Romney’s Casino Capitalism

Must-read article at Bloomberg by Anthony Luzzatto Gardner:

What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.

What’s less clear is how his skills are relevant to the job of overseeing the U.S. economy, strengthening competitiveness and looking out for the welfare of the general public, especially the middle class.

What particularly good about this is that it focuses on the period before 1999, when Mittens was, unambiguously, in charge. For example:

In 1992, Bain Capital bought American Pad & Paper by financing 87 percent of the purchase price. In the next three years, Ampad borrowed to make acquisitions, repay existing debt and pay Bain Capital and its investors $60 million in dividends.

As a result, the company’s debt swelled from $11 million in 1993 to $444 million by 1995. The $14 million in annual interest expense on this debt dwarfed the company’s $4.7 million operating cash flow. The proceeds of an initial public offering in July 1996 were used to pay Bain Capital $48 million for part of its stake and to reduce the company’s debt to $270 million.

From 1993 to 1999, Bain Capital charged Ampad about $18 million in various fees. By 1999, the company’s debt was back up to $400 million. Unable to pay the interest costs and drained of cash paid to Bain Capital in fees and dividends, Ampad filed for bankruptcy the following year. Senior secured lenders got less than 50 cents on the dollar, unsecured lenders received two- tenths of a cent on the dollar, and several hundred jobs were lost. Bain Capital had reaped capital gains of $107 million on its $5.1 million investment.

Gardner has several other examples of Romney playing casino capitalism. This is the guy who would be good for the U.S. economy?

Add to that the fact that Mittens wants to cut taxes on the wealthy even more but raise them on lower income folks. It’s like he wants to do to America what he did to American Pad & Paper — borrow money to pay the guys at the top, and let everyone else suffer. And polls suggest increasing numbers of Americans realize they are permanently stuck among “everyone else” and have no hope of every being wealthy themselves.

Paul Krugman argues that this election really does boil down to a battle between the rich versus the rest:

he story so far: Former President George W. Bush pushed through big tax cuts heavily tilted toward the highest incomes. As a result, taxes on the very rich are currently the lowest they’ve been in 80 years. President Obama proposes letting those high-end Bush tax cuts expire; Mr. Romney, on the other hand, proposes big further tax cuts for the wealthy.

The impact at the top would be large. According to estimates by the nonpartisan Tax Policy Center, the Romney plan would reduce the annual taxes paid by the average member of the top 1 percent by $237,000 compared with the Obama plan; for the top 0.1 percent that number rises to $1.2 million. No wonder Mr. Romney’s fund-raisers in the Hamptons attracted so many eager donors that there were luxury-car traffic jams.

What about everyone else? Again according to the policy center, Mr. Romney’s tax cuts would increase the annual deficit by almost $500 billion. He claims that he would make this up by closing loopholes, in a way that wouldn’t shift the tax burden toward the middle class — but he has refused to give any specifics, and there’s no reason to believe him. Realistically, those big tax cuts for the rich would be offset, sooner or later, with higher taxes and/or lower benefits for the middle class and the poor.

But it’s also the case that most American voters aren’t aware of Mittens’s specific proposals yet, or what they would do to the deficit and to their pocketbook. Krugman goes on to argue that in today’s media environment, when most people are never given straight facts, ragging Romney about his Bain record is about “the only way to bring real policy issues into focus.”

Josh Marshall explains why now is exactly the right time to hammer Mittens with his Bain Capital background.

But beyond all the specific accusations, they’re [the Obama campaign] painting a picture that makes Romney look ridiculous, like a joke. They’re making Romney look stupid and powerless on the front where he believes he’s one of the standouts of his generation. And that’s plain lethal for a presidential candidate.

But how does it come into play? Simple. Mitt Romney has two claims on the presidency: successful governor of major state and captain of industry. He’s largely written off the first by disavowing a genuine and perhaps far-reaching accomplishment: health care reform. Which leaves him with Bain Capital.

The play here is to make this swirl of awfulness the first thing people think of when that phrase gets uttered.

Think about it this: when do you think the next time will be that Romney talks about Bain Capital on the stump? What will people be thinking about when the 15 minute convention video about Romney’s life gets to the part about Bain capital? The Obama camp is working to build a mental roadblock in front of any persuasive discussion of Romney’s professional life, something which should be the major predicate of his whole campaign. They’re not quite there yet. But they’re getting close.

