If You Read Just One Thing Today
Make sure it’s this. Whether you believe it or not, are persuaded or remain unconvinced, Matt Taibbi’s piece, combined with Romney’s close to the Republican Convention, will make it the talk of the town.
A taste:
“But what most voters don’t know is the way Mitt Romney actually made his fortune: by borrowing vast sums of money that other people were forced to pay back. This is the plain, stark reality that has somehow eluded America’s top political journalists for two consecutive presidential campaigns: Mitt Romney is one of the greatest and most irresponsible debt creators of all time. In the past few decades, in fact, Romney has piled more debt onto more unsuspecting companies, written more gigantic checks that other people have to cover, than perhaps all but a handful of people on planet Earth.”
I haven’t read the whole thing yet, but from the first page alone, it looks like Moore award material.Report
So…. it’s a perfectly sensible critique that someone had the audacity to use strong language while making?Report
The languagee was definitely strong, a bit too strong because it was distracting. It is especially distracting when I find it difficult to evaluate the charges against Romney.
On the account of the sensibility of the critique, I am not sure that I entirely agree with the critique either. I think it was Tod Kelly who said that the loading companies with debt thing is not as evil as it sounds. I think he said that there are really sensible reasons to do that to a company.
I’m alsoreally uncomfrotable with a piece that tries to show not just that Romney (or for that matter any other person) would be a bad president, but that he would be mustachio-twirling-evil. Bushitler is fine as a joke. I don’t think Taibibi is joking.Report
Michael Moore? It’s funny you mention him…Report
LOOG, a bastion of the civility trope.Report
We haven’t systematized the notion that you are obligated to judge a book by its cover quite as thoroughly as Andrew Sullivan, but we’re pretty close.Report
You point to a shortcoming on LoOG’s part. No question.
But is it okay if I +1 your comment a day late? I find it awesome. (A shortcoming on my part, but I’ve learned to live with the fact that we can’t all be Sully.)Report
“But there’s a key difference between private equity firms and the businesses that were America’s original industrial cornerstones, like the elder Romney’s AMC. Everyone had a stake in the success of those old businesses, which spread prosperity by putting people to work. But even private equity’s most enthusiastic adherents have difficulty explaining its benefit to society. Marc Wolpow, a former Bain colleague of Romney’s, told reporters during Mitt’s first Senate run that Romney erred in trying to sell his business as good for everyone. “I believed he was making a mistake by framing himself as a job creator,” said Wolpow. “That was not his or Bain’s or the industry’s primary objective. The objective of the LBO business is maximizing returns for investors.” When it comes to private equity, American workers – not to mention their families and communities – simply don’t enter into the equation.”Report
I mean, the article is a bit heavy handed, yes? I think I agree with his broad points. There does seem to me, even with my limited knowledge of finance, to have been a radical change in this stuff. And I have no doubt that Romney drank deep from the spigot.
So, yeah, preach it brother.
But the article undermines its own points by its relentless invective.Report
Most definitely (with regard to the undermining invective)
From a rhetorical perspective, it could be that the invective gives a certain subset of people such cathartic relief that they will be parroting its main points endlessly but minus the underlying vitriol.
You won’t get a sense of the tone on the Sunday Morning or cable news talk shows, but you will get the bullet points.Report
But the article undermines its own points by its relentless invective.
I’m not exactly sure how invective undermines content. But I hear ya – Taibbi likes to lay it on thick, which can be offputting to some readers.Report
… read some of my comments sometime! 😉Report
“But the article undermines its own points by its relentless invective.”
That’s just Taibbi being Taibbi. Which doesn’t excuse it. But it’s to be expected. I believe he used “Vampire Squids” in the sub-heading of one of his books… I just don’t remember if he was referring to bankers or Republicans.Report
Sometimes invective is warranted. Taibbi has been banging the drum against the casino mentality in the FIRE sector and corporate cronyism in both Parties for some time. He’s been right on the content (as I think most here have expressed similar viewpoints), but he hasn’t gotten a lot of traction. It’s a Howard Beale sort of thing…Report
I’m just waiting to hear all the long-winded explanations about how this type of behavior is socially useful, how it’s a necessary component of capitalism, how it’s not Mitt’s fault that the firms he saved from bankruptcy went broke due to mismanagement after he left…Report
I have a friend who worked for Bain. He was a business prof at U Mass, and Bain liked his data-based models and hired him. His straightforward take is, almost nobody really gets what firms like Bain do; they buy companies that are dogs and try to run them for a profit; sometimes they don’t succeed, because the companies are dogs, but the did if ten enough to be very successful.
