Posted on 01/14/2012 2:24:16 AM PST by Laissez-faire capitalist
... Under Romney's leadership Bain bought majority control of World Wide Grinding Systems in 1993. It put up $8 million of the $75 million purchase price and borrowed $125 million by issuing bonds. Bain immediately sent investors $36 million in dividend checks...
A steel business is capital-intensive and sensitive to economic conditions. That's why it needs to conserve money for the lean years. When the economy did go south, so did GS Technologies. GS Technologies went bankrupt in 2001, the plant closed and 750 workers lost their jobs.
Bain skipped out on a previous agreement to provide severance pay and health benefits coverage if that happened. The workers saw their pensions slashed by up to $400/month. But Bain walked away from the smoking ruins $12 million richer, not including $4.5 million in consulting fees.
And it had tapped government as well. The company had extracted $3 million in tax savings from Kansas City... The Federal Pension Benefits Guarantee Corp bailed out the company's underfunded pension plan to the tune of $44 million [taxpayer-funded]
...
(Excerpt) Read more at sunjournal.com ...
Well, if Republicans don’t want to look at Romney’s record now, I’m sure they’ll get a chance in the summer and fall. Just counting the 80 or so companies the WSJ mentioned and the 20% or so that went bankrupt, that gives the MSM one bankrupt company a week to investigate between July through October. The guy who did the King of Bain video was apparently just a former Romney staffer who made it on his own and tried to sell it to Newt and Perry. The MSM will have about a zillion times more resources to put together their own reports.
The one common thread that seems to go through all the Bain bankruptcies is that Bain and their investors either lose nothing or very little on them. All the loss is piled onto the employees, the banks, the insurance companies, the government, etc. It’s very much like the mortgage-backed securities situation where one person uses clever financial wheeling-and-dealing to lead another person into taking all of the loss on a high risk prospect.
We’ve been focusing on the job losses, but that seems to be just one piece of a larger gaming of the financial system that shows not just ethical lapses but willful abuse of the system. It seems like the modus operandi for a lot of Bain’s acquisitions was to buy a company and cut a lot of short-term costs by selling assets, firing workers, etc. Then they would take the financial statements to creditors to show that the company is starting to show a profit and get huge loans for the acquired business. Then they would take most of that loaned money and transfer it back to Bain for their own profit in the form of fees and dividends. That money was then untouchable when the acquired business went bankrupt. The insurance companies, the government and the banks were then on the hook for the loss. The NY Times reported one case where Bain was threatened with a lawsuit and only then agreed to forego some of the fees they said they were owed from a bankrupted firm.
No one’s saying Bain didn’t have successes. But it seems like the way to “maximize their return” was to realize they could get away with scams and con jobs on 20% of their buyouts without ruining their reputation. That kept enough credit flowing and allowed them to abuse the system. I’ve seen where a couple managers from these businesses say they would’ve avoided bankruptcy if Bain didn’t drive them into debt, often just for the purpose of Bain paying itself in advance before they did anything to help the company.
I wonder if I could start a company today, get a million-dollar loan, pay myself a million-dollar consulting fee, and then let the business go bankrupt and claim it has no assets while I keep the money. Well, you have to realize this is exactly what Bain did. They just did it with a lot more cover, basically as a “side business” on top of their legitimate operations. Obviously they couldn’t do that scam 100% of the time, but they seem to have figured out they could get away with it 20% of the time without it ruining their reputation.
At any rate, most of us are amateurs trying to piece together a picture of Bain on a shoestring budget. I’m sure the MSM will do a much better job of defining Bain for us this summer and fall if Romney is the nominee.
Romney has explained none of this. But he sure has been successful at duping a bunch of people who should know better, convincing them that somehow defending his lies is defending “capitalism.”
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Exactly. Has explained NOTHING. If he could come out, provide some walk through on any of it, providing some rationales ...ok, but he hasn’t, and he won’t. He will only attack his critics.
Just like Obama does.
A man who thinks it’s ok to have some “losers” in these deals is NOT a man I want for president.
What got me in one of the stories was hearing about the lowering of quality of the products (i.e., the washing machines, for example). It reminds me of what’s being done in healthcare now ...continue to push employees, do more with less — just to stay profitable. Eventually it runs it into the ground, runs people into the ground — the “craft” of what you do is destroyed. It’s a horrible way to operate and a horrible thing to do to tour fellow human beings.
