By Numerian posted by Michael Collins
Originally published in The Agonist
The title of that last article is pretty much rhetorical, which says a lot about how times have changed if major business publications are giving credence to claims that business schools churn out criminals. It is the two Mitt Romney articles that really interest me, given how unfavorable they are to the champion of capitalism that the Republicans have put forward as their presidential nominee.
The article about Bain Capital features stories that most of the readers of The Agonist should know about, because we've been writing about these circumstances for years now. This is all about the equity extraction business, which is Bain Capital's bread and butter and Mitt Romney's fundamental business experience. In classic Republican hypocrisy mode, Mitt Romney has been saying that Bain Capital is proof that he knows how to create jobs. This is, in a way true -- it's just that the jobs he creates are all in India and China, which really means he's running for CEO of the wrong country. What the Bloomberg article shows is that the greatest "success stories" at Bain Capital were all about using leverage -- excessive debt in other words -- to buy companies, pay huge dividends to Mitt Romney and his fellow investors, and in the process destroy the companies at the cost of thousands of lost American jobs.
Just one example from the article will suffice to show how equity extraction worked. In 1994 Bain Capital bought Dade International, a medical products company, for $85 million in equity, of which Bain put up $27 million and its partner Goldman Sachs (uh oh! -- red flag already) put up $58 million. The rest of the purchase price of the company, to buy out all the public shares, was financed with debt, which constituted 81% of the total financing arranged by Bain.
In the next four years, Bain, now in complete control of the company, tripled Dade International's debt from $300 million to $902 million. Some of this debt was used to retire previous expensive debt and to expand the company by purchasing a German competitor, but $242 million was used to buy out one-half of Bain Capital's equity interest in Dade International. In other words, in just four years, Bain claimed that $85 million in equity had magically turned into $484 million in equity. The company at this stage was private, so the capital could be whatever Bain claimed it to be, within reasonable accounting parameters. It just seems very unlikely that the equity in the company grew six-fold in such a short period of time, when net income wasn't anywhere near this amount. What seems much more likely was that Bain did to Dade International what it did to nearly 80 companies when Mitt Romney was in charge -- it loaded the company up with debt for the purpose of declaring magical, gargantuan returns for itself and its partners.
The $242 million that Bain Capital took out of the company could not even be fairly described as equity extraction, because that much equity was never there in the first place. And did I mention that at same time, Bain Capital took out an additional $100 million from Dade International as a "fee"? All that superb management advice and expertise that Mitt Romney and his partners were providing Dade International had to be worth something, right?
By August, 2002 the company had $1.5 billion in debt when it filed for bankruptcy, causing the loss of 1,700 American jobs. Mitt Romney wasn't among that number -- he had "moved on", and in classic Obama terms, he was "looking forward and not backward". Bain Capital had already pocketed $216 million in net returns out of its $27 million investment in Dade International.
One of the important points the author makes about Dade International is that, with so much debt and very little capital, it was exposed to failure if interest rates rose or if the euro weakened against the dollar, since a good part of its revenue was in euros. Both these things happened, and contributed to the bankruptcy of the company. This sort of thing occurred over and over with Bain Capital's investments -- the leverage made failure of the company much more likely to occur. But without the leverage, Mitt Romney could not achieve his 1,000% returns for himself and his investors.
If Romney were a true capitalist
If Mitt Romney were a real capitalist, what would have happened is that after the first such experience, he would have said: "Wait a minute, here!" Bankruptcy is a failure with very high costs, and Romney should have looked at his business model and seen instantly that the leverage he was using was ultimately destroying economic value. He would have abandoned his model, or at the least drastically reduced the leverage to give his companies a fighting chance. That he didn't do so is a towering testimony to Mitt Romney's greed, because you don't keep repeating the Dade International experience over and over unless your sole objective is to maximize the amount of profit you are earning from each investment, and damn all the other consequences.
In fact, "profit" isn't even the right word here. In the Mitt Romney world of investment, there were no substantial profits being produced by the companies he was taking private. The game was really to load up these companies with obscene amounts of debt (because remember debt is tax-deductible for the owners), and rather than plow that debt into the company's operations, the owners took it out in the form of dividends. But of course, "dividends" isn't the right word either -- there was no profit going into the capital accounts to justify paying a dividend.
There is, in the end, nothing capitalistic about Bain Capital or Mitt Romney at all. It is not even clear he has the skills to run a company long term, because his whole game was to get in and out of the situation as quickly as possible, usually a year or two before bankruptcy became inevitable. The usual description of the private equity business is that it engages in equity extraction, but in Romney's case, he was more of an equity pirate or buccaneer. His game was to take hold of the victim, steal all their jewels, and then hold them for ransom so that their relatives would cough up more money to buy their liberty. The equivalent to ransom in Mitt Romney's world was the way he used debt to force even more payments to himself, but also the way he would raid the employee pension plan, empty it out, and then when the company went under leave the Pension Benefit Guaranty Corporation (the US taxpayer), to cover the bill.
Obama's temporary populism
It's all very interesting that Barack Obama is on the campaign trail focusing attention on Bain Capital. This is Candidate Obama, however. President Obama, should he win another term, will instantly revert back to bosom friend of the equity extraction business, so none of us can trust that this liberal/progressive/populist Obama is going to exist beyond November. Still, he is getting the public to focus somewhat on the private equity charade, but he doesn't go far enough. So far the debate has been largely about whether Bain Capital exported jobs (it certainly did), but Obama for whatever reason is missing the broader point: equity investment as practiced the Mitt Romney way destroyed economic value in the US. It's been doing this for 30 years, and making its practitioners phenomenally rich. The loss of American jobs is one thing; the loss of manufacturing capacity, of industrial know-how, of whole communities, of competitive edge -- in short, of the basic benefits of capitalism, is the real story. Mitt Romney is the anti-capitalist. He doesn't want free markets, because his expertise is in gaming the system. He doesn't care about managerial skill or running a company for the long term, because that works against maximizing his profits in the shortest time possible. He certainly doesn't want transparency, because deep down there is nothing he has done that he can point to with pride (it's curious how so many of these equity extraction guys prefer to operate in secrecy and darkness). He knows that his record is one of repeated failure in the capitalist realm, and that he nonetheless persevered destroying companies with debt so he could take the debt proceeds for himself. What he is lacking is the basic moral sense to comprehend how deeply wrong -- and in the Christian sense sinful -- his professional and personal behavior has been.