The idea that they loaded “unsuspecting companies” with debt implies that a company has consciousness, which is silly. The companies that they “loade” with debt were companies they owned. Be truthful, have you “loaded” yourself with debt? For an education, a car, and a house, odds are you have ( the general you, not Stillwater personally). You bastard!
As to others having to pay that debt, most of that is business partners/clients. Tough, but that’s always a risk. Some of it is socialized via bankruptcy, but remember that we’re talking about companies that were dogs, companies that were likely to go bankrupt anyway. And Bain’s goal wasn’t to bankrupt them-that was just the outcome they couldn’t always avoid.
But of course I’m missing the real point, which is that Bain is a good proxy for a type of capitalism that we don’t understand, that is both mysterious and frightening. Therefore it is evil.
But compare Bain to Obama’s bailout of GM, which we’re supposed to admire so much. Another dog of a company, such a dog that firms like Bain weren’t willing to take the risk. Large amounts of debt were incurred to pump money into it, but instead of it being voluntary indebtedness, we all were forced to bear that debt burden. Certain existing debtholders were stiffed in favor of others. The government would now like to sell of its GM shares, but at present could only do so at a loss (shares are trading at about half what would be needed to break even), sticking us citizens with the bill for the loss. And GM may very well be headed for serious trouble again.
So why is it wicked when Bain does it, but noble when the federal government does it? If our problem is the socialized costs of Bain’s non-successes, why are we more comfortable when the costs are even more socialized, explicitly, from the beginning?Report
So Bain buys a company, uses its imprimatur to borrow money to pay “management fees”, lays off most of the workforce, makes what remains look pretty enough that they can sell it, even though it’s so debt-ridden that it’s clearly going to fail before long, and walks off with a nice profit. None of that’s illegal, and it’s nice work if you can get it, but I’m damned if I see that it’s admirable or in any way contributes to the economy as a whole. (It’s more or less what Tony Soprano did with that gambler’s sporting good store.)Report
“But of course I’m missing the real point, which is that Bain is a good proxy for a type of capitalism that we don’t understand, that is both mysterious and frightening. Therefore it is evil.”
This is way off. I’ve been reading the same description of what companies like Bain do for 25 years. Its not a mystery or unknown. It’s pretty damn straight forward. If its evil, its not because its all magic to us folks who just can’t understand all that big finance talk.
There is a lot of moralistic talk regarding debt. In the Bain scenario ( which sounds like a Ludlum novel) they took on debt on behalf of a company. Bain itself was free from risk essentially. If the business failed then they break it up and sell off what they can while charging plenty of fees. If the business does well then they still charge plenty of fees and have a good business. Its a good business since it seems risk free for the big finance types. It looks like a rigged game where the rich guys win no matter what. That doesnt mean its evil or should be illegal. But the risk is all on the backs of the workers, the rich guys will make a pile no matter what.
In any case this piece of evidence
http://www.rollingstone.com/politics/news/the-federal-bailout-that-saved-mitt-romney-20120829
shows Bain/Mitt got a nice fed bailout himself.
Key graf is “In fact, government documents on the bailout obtained by Rolling Stone show that the legend crafted by Romney is basically a lie. The federal records, obtained under the Freedom of Information Act, reveal that Romney’s initial rescue attempt at Bain & Company was actually a disaster – leaving the firm so financially strapped that it had “no value as a going concern.” Even worse, the federal bailout ultimately engineered by Romney screwed the FDIC – the bank insurance system backed by taxpayers – out of at least $10 million. And in an added insult, Romney rewarded top executives at Bain with hefty bonuses at the very moment that he was demanding his handout from the feds.”Report
greginak,
See, now that federal bailout bit is worthwhile, not the same old silliness. But seriously, when it comes to Bain getting other private investors to pony up the dough for rescuing dog-companies, why would anybody care? If you bought a junker of a car real cheap and persuaded me that you could fix it up, if only I’ll pay for all the parts it needs and pay you for your labor (which will more than cover what you paid for the car),, then you can sell it for enough to make us both a profit, and then you fail to make it run…sure, you may be a real puts, but why would I deserve sympathy? I made an investment, which always carries risks. If Bain normally did that, nobody would invest with them–that wealthy investors continue to do so is demonstration enough that they don’t normally do so.