Romney has explained none of this. But he sure has been successful at duping a bunch of people who should know better, convincing them that somehow defending his lies is defending “capitalism.”
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Exactly. Has explained NOTHING. If he could come out, provide some walk through on any of it, providing some rationales ...ok, but he hasn’t, and he won’t. He will only attack his critics.
Just like Obama does.
A man who thinks it’s ok to have some “losers” in these deals is NOT a man I want for president.
What got me in one of the stories was hearing about the lowering of quality of the products (i.e., the washing machines, for example). It reminds me of what’s being done in healthcare now ...continue to push employees, do more with less — just to stay profitable. Eventually it runs it into the ground, runs people into the ground — the “craft” of what you do is destroyed. It’s a horrible way to operate and a horrible thing to do to your fellow human beings.
The problem is that private equity firms are able to "socialize their losses" by transferring assets from the troubled firm directly to the private equity firm. Then if or when the troubled firm goes bankrupt, Bain has no responsibility to pay the firm's debts and can keep all that money. Thus we all end up funding Bain's profits out of our pockets by covering their losses through banks, insurance, taxes, or losses in the workers' pension plans. This is the explanation that answers the suspicion as to why Bain never seemed to lose money on a deal, even when their acquisitions went bankrupt. This is the kind of "capitalism" that people, quite rightly, do not trust. It's one of those things that sounds indistinguishable to most people from what Bernie Madoff did, but just happens to be legal. You can argue it's caused by government policy or the private firm itself, whatever. Just like with the mortgage meltdown of 2008, there is plenty of blame to go around.
Why do you say the poor management had to occur before the buyout? Since Bain controlled this firm for 8 years prior to the bankruptcy, aren't they responsible for funding the pension? The article says they promised to fund the pension, so are you saying it's ok for them to lie to their workers?
I suppose that if Romney was a surgeon specializing in amputations, we would be criticizing him & his employers for creating so many cripples.
That's not the correct analogy. Here is the correct analogy. You go into Dr. Bain to get your tonsils out. During the process he also removes your kidney and sells it to someone who needs a transplant. Your health insurance then pays for your kidney to be replaced and everyone else's insurance costs go up.
Demanding a return is different than guaranteeing a return. People buy stocks all the time and they don't know whether they will lose or make money on the deal. It's called risk. It's called the free market. Rigging up your deals so that you will get bailed out by insurance, banks, the taxpayer or the workers' pension funds whether the company makes money or loses money or not isn't the free market, it's socialism and subsidization. If you want to make the argument that PE firms should be subsidized in this way because they are that important, then go ahead. But it doesn't show that Bain is an honorable business or one that succeeded on its own merits. It's essentially just another government-backed entity like Fannie or Freddie.
Ultimately, this whole argument comes down to “fairness”, a mythical concept of the Left used to encourage class warfare.
While it seems unfair that a business layoff employees or move elsewhere to a better business environment, it is just as unfair that investors lose their money supporting employees they cannot afford.
“...buying anything you could get”
This is exactly right! But, investors don't usually sell good investments, & Bain C cannot force any investor to sell their investments. You cannot buy that which is not for sale. There must be good monetary incentive (profit) to sell a good investment. Bad or poorly performing investments, OTOH, are easily acquired & are often selling at bargain prices.
Do you think those investors - owners - selling their business give one whit about the fate of the employees? Did they include protections for the employees in the sale & management turnover? Owners can do that, you know, but it costs them money. Or did they take their money & run?
Let's see? You've worked 20-30 years for a company, & one day the owners sell off & leave, often w/o so much as an “Adios”. New owners come in & gut the place, so it is entirely their fault you lose your job? Seems to me that if any obligation exists to the employee & I don't believe there is, it is the people who hired them that has the obligation, not the new owners or new management.
"These things may all have been perfectly legal, but that doesn’t make them right or beneficial to anybody’s economy except that of the speculator."
The exact same argument could be made against Boeing as it attempted to move manufacturing out of the Northwest to the Carolinas. Is it right or fair that all those people would lose their jobs so Boeing could make more money for their stockholders? That is the essence of the argument.
And, it isn't an attack on capitalism to be critical of ruthless, immoral and unethical business dealings:
http://www.nypost.com/p/news/business/ad_mitt_mistakes_jRmd2LHaPIb0bbNn1ZkgaJ
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.
