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    Romney and Bain

    By Michael Maiello on Fri, 01/13/2012 - 11:16am | Politics

    The Daily asked me to debate an able writer from the American Enterprise Institute about whether or not Mitt Romney's years at Bain Capital are worthy of our praise of criticism.  I think I was pretty even-handed here, as I really don't have it out for the private equity industry, or the finance industry in general.  I think we should have a healthy, vibrant way to help allocate resources towards people's business ventures.

    But we have to face the truth about private equity, and if you've ever worked for a company where a private equity house becomes an investor, you'll know this: the works are considered assets (sometimes disposable, sometimes not entirely) rather than players in the deal.

    My own experience here comes from working at a company that received an investment from Elevation Partners, the private equity firm that features U2's Bono as a partner.  The immediate impact on our company was that people were given a type of equity options (which were illiquid as it was a private company and which were later devalued) partly in exchange for ending the company's pension plan (which was small and, admittedly, a relic, though I will get a few hundred dollars a month out of it until I die) as well as increasing health insurance premiums and a temporary end to the company's 401(k) matching program.  Promised (but not contractually guaranteed) bonuses were not paid and there were company wide layoffs that meant more work for everyone who remained, at the same stagnant wage.  Jobs and responsibilities were also redefined, without much input at all from those expected to do the work.

    I'd like to hear Bono sing about that.  It makes me sick to see him constantly touted as some sort of moral authority on global affairs while he's involved with a firm that has made life tough for scores of solidly middle class Americans. His philanthropy is admirable, but it would be far better if he practiced a gentler form of capitalism on his own accord.

    And here's the real thing, whether it's Bono or Mitt Romney -- these people have a lot of money.  Mitt was born rich.  Bono is one of the most celebrated and heavily rewarded entertainers in the world.  They have choices.  Nobody forced them into this line or work.  Nobody forced them to pursue it in such  way as to cut out labor as significant stakeholders in the deals they pursue.

    By most accounts, Bain Capital (as well as Elevation) are relatively benign investment firms.  They are not "Barbarians At The Gate."  But they are also not always great to the people who work for the companies that they invest in.  So far as voters go, most of them work for somebody else.

    I'd be very interested to see Romney's tax returns, though.  I'm pretty sure his effective rate will be shockingly low.  These people get paid in dividends and capital gains, after all.  Salaries are for the suckers who work at the companies they buy.

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    I too worked for a company acquired by Elevation Partners, and while they did treat the employees very well (especially compared to your experience), in the end we were sold to a large, publicly-traded corporation in a deal that resulted in our company being shut down.  There were a lot of things about the deal that seemed like insider trading to me, and given how interconnected the world of top Wall St. and corporate executives is, I bet it's not uncommon for private equity firms to exploit the even deeper pockets of public companies in this way.  You can read more details about what happened to my company here:  Outrageous: Electronic Arts Inc CEO Riccitello Buys His Own Company and Closes it Down Two Years Later.


    by Anonymous (not verified) on Fri, 01/13/2012 - 12:33pm

    It's off the thread but insider trading is so persuasive that I think it should be decriminalized.

    It's impossible to prevent- visit the bar nearest the headquarters of any company and you can learn enough to invest in or short it. Prosecuting the occasional target merely misleads ordinary investors into thinking they have full information. They don't.

    Before you take a position in any equity you should be required to sign an acknowledgement that you understand  that you only possess inadequate information  per se and compared to that of  insiders.


    by Flavius on Sat, 01/14/2012 - 8:27am

    It's pervasive not persuasive, and insider trading ONLY involves persons who own tens of thousands or millions of shares, and have exclusive communications over a period of time with top executives, not guys in bars. Legalizing insider trading would be a like legalizing robbing banks.


    by NCD on Sat, 01/14/2012 - 10:32am

    I agree that the debate, tho' very minimal, was without needless rhetoric and balanced. Kudos.

    And this post with the factual data that's up close and personal about a specific company and the impact of a private equity corporation's investment on the people delivers information we all need to build awareness of the role played by these firms in the real worlds of the 99%.

    As to 'Myth's' tax returns, he'll hold off as long as possible - for sure until after the primaries unless and until there is great pressure and demand to do so and/or it becomes clear it is negatively impacting his ability to succeed in the primary arena. I believe that sites such as this need to 'speak out' about this daily, as well as a strong showing of letters to editors and to the RNC, et al. to keep this issue at the forefront.


    by Aunt Sam on Fri, 01/13/2012 - 12:39pm

    But more jobs and higher wages aren’t the primary goal, just a wonderful side effect. Entrepreneurs such as Microsoft’s Bill Gates, Apple’s Steve Jobs and Google co-founders Sergey Brin and Larry Page didn’t set out to create thousands of high-paying jobs. Successful entrepreneurs never do.