Ultimately, what Bain is mostly being criticized for is not suffering enough for its failures. It’s largely a moralistic response from the public, not a very analytical response.Report
I think Bain is being criticized for a practice many companies engaged in starting in the 80’s . I think i’m being repetitive but the distaste comes from feeling the Bain type companies will get richer no matter what and have no risk. Can you phrase that as not suffering enough, well i guess so. But if a company does or doesn’t have , lets say, skin in the game, then that does color their incentives. If they win no matter what happens then that does change their outlook.
The more general concern, i think, is that the system is built more around making money for finance types and less about jobs and making things. It that analytical, well no. If i ever give a rigorous financial analysis, then i got lucky or stole it from someone else. Moralistic….ummm sort of, but i think its reasonable to want to have “the system” not be rigged. That is more then just being moralistic.Report
greg – I think you’ve got this basically right, though I’d make some qualifications to be completely fair to Bain. There are “big finance types” taking risk in the form of the PE investors Bain lines up to buy up all the debt. If the target business does well, the investors make out well and if the target business tanks the investors only get what comes of selling off the carcass of the company. Bain gets their fees no matter what, but if they didn’t have more success than failure, they’d risk losing their investors. The odds still greatly favor the house, but it’s something.Report
Scott, that’s it exactly. Bain’s skin in the game is their continued ability to get investors to out money onto the businesses they buy. If no one is willing to do that, Bain’s got nothing.
So what’s Bain’s economic contribution? Reviving more dog companies than they fail to revive. Everyone focuses on the companies they sell off in pieces, but those are in the minority (or at least their net value is), and it’s worth repeating that they ended up in Bain’s hands because they were doing badly anyway. These were not robust companies destroyed by predatory financiers, but failing companies that Bain also failed to save (i.e, companies Bain was wrong about when it thought it could save them).Report
James –
Well, not nothing. Bain wouldn’t be able to sustain its business model, but they’d still walk away with their massive fees. It is disingenuous to claim the risks Bain assumes are in any way equivalent to what we typically mean when we speak of entrepreneurial risk where some guy sinks his life savings into a small business or even when a large company invests in an innovative, untested product line. The gains far outweigh the risks – nice work if you can get it (that’s is if you’re born into connections and wealth), but don’t kid yourself that it is admirable. I don’t see why socialized risk with privatized gains is any more respectable when the risk is socialized over a bunch of pension funds and endowments rather than taxpayers.
Your mileage may vary, but I think the contribution of reviving marginally more dog companies than would maybe fail otherwise is greatly oversold.Report
James-
This is all so far over my head.
My question would be this…
Was the debt that these companies took on while managed by Bain actually used and intended to help save the companies?Report
The debt these companies took on while managed by Bain was, I imagine, used and intended to make the company easier to sell. After all, who did Bain sell the companies *to*? Not rubes. Rubes don’t have enough money to buy huge companies.
Usually those two goals align. Not always.Report
Well, that’s precisely what’s at issue, innit?Report
And what’s why I asked.Report
Yeah. Of course. I meant that Taibbi’s article is providing an answer to that question. It’s the end of a long, rambling vampiresquiddlike argument and can’t be answered by a priori views of subjectively determined non-coercive utility enhancement.Report
Pat’s right, but doesn’t give the whole story.
A company like Bain doesn’t have an emotional commitment to the companies it buys, so effectively all of them are for sale: it’s just a matter of price and timing. Some they’ll hold longer than others, but any of them they’ll sell when they see that as giving them a better return than continuing to hold them.
But remember they’re buying dogs–how do you convince a savvy investor to pay good can money for that company? By improving it. So using the money to improve the company and using it to make them easier to sell are noneurally in conflict.