Romney is NOT a Republican; he is a Democrat posing as a Republican.
Bain is one of the largest donators to the Democratic Party. What you’re trying to defend as being Capitalism is actually Democrats without ethics in business! For them, any means justifies the end if enriches themselves.
We no longer teach capitalism - so no one understands how it works.
We only teach Marxism in our schools. And Marxism only points out the flaws in Capitalism.
Our Republic could very well be screwed. :(
Worth repeating. Because it's the most intelligent post on the thread.
May we have the shole story, please? And may we have it from somebody who knows more about business (and life outside the ivory tower) than Froma Harrop -- who knows nothing about anything?
Funny how liberals (like Romney) are so big in amoral financial shenanigans. Making those megabucks via shoving pension funds onto the American taxpayer and extracting $$$ from a victim company until it bankrupts. This is what took place most of the time
Romney’s father ran an automobile company, a captain of industry. His lazy arse son gets together with fellow Mormon Robert C. Gay and founds Bain Capital with a few others
They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.
So the business model is based on a capital structure and tax arbitrage?
Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt. It think it is real – the very early firms targeted industries in predictable industries with reliable cash flows in which they by and large could handle this debt. As more went into this industry, it became very hard to speak to the original model. Now firms are taken over in very volatile industries. And they are taking on debts where they have to pay 15 times their cash flow over seven years — they are way over-levered.
The most common argument for why Bain Capital and other private equity firms benefit the economy is that they are pursuing profits. They aren’t in the business of directly “creating jobs” or “benefitting society,” but those effects occur indirectly through the firms making as much money as they can.
But even here, “profits” — how they exist, where they come from, and how they are timed — have a crucial legal and regulatory function. A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?
That sounds about right. If you took away this deduction, you’d still have takeovers, but you’d have a lot less leverage and the buyer would be forced to really improve the company in order to make profits. I think that would be a great thing.
If you look at the dividends stuff that private equity firms do, and Bain is one of the worst offenders, if you increase the short-term earnings of a company you then use those new earnings to borrow more money. That money goes right back to the private equity firm in dividends, making it quite a quick profit. More importantly, most companies can’t handle that debt load twice. Just as they are in a position to reduce debt, they are getting hit with maximum leverage again. It’s very hard for companies to take that hit twice.
If you look at Ted Forstmann, an original private equity person who just passed away, he would rail against dividends in this manner — borrowing money to pay out dividends. He was more interested in taking companies public and selling shares and paying down debts and collecting proceeds that way. I can respect that a lot more. The initial private equity model was that you would make money by reselling your company or taking it public, not by levering it a second time.
Private equity and buyouts started as a way to take advantage of tax gimmicks, not as a way of saying “we’re going to turn around companies.” And now it’s out of control. I look at the 10 largest deals done in the 1990s, during ideal economic times, and in six cases it was clear that the company was worse off than if they never been acquired. Moody’s just put out a report in December that looked at the 40 largest buyouts of this era and showed that their revenue was growing at 4 percent since their buyout, while comparable companies were growing at 14 percent.
In January — so just in the past 12 days — Hostess, the largest bakery in the country, just went bankrupt. Coach, the largest bus company, just went bankrupt. And Quizno’s is about to go bankrupt. All of these were owned by private equity.
This battle is part of a larger discussion of, in Henry Manne’s phrase, “the market for corporate control.” The tax code is set to overlever firms, which require increases in earnings to go toward debt payments instead of research and development, expansion, and other things that build the firm. What could we change to generate different outcomes?
That’s exactly right. Right after this goes on for a few years, you’ve starved your firm of human and operating capital. Five years later, when the private equity leaves, the company will collapse — you can’t starve a company for that long. This is what the history of private equity shows.
What I’d like to see Mitt Romney do is to show an example of a buyout that went well. The only success stories he’s talking about on any level are venture capital investments — Staples and Sports Authority. Personally I like venture capital, I think it provides a lot of value, but that’s not what he did mostly, and that’s not what these takeovers are about.
The big fix I’d encourage is an end to interest-tax deducibility for leveraged buyouts. The tax system encourages companies to borrow as much as they can. For certain industries, like telecom, these deductions might make a lot of sense. But it was never intended for financing leveraged buyouts. If you put a cap on this you would find buyouts and private equity firms that were much more focused on building companies.