    Good debate, Destor. I'll get to the above in a second. Seems to me there are basically three scenarios: 1) new company trying to get off the ground; 2) failing company in need of saving; and 3) so-so company that could be improved.

    The first scenario is the most positive. A new entity and new jobs come into being. The second scenario is second best. Some jobs are saved by avoiding a total loss.

    But the third scenario is highly suspect. Because in this case, "improved" doesn't redound to the workers' benefits but only to the "Bain" and the firm's shareholders. The workers are but bit players there to swell a progress. In fact, workers will be let go to improve the bottom line and will be replaced by machines for the same reason.

    (You could say that a company needs to improve its efficiency in order to compete against other firms that are doing the same. And this is true to a degree. But if the idea was for everyone to tighten his belt, etc., we wouldn't be seeing those massive payouts that could be shared more broadly or used to save a few more jobs. One gets the image of a passel of companies to do without as many employees as possible and still grab the biggest market share.)

    But beyond this, your opponent hit it on the head above:

    For Romney, or any capitalist, to call himself a "job creator" is a misnomer. They are profit seekers. I don't say this with a curse under my breath, but as matter of fact. The IDEAL company--if it could be created--would have only one employee. Or none!

    Employees are necessary evils, if you will. Costs of doing business; like paying fines or paying for supplies. You add them only to get to a level of income and profit that would otherwise be out of reach. And as soon as you can let some of them go...replace them with machines...replace them with lower cost works...you do. ANYONE in their position would most likely do the same. You don't ask the black widow not to kill.

    But what is the problem we are facing right now? A lot of people out of work, without jobs. We are not facing the problem of companies without profits; they have record earnings. We are not facing the problem of companies bumping along with huge inefficiencies. They are very efficient; too efficient from the point of the labor pool. So even if we grant that Bain and its acolytes aren't "bad," they don't have the skill set or orientation to solve the problem of no jobs.

    Creating jobs is not what they do; nor is it what they're interested in doing. Jobs come as a by-product of what they do. Their goal is actually to create AS FEW JOBS as they can consistent with what they hope to make in revenues and profits.

    It would be perverse for a CEO to create jobs his firm doesn't absolutely need. That's why, when the need is to create jobs, we turn to government to create them. The government isn't required to, and shouldn't, make a profit. The people created government to do the things we can't do, or can't do as well, by ourselves.


    by Peter Schwartz on Fri, 01/13/2012 - 2:32pm

    Excellent analysis. You left out the scenario of LBO, leveraged buyouts, or 'hostile takeovers', which I would add as #4 to the list: 1) new company trying to get off the ground; 2) failing company in need of saving; and 3) so-so company that could be improved.

    The #4, 'Hostile' LBO, can be far more profitable than #1-#3. It involves takeover of a very sound company with little or no debt and lots of assets, taking fees and loans against those assets, and then maximizing income in any way possible by cutting workers, extracting resources, selling off property, raiding pensions funds etc. With retail outlets like Mervyns, which was raided by Sun Capital Partners and Cereberus Capital, Mervyns owned most of the property many stores were on, to make money for the investors, the company was divided into retail/real estate pieces.  Loans were paid off by raising the rent on the retail arm, which was it unable to pay eventually. The chain was bought in 2004, and went under in 2008.

    A classic hostile LBO case of this was one of the first in 1986 when  MAXXAM took over Pacific Lumber which had been in business for over 100 years. Pacific Lumber had no debt, had a huge inventory of  200,000 acres of old growth redwoods, used selective cutting, no clear cutting, and had a sustainable forestry plan that stretched for 100 years.

    MAXXAM borrowed money to gain control of the company, and immediately accelerated the cutting of all old growth redwoods to pay itself fees and service the debt. It instituted the cheaper to use, redwood forest destroying method of clear cutting to maximize short term profits. Environmental laws, lawsuits, and direct actions slowed them down. The last 60,000 acres of virgin old growth from the original 200,000 owned by Pacific Lumber were purchased in 1999 for $480 million and are now under BLM control. Pacific Lumber lost over 1000 jobs between 1986 and 2008 when it went bankrupt.

     


    by NCD on Fri, 01/13/2012 - 3:13pm

    Yeah. I guess there are sort of two broad categories here: 1) Companies whose parts are worth more than the whole. You kill off retail to get at the more profitable real estate. And 2) you want to generate high returns very quickly instead of dragging them out over a second two hundred years.