But sometimes Bain sells off companies that they haven’t managed to save. In those cases they’re just cutting losses. They’re reselling a dog, and conceivably it’s an even worse dog because it’s now saddled with debt. But the price they get will reflect that. So in those cases the investment was intended to improve the country, in order to ultimately improve its resale value, but the reality didn’t achieve the intention. But that doesn’t mean the intention wasn’t there.Report
James, the sales pitch to investors was to improve the company, and therefore justify the investment as being profitable over the long term. But that pitch is inconsistent with Bain’s actions, which saddled companies with loads of debt that there was no hope of ever repaying. So the theory Bain was operating on was to attract investors to finance profitable ventures, but the practice was that Bain front loaded the debt to such a degree that profitability wasn’t even an option.
I mean, did you read the article? There’s quotations from Wall Street brokers saying that Bain’s operating principle was to take what they could get independent of any consideration for the future viability of the firm. At only a marginal risk to Bain.Report
Think about it, though. How do you saddle a company with so much of other people’s money that there’s no hope of ever repaying it? Why the hell would those people put their money into such a proposition?
And it ignores the fact that Bain doesn’t just flip businesses. They may flip some, but if so that’s not the whole of their business model, because they do hold onto some companies for long periods of time.
The whole argument that’s being made depends on having people who stupidly invest in an impossible situation. But they’re dealing with money people, and money people don’t become money people by doing that.
Taibbi’s a rabble rouser, a muckraker. It’s a fine tradition, but toy can’t exactly trust them to not give you a biased view or to even understand what they’re discussing (going into an issue with the presumption opthatbomething wicked I’d going on and you’ll surely reach that conclusion). For example Taibbi implies that Bain did nothing at these companies but fire people, so of course the companies couldn’t pay back the debt. He doesn’t show what Bain did with the money put into those companies–he only says they “extracted it by force,” a term designed to induce more heat than light.
Did Bain always succeed I reviving companies? No, obviously. were they trying and failed, or we’re they actually not trying? Which makes more sense from a business perspective? Are you going to get more money from a thriving company or a failing one? Is it more parsimonious to assume Bain was wicked or that they were sometimes stupid?
How many of us have looked into the Bain story with the beginning point of giving Bain the benefit of the doubt, and how many of us have looked into them with the beginning assumption that they were sunsabitches and we just want to see in what ways they were sunsabitches? What role is confirmation bias playing in our various considerations of Bain?Report
James, correct me if I’m incorrect on this but my understanding is that one of the things Bain did was grab struggling companies and, among the other debt related things, clean out their pension funds and dump those dependents on the Feds when the companies went bust. Sure maybe the companies were not doing well in the first place but I would presume the public and certainly the employees have a strong opinion on the difference between the company sinking but their pension funds still having assets and the company foundering and them finding out that the pension fund had worthless corporate IOU’s in it.Report
This would indeed be problematic, especially if at the same time Bain is lobbying to lower, say, the amount of capital that a company needs to hold in reserve for its pension obligations or whatnot.
But those are pretty specific claims, and they require something substantial to back them up.
Also note: if the company is going bankrupt, IIRC the pension obligations get in line with everything else, at the top of the “unsecured creditor” line, but that’s after everybody else (if anybody can correct me on that, go ahead, but that’s what 10 minutes of research told me). So I imagine in many cases “robbing the pension fund” is robbing… well, the secured creditors, really. Typically the secured creditors don’t get their full investment back, and the unsecured creditors get bufkus.
So if the company lives, the pension lives on (albeit reduced, the price they paid for the rescue) and if the company bottoms out, the pensioners were going to get nothing anyway.
That seems like a non-losing proposition if the company is likely to fail without help.Report
I may be wrong on this Pat but I thought defined pension funds had specific assets in them that were set aside. I may be wrong on that though, I haven’t done pension accounting in years.Report
Where’s a real financial accountant when you need one?
That’s what the League needs, a financial accountant. Does any one blog anywhere?Report
Agreed.