Mistermix asks the question — what does Romney have left to run on? The two major pillars of his biography — being governor of Massachusetts and being a successful CEO of Bain Capital — are out of play, or nearly so. What’s he got left?

The Romney campaign’s big counter-offensive today is to accuse the President of cronyism. Per Steve M., not even Cokie Roberts thinks that will work. And lawsy, when an empty-suit elitist loses Cokie, he should be very afraid.

17 thoughts on “Romney’s Casino Capitalism

  1. I assume the whole “Chicago politics” charge, and the demand for an apology, is the Romney campaign’s dogwhistle to the base to be enraged because ‘that black thug’ is being uppity and not showing proper deference to his betters again.

    For anyone who remembers last round’s charges about Rezko and about Rev. Wright, the idea that the Obama campaign is doing anything beyond the norm is laughable.

    Back in January, Romney himself made the point that politics ain’t beanbag, in one of the many GOP debates, when people were complaining about his attack ads. Does this count as yet-another flip-flop?

  2. David Broder put the “D,” and Cokie Roberts put the “C,” in ‘DC Villagers.’

    Broder’s gone to that great bipartisan place in the afterlife, where Heaven and Hell always compromise. Or, at least Heaven has the good taste to admit it’s the one causing all of the problems.

    Maybe Mitt can run on the time he was in the elite Prep Schoo…
    Er… uhm… no, he can’t do that.

    So, he can’t run on that.
    Or his father’s record, since the father was a decent, self-made man, and not a “Cannibal Capitalist” with a nice start from Daddies Trust Fund.
    No schools at all. Not even college and post-graduate degrees, since he went to elite schools all of his life.
    He can’t run on Bain – or, 18 years after losing to Ted Kennedy because of Bain, hasn’t yet thought of a strategy to explain it away – I don’t think Presidents have the luxury of 18 minutes or hours, let alone years, to explain some things.
    He can’t run on his previous political positions, since they were all 180 degrees the opposite of what he says he stands for now.
    And he can’t run on his record as Governor, since he treated that like a part-time job, except when he provided the blueprints for “Obamacare,” which he then signed.

    What to do…? What to do…?

    Cue the cries of Nigrah President who cheated his way into office thanks to ACORN, the NAACP, and ACORN; bring out the Gay-bashers; and the peeker’s-into of the Shameless Hussies puss… vagi… LADY PARTS!!!

    There’s and Election to be won!!!

  3. Maha:

    Unfortunately, what Romney was doing is actually quite common. Its how all VC firms operate. Thus, I don’t fault Romney for acting as he acted. In fact, this was Obama’s point when he said that CEOS of VC firms have one goal,l to make money for their investors. If they create jobs as a by-product, so be it, but that is not their goal.

    Also, I disagree that Romnet “socialized” the losses. Private investors believed they could make money financing this transaction. Indeed, many may have by selling the bonds (or other financing instrument) prior to the company’s downfall. Other investors, creditors, etc., were left holding the bag when the company failed. That speaks more to the nature of the stock market/capitalism itself, than it does to “socialized losses.” To me, socialized losses are where the government (i.e., the people) suffers the loss if the investmnet fails (as happened in the banking crisis).

    How this experience prepares him to be President, is a valid question. The connection between Romey’s actions as CEO and his goals as President (top benefits, bottom suffers), is interesting.

    • Unfortunately, what Romney was doing is actually quite common. Its how all VC firms operate.

      I think most of us here know that. The public at large doesn’t, though.

  4. Or, to paraphrase a woman on Facebook: ” There’s something slimy about Obama, we just haven’t found out what it is just yet”.

  5. Just concentrating on Ampad, does it seem to anyone else that nothing done with it had an eye to long-term profitability, or even survival? Loading up that much debt on a company with so little annual income would be like a person earning 100K buying a house that cost 440x100k, which I think my English major math tells me would be 44,000,000, or some other such equally ridiculously sum. Once you get past about 4 times your income, you’re in trouble at the very best. How much pension debt did the government have to cover after the collapse? How guilty did Mitt feel about it? I suspect one of those amounts is high, the other one low. I got $5 says it goes parallel to the order in which I mentioned it.

  6. And Romney just isn’t a good enough politician to some how recreate himself to get himself back in the game. Not many would be, but certainly not Sir rMoney. How did this guy get the nomination? Anyone? Bueller, Bueller??