Newt or Santorum. Bain has made the spaced out Mormon unelectable. Why did he thrust himself upon the Republican party? Mittens is a 100x worse than I thought. This egomaniac thinks he is a moral person? He is that crazy and will drag us down if he runs against Obama. Team Obama is salivating, planning for a run against Romney, their ideal Republican nominee.
Another Karl Rove scheme....
All these attacks of late on capitalism in general from conservative FReepers, are to say the least, making me a tad confused as personally I LOVE Capitalism in all it's forms. And some of those forms are like making sausage: You don't want to see how it's done.
I also rather enjoyed having people fired when they were costing my projects, my company, and ME -- MONEY! One guy in particular who was a THIEF and wasn't arrested on this one construction project solely because nobody in that building actually saw him loading the four computers that went missing into his truck.
The staff walks out of room with computers there. This guy comes in to work, he finishes, then the staff comes back in -- POOF -- no more computers in the room.Seeing his final paycheck being printed and the Field Superintendent delivering it to that mutt was one of my happier moments.
So yeah, Firing People IS Fun!
This is NOT a pro Mittens comment, IMO he's a snake and phony.
It's a Pro Capitalism comment.
The MSM is just drooling over the stories that they will publish about Mittens once he gets the nomination. That's why we haven't seen much in the way of attack news against Mitt -- there is SO much good stuff that they are praying he's the one to go up against Obama.
No, it's one of the stupidest posts in the thread. Criticizing the messenger instead of the message is a classic logical fallacy, hence it fits the textbook definition of stupidity. If you can't find any faults in the accuracy of the message but simply insist it must be wrong because of who the messenger is, then you're being stupid. If one of the candidates murdered somebody, I would expect Democrats to report it. Would that make the message false?
Talk about a strawman argument. Who here would disagree it’s wrong to fire someone because they stole from the company?
If you like capitalism in all its forms, then you like crony capitalism, government bailouts, monopolies, lobbyists gaming the tax code so some firms can benefit over others, etc.
Romney and Bain could not do what they do without favored tax breaks, government insurance bailouts, unnaturally low interest rates, and laws that allow their acquired firms to go bankrupt without requiring Bain to pay back any of the borrowed money that they “transferred” to themselves. What they’re doing does not exist in some kind of mythical free market, which also does not exist in our country. They are gaming a system which is set up to favor some forms of market activity and punish others.
Thanks for that! That’s a missing piece from my analysis on how the tax code gives special government favor to these private equity firms. I really hope Newt and others DO NOT back off these attacks because what Bain did looks dirtier and dirtier the more you look into it. Here is a Wall Street Journal review of the book they’re discussing:
Private Equity, Debt Worries
A warning about the precarious state of companies owned by buyout firms.
http://online.wsj.com/article/SB10001424052748704013004574515450045378722.html
Mr. Kosman brings to the subject a relentlessly critical approach that is refreshing, simply because so many stories about the buyout firms are the sort of puff pieces that result from delicate negotiations for access. He documents dozens of companies acquired in buyouts—such as hospitals, mattress manufacturers and a car-parts maker—whose service or products went downhill, whose employees suffered pay cuts or layoffs, and whose fortunes plummeted, sometimes ending in bankruptcy.
Time and again, Mr. Kosman details how the rest of us suffer at the hands of the buyout barons, 17 of whom are members of the Forbes 400. The private-equity firms pay lowball prices, he says, shortchanging public investors, by teaming up with management to pre-empt competing bids. They cream fees from their acquisitions, generating profits no matter how the companies fare. The companies cut more jobs than publicly owned competitors and sidestep proposed reforms by currying favor with politicians. Mr. Kosman finds a University of Chicago study showing that, for the years 1980 to 2001, the private-equity firms’ investors got returns that fall short of the broad market average, after fees.
At Bain Capital, built by former presidential candidate Mitt Romney, dividends paid to investors siphon off much-needed capital, weakening company after company.
http://www.washingtonmonthly.com/political-animal/2011_12/romneys_carried_interest_probl034344.php
Romney is likely paying taxes at 15% rate due to the carried interest scam/loophole that hedge fund guys also pay. If true and this comes out while he is running against Obama....
Romney is kinda spacey. He is not grounded. David Axelrod loves him...an easy target
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