My own interpretation: pension funding on defined benefit pension funds isn’t something that is simply another asset on the ledger that can be seized in bankruptcy. Specifically as I understand it (but remember my accounting experience is rusty) pension funds are separate from the company and the assets that are put into them are property of the pension fund and its beneficiaries; not the company and thus aren’t seized by creditors when a company goes kaput.
http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/08/28/gop-worries-about-pension-agency-that-gave-a-44m-bailout-to-a-bain-run-company/
So what we have here is Bain coming in, looting and under funding (in violation, note, of their contractual obligations) pension funds and then dumping the resulting costs on the Pension Benefit Guaranty Corporation (and by extension the tax payers).
Viewed this way Bain isn’t so much the efficient whirling blade of efficient capitalism but rather at least partially the “vulture capitalist” entity they’re accused of driving companies into early failure (granted they’re typically on a decline in the first place), screwing the employees and tax payers both in the process and larding themselves with fat dividends, bonuses and fees on top of it.
Also as an aside, I’m off to Nova Scotia for a week after tonight so I’m gonna miss y’all and also miss the goddamn Dem convention (I’ll miss the former a lot more than the latter).Report
There’s a bit of a difference between using debt to finance investments into your own future (which most people and even most companies do) and using a company you’re acquiring’s own assets as collateral to issue bonds to do a leveraged buy-out. The companies become “loaded” with debt as a result of the buyout as much as the previous business problems.
Now if they’re purposefully buying dogs, there actually then becomes the problem of whether or not they’re actually deliberately intended to sell off the company later with the foreknowledge that it was distressed. (This is a very profitable and popular field of corporate law…) Bain Private Equity is a different beast of course, than the venture capital firm with the same name, and the behavior that Taibbi describes was pretty common in the private equity community in the 80s and 90s.Report
Mike,
A) And when the Prez of the US does that?
B) Since when did liberals suddenly become so concerned about those poor fat cat investors who are too dumb to recognize they’ve been scammed?
C) I guess it would contribute more to the economy if the dog company was just left to fail more quickly, but that’s not what Dems argued with respect to GM, and they got mad at me when I did. It’s nice to see them coming around to my way of thinking–Bain should just let the fishers fail, and not do anything with them.
D) Of course that’s not a very accurate representation of how Bain generally operates, but since it fits the popular storyline, why should we bother to strive for more accuracy than the rest of the American media?Report
A+C) If GM fails, the bailout won’t have been worthwhile If it succeeds, there’s a large amount of capital stock, expertise, property, etc. that won’t have lost most or all of its value. Nor do I think GM got loaded up with extra debt as part of the bailout.
B) As the corporatists never get tired of pointing out, the investors are largely things like pension funds.
D) It was deliberately exaggerated. I was curious if anyone would respond with “They were all voluntary transactions, so the result must be positive-sum.”Report
A) So when Bain bails out a failing company, it saves capital stock, etc., and deserves praise, right? So why does it get none for its successes? And if GM fails, you’ll call Obama all the bad things you call Bain?Report
I’ll call Obama a greedy bastard who looted GM’s pension fund and maxed out its credit cards before declaring bankruptcy? Naah.Report
It looks like a rigged game where the rich guys win no matter what. That doesnt mean its evil or should be illegal. But the risk is all on the backs of the workers, the rich guys will make a pile no matter what.
Isn’t it the case that the companies which Bain purchased were sure to fail otherwise? Then really what is happening is that Bain charges money to bring down te risk of failure from close to 100% to somewhere cloer to 50%. (Or else why would companies consent to being bought by Bain?) Now, maybe the risk could have been mitigated even more. Maybe this could have been achieved by Bain charging less. But just because his actions under Bain were less than socially optimal doesn’t mean that they weren’t socially useful.Report
I don’t particularly disagree. I think the anger over this kind of financial action goes far beyond what Bain did to many other fianance companies over the last 20-30 years. I think some companies didn’t care about trying to turn the failing business around, they cared about getting as much cash out as they could. That doesn’t really change the calc though. If the rich dudes screw up they get richer and they can discharge the immense debt they took out. The workers get foreclosed on and told they are deadbeats for not paying their mortgage. It may be socially useful for compaines like Bain to do what they did, if they cared about trying to rebuild the company. If not well then, the workers are really screwed.Report
Isn’t it the case that the companies which Bain purchased were sure to fail otherwise? Then really what is happening is that Bain charges money to bring down te risk of failure from close to 100% to somewhere cloer to 50%. (Or else why would companies consent to being bought by Bain?)