  7. I have to say, BLD, that i respect your professional viewpoint, but my interpretation of “socialized losses” includes unemployment, failed mortgages, reduced buying power, PBGA assumption of pensions, reduced pensions resulting in reduced community income, loss of quality maintainence in neighborhoods resulting in spreading blight and housing value, and everywhere else in the society of communities Ampad’s dry husk afflicted. So, BLD, I think the market view of profit as the only goal is a convenient and yes, realistic to its believers way of seeing things. I certainly don’t denigrate profits. What, however, are we willing to take away from our neighbors when they cannot see what we are doing? Our system has to recognize the people who work in it. I know there will be disruptions and “creative destruction” from time to time. VC, however, has problems with disproportionate power in the hands of the uninvolved. I know, I’m just an old liberal. But I take that as a compliment and a committment.

  8. What I don’t “get” is why, when you have money, you are simply allowed to do this.

    I had about 46K from my divorce which I put into the liquor store I opened (plus friend loans and credit cards). To be where they were at Ampad, I should have been able to take out 1.86 MILLION dollars in loans, living pretty high on the hog. And the interest payment would only be 230K per annum, which is only half of my cash flow, not 3 times greater like theirs is. So I would be able to keep this going for quite awhile.

    But I have to sign for everything personally because of the small sums of money I have. I can’t have the LLC sign for it, then go bankrupt and keep all the money like they seem to be able to do. There is something wrong with a system that lets them pay themselves with loans while I try to make do with a little bit of money I earn from selling a Product and providing a Service (the service of selling beer, but hey, many people feel it’s a service).

    It’s stories like this that make me want to figure out the system and abuse it like they do.

  9. Thanks, Bill. I certainly didn’t intend to defend the practice. So, apologies if my post was ambiguous. Nor do I condone this form of capitalistic behavior. I think you are right that the problem may be how society defines profit.

    I read the Count of Monte Cristo a while back. As you all probably know, it takes place in 18th century Europe. There is a passage in the book in which the Count saves a man from almost committing sucide. The man was inconsoldable because of the sins he committed. He could not bear to face the community any longer due to the shame he brought to himself and his family. His irredeemable sin: not being able to pay his bills. I often think about that passage in light of how VC firms operate and 21st century capitalism operates.

  10. “And polls suggest increasing numbers of Americans realize they are permanently stuck among “everyone else” and have no hope of every being wealthy themselves. ”

    If true, this is extremely significant. The reason people have forgiven the rich for their excesses for so, so long is because we are raised in America to believe anybody can “make it big. You CAN, but the odds are pretty long.

  11. BLD, it seems we are on the same track. The Dumas character presciently represents the way money becomes respectability. Oddly, many early religious settlers of this nation were very much in line with “prosperity theology” that presented one’s financial state as a judgment from God on whether He was pleased with one’s soul status. To be blessed was to be successful, and the poor were despicable because of their poverty indicating God’s judgment against them for either obvious or hidden sinfulness, or simple failure to have strong enough faith. This is so reminiscent of the attitudes expressed today by the “haves” in re the “have nots”.

  12. OK, too many comments from me today, but Boykin has an article up on THE SWISSBOATING OF MITT ROMNEY that says it all in the title. Maybe a nice slice of Swiss with big holes should be his bumper sticker!

  13. Jen, when you get a chance, rent the movie “Rat Race”; perhaps it will help you understand how the “game” works. When a person gets to a certain level of wealth, it becomes a game. Besides that, Rat race is one of the funniest films I’ve ever seen; the statement “you shoulda bought a squirrel” is priceless!

  14. Speaking of making Mitt look ridiculous, stupid, a joke, it doesn’t help when one of his key advisers says that Mitt had retired from Bain retroactively. What???

    So, not only is Mitt an economic wizard, an experienced head of a state (Mass) he’s also a time traveler.

    (Someone posted a sign asking his viewers, “What do you intend to do today, retroactively.” I loved it.)

  15. BLD is right. I would add that along with accruing as much capital as possible and making a profit as close to the poison line as possible, the VC abhors any ‘interference’ by bureaucrats, regulators, or union bosses in the carrying out of his goals.

    With Mitt in the presidency, the question then is as president can we assume that bureaucrats (the government) regulators (the government) and unions (the people) would be made powerless to stop the all-powerful, unhindered oligarchy from creating an economy/country which served them and them only?

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