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Friday, January 13, 2012

Mitt Romney's Version Of Capitalism, part 3

Jan 13th, 2012

As attacks on Mitt Romney's years at Bain Capital have picked up steam, a veritable army of apologists has taken up the mantle of "defending capitalism." Except that's not precisely what they are doing.

Ross Kaminsky has a typically defensive piece over at The American Spectator. He begins with a caveat:

"Nobody is going to put Mitt Romney in a category with any of the great inventors of American history. Nevertheless, Romney's function in terms of "creative destruction" is not fundamentally different from that of any other participant in the capitalist system." EMPHASIS OURS

He then proceeds to bloviate that the advances brought to the world by Thomas Edison, Henry Ford, Bill Gates and Steve Jobs led to job losses, too. So there. Kaminsky's missive is a wonder of contradictions with the usual dose of "Austrian" economic voodoo.

He argues that what happened at Bain was just the march of progress. What's worse is that he actually portrays Bain as an exemplar of the "free market." Nothing could further from the truth.

Pat Garofolo recently examined Bain's history of gaming the system:

"Bain’s modus operandi was to invest in companies, leverage them up with debt, and then sell them off for scrap, allowing Bain’s investors to walk away with huge profits while the companies in which Bain invested wound up in bankruptcy, laying off workers and reneging on benefits."

Last week, Reuters profiled one company, Worldwide Grinding Systems, that went belly up after Bain invested in it. The company not only lost 750 jobs, but the federal government had to come in to bail out its pension fund, while Bain walked away with millions in profits.

And according to an analysis by the Wall Street Journal, this was far from an isolated incident. In fact, 22 percent of the companies in which Bain invested wound up either in bankruptcy or shutting their doors entirely, while Bain itself has made billions of dollars for its investors."

This was too much for Kevin D. Williamson of the National Review. He argues that the Pension Benefit Guarantee Corporation bailout was not actually a bailout:

"One might argue that the PBGC creates a moral hazard, encouraging managements to intentionally underfund pensions while offloading the risk onto the federal agency, but it would be difficult to make the case that this describes Bain’s actions in the GS Technologies case. Simply put, the U.S. steel industry got wiped out by lean and wily foreign competitors in those years: Half of the U.S. steel industry went belly-up around the turn of the century. Bain had both good luck and bad luck with its steel investments. Some of the firms thrived, and some did not. That is the nature of investing, which is another word for risk-taking."

Seneca Doane fires back:

"Yeah, but it's not "risk-taking" if you deliberately take advantage of the fact that someone else is going to pick up the tab. The author, Kevin D. Williamson, says it would "be difficult to make the case" that Bain succumbed to the "moral hazard" of free availability of a subsidy on a deal in which Bain made $10 million, but I find it to be not difficult at all. Here, we can do it with a few questions, if Mitt will sit still for them:
(1) Mr. Romney, did you know as CEO of Bain Capital that the PBGC would cover the costs of the failed pension plan if GS Technologies went bankrupt?
(1A) If so, when? (1B) If not, why?
(2) Did the availability of the PBGC coverage play any role in the decision of Bain Capital to make risky investments?
(3) Did you have any moral qualms about using money from a government program to turn your own losses into profits?
(4) Was this the sort of business maneuver that justified your high compensation?"
Over at Human Events, John Hayward sneers at the "anti-capitalists" and "class warriors" who "assail" Romney's noble "profit motive" before making this proclamation:

"Across a vast population, when assembling corporate endeavors on a grand scale, the pursuit of profit becomes the only moral means of allocating resources. It is also the most efficient." EMPHASIS HIS

The "only moral means?" If the PBGC bailout was a component of Bain's planning, this is roughly equivalent to a group of bank managers intentionally diverting depositors' money into their own coffers through deception, collapsing the organization and getting away with it knowing that the FDIC would bail them out. That the capital exchanges involved in the Worldwide Grinding Systems affair were legal doesn't make them ethical. Or "moral." Furthermore, Hayward demonstrates the common inability on the American right to critique the morality of planned outcomes.

Andrew Sullivan hammers this point, drawing from "The Real Romney," by Michael Kranish and Scott Helman:

"Here's the description of a classic success in Romney's business record:
In 1996, Bain invested $27 million as part of a deal with other firms to acquire Dade International, a medical diagnostics equipment firm, from its parent company, Baxter International. Bain ultimately made ten times its money, getting back $230 million. But Dade wound up laying off more than 1600 people and filed for bankruptcy protection in 2002, amid crushing debt and rising interest rates. The company, with Bain in charge, had borrowed heavily to do acquisitions, accumulating $1.6 billion in debt by 2000. The company cut benefits for some workers at the acquired firms and laid off others. When it merged with Behring Diagnostics, a German company, Dade shit down three US plants. At the same time, Dade paid out $421 million to Bain Capital's investors and investing partners.
Remember: for Bain and Romney, this was a huge investment triumph. But when you break it down, you see the core issue. This was not just about restructuring or remaking or rebuilding companies. It was about making more money than God by leveraging debts, selling companies, and gutting workforces. Notice that Bain's dividends are the first things these collapsing firms pay off. Even Romney has admitted it can get ugly to the NYT in 2007 (again from Kranish and Helman):
"It is one thing that if I had a chance to go back I would be more sensitive to. It is always a balance. Great care has got to be taken not to take a dividend or a distributuion from a company that puts the company at risk," he said, adding that taking a big payment from a company that later failed "would make me sick at heart."
This is a lot of heartsickness. As the New York Post reported,
Romney's Bain invested 22 percent of the money it raised from 1987-95 in five businesses - Stage Stores, American Pad & Paper (AMPAD), GS Industries, and Details - making a $578 million profit.
Every one of them went bankrupt, with the loss of many, many jobs. The question Romney has to answer is: how is it "capitalism" to make so much money from companies that went bankrupt? It's one thing to be a businessman and make money by building an enterprise. But Romney never managed a business, apart from Bain. He just made a large part of $250 million by investing in companies that went belly-up."

This is pattern behavior. It represents institutionalized slashing and burning. It's also not new information. Nearly a year ago, Josh Kosman reported:

"Romney's private equity firm, Bain Capital, bought companies and often increased short-term earnings so those businesses could then borrow enormous amounts of money. That borrowed money was used to pay Bain dividends. Then those businesses needed to maintain that high level of earnings to pay their debts."

When those businesses could not do so, they were torn to pieces. This was, apparently, just fine with Bain and their investors because, after all, they got theirs.

"Romney in 2007 told the New York Times he had nothing to do with taking dividends from two companies that later went bankrupt, and that one should not take a distribution from a business that put the company at risk."

Yeah. We've heard this before. 'I am the titan, the hands-on manager of a giant... who also had no idea about anything untoward my firm ever did.' People in the know, however, say this doesn't wash.

"...Geoffrey Rehnert, who helped start Bain Capital and is now co-CEO of the private equity firm The Audax Group, told me for my Penguin book, "The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy," that Romney owned a controlling stake in Bain Capital between approximately 1992 and 2001. The firm under his watch took such risks, time and time again.

Bain and Goldman Sachs, for example, put $85 million down in a $415 million 1994 leveraged buyout of Baxter International's medical testing division (renamed Dade Behring), which sold machines and reagents to labs.

Former Dade CEO Scott Garrett, who managed the business for the first few years after the takeover, said Romney "was far more in tune with what was going on throughout his firm, and even the portfolio companies, than you might expect."

As more and more information is released and older coverage continues to resurface, the Bain Capital story is becoming just what I had predicted it would be; One of the worst examples of all that has gone wrong in our corporate culture over the last 20 years.

The establishment GOP is terrified. They should be. All their guns are being drawn.

Fox News has been kicked into to high gear to provide pushback and damage control (they go after Rick Perry HERE and Newt Gingrich HERE). Sean Hannity has pleaded on his radio show for the "not-Romneys" to stop the attacks. 

Michele Malkin, who has gone so far as to compare GOP criticism of the Bain record with the "Occupy" movement, writes:

"Instead of focusing on his long political record of expedience, incompetent non-Romneys have morphed into Michael Moore propagandists — throwing not just Bain Capital under the bus, but wealth creators of all kinds who take risks in the private marketplace." EMPHASIS OURS

One more time, it's not a "risk" to run up bills on a joint's credit and divert the money to other accounts when you're planning to burn the place to the ground ala "Goodfellas."

What these echo-chamber propagandists are selling as all-American capitalism doesn't look very good up close. As Kosman noted:

"Bain in 1988 put $5 million down to buy Stage Stores, and in the mid-'90s took it public, collecting $100 million from stock offerings. Stage filed for bankruptcy in 2000.

Bain in 1992 bought American Pad & Paper (AMPAD), investing $5 million, and collected $100 million from dividends. The business filed for bankruptcy in 2000.

Bain in 1993 invested $60 million when buying GS Industries, and received $65 million from dividends. GS filed for bankruptcy in 2001.

Bain in 1997 invested $46 million when buying Details, and made $93 million from stock offerings. The company filed for bankruptcy in 2003.

Romney's Bain invested 22 percent of the money it raised from 1987-95 in these five businesses, making a $578 million profit.

While I have not investigated all of Romney's Bain investments and there may be cases where he made money and improved businesses, there's little question he made a fortune from businesses he helped destroy."

There is also something else that hasn't gotten much attention yet...

There are signs that the FBI is engaged in an ongoing investigation of Bain under Romney's watch.

More on that later...

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