Actually no. Some of the takeovers were essentially hostile, like that of KB toys. If you ignore Taibbi’s hyperbolic ranting (which I happen to enjoy, but that’s besides the point), he provides a very clear explanation of what companies like Bain do and why the financialization of the American economy has ultimately been far more harmful than helpful.Report
I’m certainly willing to accept that rules can be bent, and also that not all of the rules are the way they ought to be, and further that some of those who bent rules are also the sort of cat who will use political advantage to game rules.Report
This probably isn’t what you intended to imply, but it’s worth clarifying anyway, since the terminology is misleading: A hostile takeover isn’t bending the rules, or even unethical. All it means is acquiring a controlling share of a firm’s stock after management has refused to approve an outright sale. This can be done by purchasing directly from shareholders or by convincing the shareholders to vote out the management and replace it with a board more amenable to the sale. There’s no way to acquire a controlling share without the consent of the holders of a majority of the firm’s shares. It’s hostile to management, not hostile to the shareholders.
You can do unethical or illegal things after a hostile takeover, just as you can after a friendly takeover, or after starting your own company, but there’s nothing inherently wrong with a hostile takeover.Report
Its kind of like going to a surgeon right? It increases my chance of recovery if successful, but can completely screw me over if not. I still lose money in the process and the surgeon still gets paid. Either way the surgeon gets richer. But we can’t just point to the cases when the patient died to say that the surgeon was just mucking around.
its kind of like saying doctors are really aiming to kill patients because more people die in hospital than out of.Report
It would be good to know if that was the case. My assumption is that Bain probably bought companies they thought they could sell parts of or all of (in parts or whole) at a profit. Full stop. Further, I’d bet that the dispositions of the companies that were bought toward being bought by Bain were pretty much all over the map, across companies, and over time within the stages of the transactions, from potential to actual.Report
Given the small amount of up front risk, Bain bought companies which they thought they could turn a profit on, irrespective of whether the company itself would ever become or maintain profitability.Report
That’s what I thought I was saying.Report
Oh! I lost my mind for second there MD. Sorry about that.Report
Michael, that’s not what my friend who worked for Bain said. Keep in mind how business decisions are made, and how they can be represented to the public. Businesses often sell off parts of themselves because they see those pieces as unproductive for them. Famously, Kimberly-Clark sold off all its (profitabke) paper mills when that was the major part of their business, so it could focus solely on making paper products, not actually making paper. A lot of people thought it was crazy, but they became thecworld’s leading paper products company, and much mor profitable. (See Jim Collins’s Good to Great).
Now, consider if a company like Bain bought Kimberly-Clark, borrowed money to invest in reorganizing it to have a different core business, then sold off the (profitable) mills to use the finds to service the debt and get the company out of that business. How easy would it be to tell a story of Bain losing the company with debt and selling off the pieces? But it wouldn’t represent the real story very accurately at all.
Bain has been successful with a lot of companies, but how many of them have you seen folks like Taibbi writing about? How much can we say we really understand Bain when we’re only being told about the stories that have shock value?Report
How is driving a company which can’t compete into bankruptcy after collecting millions in fees socially useful? If it can compete, how is the predatory nature of an LBO and the accumulation of fees which burden the company with insurmountable debt on the premise that it’s viable socially useful?Report
Stillwater,
Your question assumes that Bain’s primary business model was to drive companies into bankruptcy. Can you consider the possibility that it wasn’t? That the social usefulness came from reinvigorating companies, but that they didn’t have a perfect track record, and now everyone is treating their failures as their goals
What if the media reported your failures as your goals? And what if everyone believed them? Would the world have an accurate perspective on your social value?Report
Isn’t it the case that the companies which Bain purchased were sure to fail otherwise?
I don’t know about sure to fail. At risk, probably.
Then really what is happening is that Bain charges money to bring down te risk of failure from close to 100% to somewhere cloer to 50%.
I don’t necessarily believe either of those numbers.
Or else why would companies consent to being bought by Bain?