    There is this concept of an "under-leveraged company," which you referenced above. I think of it in terms of a homeowner with lots of equity in his home. There's all this value "imprisoned" in his house which remains "inert" as long as he just pays his mortgage (if he still has one) and lives his life.

    He can either sell it or take out a home equity loan to unlock this value and use it for other purposes. That's fine when he is owner AND employee as it were. Not so good when the employees are like pieces of furniture, "No, we don't really need two couches in the one big TV room we've created."

    My wife used to work in the broadcasting field. It used to be that the rules were very strict about how many news outlets--newspapers, radio, TV--one company could own in a single market. These companies had been toddling along under these rules for a long time and had almost no debt. There was all this value locked up in these properties that couldn't be accessed and used for other purposes.

    But when Reagan loosened these rules, these properties suddenly had new and added value and lots of buying, selling, and expanding went on--all leveraged. Tremendous consolidation was the result.


    by Peter Schwartz on Fri, 01/13/2012 - 4:26pm

    Peter, this is a great point about the jobs. From a person's point of view, having a job is a nice thing. (And arguably, for a CEO as a person, giving people jobs is nice too, Kumbaya and all that.) But from a company's point of view, a job is an expense, one that should be cut if at all possible, and as soon as possible.

    This is why corporations are NOT the same as persons, and all of us persons should keep it in mind when we talk about "running the country like a business" and especially when we vote.


    by erica20 on Fri, 01/13/2012 - 4:07pm

    I love your analysis and the discussion you and NCD had.  I tried to get at this when I said that workers in a private equity deal are an asset, not deal participants.  Republicans try to make it out as if the workers participate too, because they get to keep their jobs if the deal is good.  That's meager reward.  It's like when conservatives tell unions that they better not make demands that puts the boss out of business.  Duh.  But the idea is for workers to get a fair share for... you know... making the business possible.

    In the end, conservatives don't believe that labor makes business possible.  They believe only in owners and executives.  Any benefit to the rank and file is, as you say, a purely unintended consequence. If they take any delight in "creating jobs," it's only because being able to say so gives them outsized influence in society.

    As for so-so companies in need of improvement... there's an analyst or consultant out there that can say that about any company.  Smart owners don't get taken.  Unless, as NCD says, they are greedy.


    by Michael Maiello on Fri, 01/13/2012 - 7:42pm

    Destor, did you see this McClatchy piece on GS Steel?

    MYRTLE BEACH, S.C. — Boston-based Bain Capital LLC more than doubled its money on GS Industries Inc. — the former parent company of Georgetown Steel — under Mitt Romney's leadership in the 1990s, even as the steel manufacturer went on to cut more than 1,750 jobs, shuttered a division that had been around for 100 years and eventually sank into bankruptcy......Sanderson said Bain Capital replaced longtime managers who had built Georgetown Steel with bean counters looking for ways to cut costs. They demanded increasing financial performance with little idea of how the daily operations were run, he said.

    "They were investors. They weren't steel mill operators," he said....Less than a year after taking a controlling interest in the Georgetown plant, Bain Capital cut the employees' profit-sharing plan twice - lowering the plan's hourly rate from $5.60 an hour to $1.25 per hour. Most of the workers didn't learn about the cuts until they received their paychecks. The profit-sharing checks eventually disappeared altogether...


    by NCD on Sat, 01/14/2012 - 10:37am

    Wow.  See, there's a bunch of reasons why management might want to cut employees in on a share of the profits, not the least of which is that management are employees, too, so they're cutting themselves in.

    A private equity investors does not want other people to have a cut, if it can be avoided.  Their job is to increase profitability and to lay claim to every cent of it.  That last part gets lost.  But it has nothing at all to do with job creation.


    by Michael Maiello on Sat, 01/14/2012 - 12:52pm

    In the end, conservatives don't believe that labor makes business possible.  They believe only in owners and executives.

    I think the idea or ideal is to put labor in a position where it has nowhere else to go. After all, unlike people with serious money, these folks have to work every day to support themselves and their families. They can't just sit on the beach.

    (One conversation I have pretty regularly with old high school chums who've "made it" is this: They say that if they're taxed or regulated too highly, it just won't be "worth it" for them to work. They'll just sit on the beach. No working person has this option.)

    Execs know they need labor, but they don't want labor knowing it or feeling their power. And they know that, as individuals, labor doesn't have much power or many options. Most people are easily replaced, especially in a market like this.

