for asset strippers. The real purpose of the corporate income tax is not taxation since it draws less revenue each passing year. It so that a window into the the corporate world can be given to government regulators so that its democratic underpinnings are not subverted. With corporations now largely owning the government that subversion does all that it can to avoid any one looking.

What is the basic anti-regulatory strategy today? Avoid disclosure at any costs. What is the basic anti-democratic national security state strategy? Avoid disclosure at any costs. Are these linked strategies? Maybe but not enough disclosure to know!

[Roy G.]

Government is not a business, and Corporations are not People - despite Romney's assertions on the campaign trail. He is the apotheoses of the New Republican Party, which itself has become in essence a private equity firm, and America is the target of their looting.

Romney's career on both sides has been characterized by extremely flexible opportunism, where pursuit of power is the sole aim. The ambivalence of Mr. Lifton's post represents both an outdated triangulation strategy, and IMO, an unwillingness to buck the status quo, and call a spade a spade. If anything, Mr. Lifton's post represents the quandary of the Republican Party, which is now clearly at odds with 99% of the American People. If you doubt that, just look at Romney's tax plan.

[johnf]

Phil Weiss has a theory to answer my question above??:

"...The Republican process is now a war over Romney’s policy positions; and the neoconservative fear is that he will be tugged left by Ron Paul's movement inside the party. So Adelson is applying a counter-weight by giving money to someone who is to Romney's right on Israel questions. Anything that brings down Ron Paul’s vote will advance neocon policymaking inside the Republican party.

Notice that Paul is working that leverage. He made nice to Romney lately, defending him yesterday on the Bain Capital criticism, and pretty much promising not to run as a third party candidate. Last night Al Sharpton expressed fear that Ron Paul would get to determine a President Romney Supreme Court pick.

In other words, the game now is how much influence Ron Paul will have..."

http://mondoweiss.net/2012/01/israel-is-the-elephant-in-the-studio-during-msnbc-discussion-of-adelsons-giving.html

(Though I'd hardly describe Ron Paul as "left.")

[steve g]

Since you have worked the the venture capital
field what do you think of the Austrian school
of thought concerning free market capitalism.
Ron Paul is an advocate of course. Read Lew
Rockwell and Mises Institue websites to get an
understanding of their version of free markets.
Is this theory practiced anywhere in the world?
They do not like statist intervention in any facet
of market functions. Is this just another think
tank exercise or does it have real world applicat-
tions?
From my limited understanding of history, govenment forces were brought to bear on industry
in the 19th century to curb the excesses of the "robber barons". In the eary twentieth century
the non regulation of Wall Street help precipitate
the crash of '29. In the 80's Milken, Boesky, KKR
and others started the take over and stripping of
assets processes. Currently, we have the "bandit"
or "Casion" bankers/capitalists. It would seem no
matter what era a loophole is found
or created to ensure this type of capitalism as we
know perserveres. The "Let the market place police
itself" has never worked IMO. As long as K street
and its bastion of attornys exist, will true capitalism manifest itself whatever the definition?

[Bill H.]

I'm not entirely certain that my thinking is entirely valid here, comments welcome. The thought is that Romney's business experience is relevant to the extent that it reveals his ability to evaluate and respond to variables. At Bain, for instance, he poured capital into some aquisitions and stripped others, based on his evaluation on the condition and viability of the aquisition. The success of Bain would suggest that his ability to evaluate and act appropriately was pretty good.

Even his shifting stances are not necessarily all that bad. One stance is not getting support, he'll shift to one that does. His goal is not some sort of self revelation exercise, it's to attract votes. Do we think that what Obama is doing now has any purpose other than getting votes?

Compare Romney's Bain performance to Obama's evaluation and response on, say, Iran; sanctions aren't working so lets double down on sanctions.

I'll grant you that what Romney is offering on Iran is no better, worse in fact and there is much I dislike about the man, but this is all campaign rhetoric to outflank his Republican opponents. How much of Obama's primary campaign rhetoric has he followed up on?

[Frabjous]

All that really "matters" is the atmospherics as scripted, presented, managed and commented upon by the mediasaurus.

For the bourgeoisie (as opposed to Mitt et al in the lumpenproletariat), all that matters is which “issues” are “debated” in the “media”, and such things as have been discussed so artfully in this post and comments on this thread are only dimly glimpsed below the surface if at all.

Thus, when Romney utilizes the meme of “job creation” as being the sine qua non qualification for the presidency and then cites his experience at Bain Capital as meeting that qualification, the mediasaurus bleats (or tweets?) that as the received truth.

In truth both parties are whistling past the graveyard; the next primary battle for the democrats will be just as puerile, craven and indicative of the rot within both parties and the political system as a whole. A third party may never be able to surmount all the extra-constitutional barriers that the two parties have arrogated unto themselves to actually achieve the presidency, but a third party may arise soon (“Paging Ron Paul on the white courtesy phone!") to force the discussion of substantive issues rather than the specious pablum in the news every day.

Mark

[jdledell]

Steve - Austrian economic principles are not practiced in any developed country. It's laissez faire business on steroids. While the economic principles it proposes may sound academic and meaningful, in practice it's the law of the Jungle. While Austrian economics is supposedly based on Praxeology(the study of human economic behavior) it ignores the underlying greed of the human species. Essentially, left to its own devices, the economic predators will eat everything in its path - their appetites for money never sated until there is no food(economy) left.

This is behind Paul's war on the Federal Reserve, regulations, bringing back the Gold Standard etc. Individuals should be allowed to become Tyrannosaurus rex with the rest of us assuming whatever our natural position in the economic food chain is.

This is probably a biased answer to your question but its the best I could do.

[JohnH]

It looks like the Romney campaign may be bring a long needed discussion of vulture capitalism:
http://www.mcclatchydc.com/2012/01/14/135889/romneys-bain-made-millions-as.html

It would be good to have that discussion before vulture capitalists dismember the USG, feast off the spoils, and drive the remains into bankruptcy.

[las vegas lawyer]

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