To eliminate the risk to the current ownership, who will have no stake in the future of the company thereafter.Report
Right. The article argues that the management of the company made out fine from bonuses. It is the workers who are screwed.Report
Not sure to fail, although many woukd have. Generally companies that had potential but weren’t doing well.Report
Yet I’m seeing assertions that they were all doomed without Bain’s tender mercies. Must be some of that onfirmation bias you were talking about.Report
The Taibbi’s piece is, to my mind, a must read for anyone who wants to understand what Romney did for a living, how he was able to use loopholes in the American tax system to multiply his fortune, and the overall impact firms like Bain have had on the American economy. Taibbi’s makes clear that Romney was never a job creator; he was a money creator, making exhorbitant profits for a very few, including himself, while frequently leaving a path of destruction in his wake. More generally, Taibbi’s addresses the financialization of the American economy and it’s impact on our society.
What’s clear is that Romney is a huge hypocrite when it comes to matters of debt and government bailouts, both of which he made liberal use of during his days at Bain. It’s likely one of the reasons he doesn’t want to talk about his years at Bain except in banal generalities, just like he doesn’t want to talk about his days as Massachusetts governor. Heck, he doesn’t even want to talk about his role in the Olympics all that much because it also involved a major sucking up of federal funding, about five times the amount the LA Olympics did.
At any rate, read the article. Agree or disagree with its conclusions, it’s a brilliant piece of writing.Report
As Michelle notes, the problem lies not with Romney, or with Bain, but with a tax and regulatory system that incentivizes these kinds of behaviors.
The picture he paints at the end of the piece is of someone like the people noted by Mike Lofgren who are not of a place, or have a stake in the greater public good, because they are above and beyond it, culturally, financially, and politically.
http://www.theamericanconservative.com/articles/revolt-of-the-rich/Report
Some say a flat tax would solve that problem. Can we expect liberals to advocate one? 😉Report
Wait. All thru this thread you’ve been defending Bain for having done nothing wrong, for in fact doing socially useful things. So what problem needs correcting?Report
Um, the problem isn’t the tax brackets. It’s the other 10,000 pages of the Tax Code. Nice try, though.Report
So which tax credits should we get rid of?Report
Most of ’em. I’d phase out pretty much 90% of ’em over the next ten years. I don’t like social engineering through the tax code. If you want to give people money for having kids or for buying a house, send ’em a check, with the words ‘directly from the US government’ right on it.Report
The thing is, Ethan, some like me see no problem here. These companies were doomed. That Bain minimized its financial exposure rather than go down with the ship was smart, not predatory.
Yes, they paid themselves for their expertise, while they tried to use that expertise to save these companies. Bankruptcy lawyers get paid off the top. That’s how it works. Otherwise, nobody worth their salt would bother.
“…a stake in the greater public good, because they are above and beyond it, culturally, financially, and politically.”
We all have a stake. Our duty to ourselves and our families is to work hard, our duty to fellow man is to be honest. That’s it. The rest is that Adam Smith thing, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Show me the benevolent butcher, brewer or baker and I’ll show you what it looks like to be bankrupt.Report
Ampad was not a doomed company until Bain larded it up with questionable acquisitions.Report
The article says that about 7% of private equity takeovers end in bankruptcy. That doesn’t sound too bad, considering that they tend to target underperforming firms. Taibbi gives some examples of Bain takeovers ending in bankruptcy, but unless I missed it, he doesn’t actually tell us what percentage of Bain takeovers ended in bankruptcy. Why not?
I’m also skeptical of the account Taibbi gives of how a leveraged buyout actually works. I’m by no means an expert in finance, but the claim that the investing firm is able to borrow money to buy the company and then transfer that debt to the purchased firm without having 100% ownership strikes me as somewhat implausible. Can anyone here clear this up?Report
After thinking about it some more, I realize that I don’t actually know how minority shareholders are protected from expropriation by controlling shareholders. I found some other papers alluding to the fact that the US and other common-law countries have relatively strong protections against this sort of thing, but they don’t give details.Report
People around here have commented that shareholders can sue for egregiously bad decisions. I think that would have to cover bad-faith expropriation. I’d be interested in learning more, though.Report
I’ve attempted such a lawsuit. It is called a derivative suit and even if you prevail the shareholders evenly divide the spoils. In other words, if I own 20% of a company and the 80% owners screw it up, I can spend my /own/ capital and time and sue the other owners and /if/ I win the suit, the money is split pro-rata among the shareholders, in other words I collect 20% and the bad guys get 80%. Not very fair but them’s the breaks.Report
Again, I think Taibbi’s piece is less about private equity than it is trying to make claims about the “Bain” mentality and how it’s perceived by the larger public.