    This may be less true in the trades. Machinists may not be that easy to replace. But how hard is it to replace a Wal*Mart "associate"? (Don't answer that.) But imagine all of them striking at once?


    by Peter Schwartz on Tue, 01/17/2012 - 4:56am

    Totally.  What worries me is that I also believe that most employers, who make money from their employees, have an incentive to never pay them enough that they can go to the beach as well (at least, not while they're young and useful.)  They pay you enough to make you not leave to work elsewhere, but never so much as to give you the choice between working or not.  The conversation I would like to have, but that does not fit into our current politics, would be about whether or not freedom from the obligation to work should be a goal of society.  I think it should be.


    by Michael Maiello on Tue, 01/17/2012 - 5:18pm

    You may be too young to remember this, but back in the 50s and early 60s--and maybe before that--the culture was all abuzz about "labor saving devices" for the home.

    Things like washing machines, dishwashers, and even things like cake mixes would save us all a lot of time we could put to better use.

    There was a lot of populist futurism surrounding these inventions in which wise heads painted pictures of then-far-off years like 2001 when robots would have taken over almost all our chores--at least around the house--but even at work.

    The Jetsons pretty much captures this idea, and you'll notice that 1950s furniture has a Jetsons feels to it. Lots of ovals.

    But the serious part was that, in the future, machines would take over the dreary parts of life and free us to do more of the fun and enriching parts. Who would not want that?

    In a way, a lot of this has come true. However, the piece that was left out of this picture was that when a machine took over your job, you would be left without income. You wouldn't have more time to read Thoreau; you'd be spending all your time competing against the machine, and the Chinese, etc.

    And if you still had a job and were vastly more productive because you'd learned to use all the new-fangled devices, you wouldn't benefit financially from your increased output; only the owners of these devices would. You would get paid the same, or even less.

    After all, who is more skilled and therefore more valuable? The person who knows how to bake a cake from scratch...or the person who dumps the Betty Crocker mix into a bowl, adds an egg, and pops it into the oven? You have to pay the first person more because not everyone has the skill to do what she does. But an idiot can make a labor-saving Betty Crocker cake.

    When the ads for dishwashers touted their "labor-saving" benefits, there was a hidden and ominous message in them that 99% of us never picked up.


    by Peter Schwartz on Wed, 01/18/2012 - 2:00pm

    Maybe too even-handed. 

    AEI guy pretty much used the classic "business is business" meme, with its underlying threat that anybody who's not all about becoming a financial expert or happy to be screwed by one just doesn't love America.

    I think you tried to respond with "and politics is politics," and talk about how we have a right to vote our interests, which are not their interests, but somehow we are all too muted when we come up with this stuff. (What you wrote here on DAG was clearer than your Daily response, BTW.)

    We need to find a way to be clearer about this. The "Greed is Good" people have been pushing this meme openly and expecting everybody to go with it for thirty years now, ever since Ronald Reagan took the Presidency and Gordon Gecko sat back in his limo and said it out loud on the big screen for everybody to hear. (I wonder if the screenwriters knew back then how breathtakingly bad the American people would be at comprehending irony, but that's neither here nor there.)

    At the end of the day, despite the need for legitimate commerce to keep things moving along, Greed is Not Good. It's still a sin. And no matter how often the Republicans try to tell us that Shitty is Just a Different Kind of Fair, it's not true. We all know it. (Even the Republicans know it, which is why, deep down, Mitt and his Friends make them a little nervous, too.)

    To go all Animal Farm on this thing: We pigs know a butcher when we see one. You shouldn't expect us to happily vote one into the Presidency. 

    And additionally, we know that Mitt Romney and the Koch Brothers are not really that interested in some kind of sustainable American pig manure and lactation operation, regardless of what gets said around election time. That's not how their brand of Capitalism works. We know what bacon is, we know where it comes from, and we know that when they say "Your vote will get you a place at the table," it might not mean what they think we think it means!

    I dunno, Destor--how do we say this simply, so that the saying leads us all into action that makes sense?

     


    by erica20 on Fri, 01/13/2012 - 3:58pm

    Thank you, Erica.  Good points.  I didn't get to read his points before I wrote mine and he didn't get to read mine either.  So, he made the "business is business" argument and I responded to my assignment, which was to answer whether or not Romney's Bain record is fair game.  I tried to twist the knife a little at the end, with the tax issue. :)

    What I wrote here was, yes, a lot more passionate and maybe more persuasive.  I'm glad I have places to do both.  But, I do see your point and it's something I'm going to think a lot about.


    by Michael Maiello on Fri, 01/13/2012 - 7:36pm

    Thanks Destor. By the way, they were both really good pieces.


    by erica20 on Sat, 01/14/2012 - 11:57am

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