The problem, at least as he argues it, is that people in these positions win even when they lose, and amass so much money while doing so that they find themselves extricated from the social compact that the rest of us still find ourselves in.
The key is his part at the end about Romney being the 21st century “nowhere” man. Whether or not that’s actually true, or a fair characterization, I think it does push an important issue which the election isn’t dealing with, despite the fact that someone like Romney is half the equation, which is, what do we decide has value (a GM plant vs. a stock price) and how do we think people should be compensated for creating or obtaining value.
I know even asking those questions sounds antithetical to free market capitalism, but what it’s really getting at is the change from the American free market capitalist system of the 50s-60s-early 70s to the post-modern version of the 80s-90s-00s where time and again a bunch of people get rich for exploiting or creating to popping bubbles, without having actually created much of value in the process.
Romney was part of that exploitative process, which was in part only possible because of handouts and exemptions made available by the U.S. government whose intervention he deplores, and which did also add value in many instances, as well as not add value in others, but he won either way, and so the he needs to answer for the kind of non-competitive, government subsidized capitalism he’s been a major part of.Report
Again, I think Taibbi’s piece is less about private equity than it is trying to make claims about the “Bain” mentality and how it’s perceived by the larger public.
Right. The point is that those claims seem to rely very heavily on innuendo, and there are some key details that don’t sound entirely plausible. It’s clear that he has an axe to grind, which suggests that the details he’s omitting may cast Bain in a more favorable light.
The problem, at least as he argues it, is that people in these positions win even when they lose
Sure, but so do doctors, teachers, therapists, social workers, politicians, congressmen, most lawyers, and many others. Working on a contingency basis is fairly rare. Given that they took a controlling stake in the companies, it’s likely that they made more money when they did well, since this would allow them to sell the company for more.
By the way, I’m pretty sure the bolded part here is wrong:
The entire business of leveraged buyouts wouldn’t be possible without a provision in the federal code that allows companies like Bain to deduct the interest on the debt they use to acquire and loot their targets. This is the same universally beloved tax deduction you can use to write off your mortgage interest payments….
Deduction of interest on business loans isn’t some kind of government handout, it’s recognition of the obvious fact that the interest is a legitimate business expense. If you have $10,000,000 in gross profits and $7,000,000 in income expenses, then your profit is $3,000,000, not $10,000,000. Interest expenses are not fundamentally different from any other kind of expense, and expenses are not profit.
Nor is this unique to leveraged buyouts. Many different types of businesses rely on loans for financing; failure to recognize the interest as a legitimate business expense would render many such ventures unprofitable.
Home mortgage interest is different, because a home mortgage is a loan taken out for personal consumption rather than for business expenses. Home mortgage interest is not fundamentally different from rent, utilities, credit card interest, car payments, or other non-deductible personal expenses.
And this is wrong:
So the Romney who routinely rails against the national debt as some kind of child-killing “mortgage” is the same man who spent decades exploiting a tax deduction specifically designed for mortgage holders in order to bilk every dollar he could out of U.S. businesses before burning them to the ground.
The interest deduction has been in place since the income tax was first instated, and it was intended primarily for business expenses. Originally all interest was deductible, because at the time loans for personal expenses for comparatively rare (no credit cards, no cars, and homes were usually purchased in cash). The 1986 tax reform repealed the deductibility of most personal interest expenses but continued to allow deductions for home mortgage interest. This NYT article has a good overview.
This is really bad. If Taibbi doesn’t understand why interest is a legitimate business expense and why it should be deductible, and if he doesn’t see the distinction between that and the home mortgage interest deduction, he has no business writing about this stuff in a national publication.Report
Correction:
If you have $10,000,000 in gross profits and $7,000,000 in
incomeinterest expensesReport