By: Eugene Robinson, Opinion Writer, The Washington Post, January 16, 2012
“Everyday Workers”: Capitalism’s Real “Risk-Takers”
Mitt Romney is casting the 2012 campaign as “free enterprise on trial” — defining free enterprise as achieving success through “hard work and risking-taking.” Tea Party favorite Sen. Jim DeMint of South Carolina says he’s supporting Romney because “we really need someone who understands how risk, taking risk… is the way we create jobs, create choices, expand freedom.” Chamber of Commerce President Tom Donahue, defending Romney, explains “this economy is about risk. If you don’t take risk, you can’t have success.”
Wait a minute. Who do they think are bearing the risks? Their blather about free enterprise risk-taking has it upside down. The higher you go in the economy, the easier it is to make money without taking any personal financial risk at all. The lower you go, the bigger the risks.
Wall Street has become the center of riskless free enterprise. Bankers risk other peoples’ money. If deals turn bad, they collect their fees in any event. The entire hedge-fund industry is designed to hedge bets so big investors can make money whether the price of assets they bet on rises or falls. And if the worst happens, the biggest bankers and investors now know they’ll be bailed out by taxpayers because they’re too big to fail.
But the worst examples of riskless free enteprise are the CEOs who rake in millions after they screw up royally.
Near the end of 2007, Charles Prince resigned as CEO of Citgroup after announcing the bank would need an additional $8 billion to $11 billion in write-downs related to sub-prime mortgages gone bad. Prince left with a princely $30 million in pension, stock awards, and stock options, along with an office, car, and a driver for five years.
Stanley O’Neal’s five-year tenure as CEO of Merrill Lynch ended about the same time, when it became clear Merrill would have to take tens of billions in write-downs on bad sub-prime mortgages and be bought up at a fire-sale price by Bank of America. O’Neal got a payout worth $162 million.
Philip Purcell, who left Morgan Stanley in 2005 after a shareholder revolt against him, took away $43.9 million plus $250,000 a year for life.
Pay-for-failure extends far beyond Wall Street. In a study released last week, GMI, a well-regarded research firm that monitors executive pay, analyzed the largest severance packages received by ex-CEOs since 2000.
On the list: Thomas E. Freston, who lasted just nine months as CEO of Viacom before being terminated, and left with a walk-away package of $101 million.
Also William D. McGuire, who in 2006 was forced to resign as CEO of UnitedHealth over a stock-options scandal, and for his troubles got pay package worth $286 million.
And Hank A. McKinnell, Jr.’s, whose five-year tenure as CEO of Pfizer was marked by a $140 billion drop in Pfizer’s stock market value. Notwithstanding, McKinnell walked away with a payout of nearly $200 million, free lifetime medical coverage, and an annual pension of $6.5 million. (At Pfizer’s 2006 annual meeting a plane flew overhead towing a banner reading “Give it back, Hank!”)
Not to forget Douglas Ivester of Coca Cola, who stepped down as CEO in 2000 after a period of stagnant growth and declining earnings, with an exit package worth $120 million.
If anything, pay for failure is on the rise. Last September, Leo Apotheker was shown the door at Hewlett-Packard, with an exit package worth $13 million. Stephen Hilbert left Conseco with an estimated $72 million even though value of Conseco’s stock during his tenure sank from $57 to $5 a share on its way to bankruptcy.
But as economic risk-taking has declined at the top, it’s been increasing at the middle and below. More than 20 percent of the American workforce is now “contingent” — temporary workers, contractors, independent consultants — with no security at all.
Even full-time workers who have put in decades with a company can now find themselves without a job overnight — with no parachute, no help finding another job, and no health insurance.
Meanwhile the proportion of large and medium-sized companies (200 or more workers) offering full health care coverage continues to drop – from 74 percent in 1980 to under 10 percent today. Twenty-five years ago, two-thirds of large and medium-sized employers also provided health insurance to their retirees. Now, fewer than 15 percent do.
The risk of getting old with no pension is also rising. In 1980, more than 80 percent of large and medium-sized firms gave their workers “defined-benefit” pensions that guaranteed a fixed amount of money every month after they retired. Now it’s down to under 10 percent. Instead, they offer “defined contribution” plans where the risk is on the workers. When the stock market tanks, as it did in 2008, the 401(k) plan tanks along with it. Today, a third of all workers with defined-benefit plans contribute nothing, which means their employers don’t either.
And the risk of losing earnings continues to grow. Even before the crash of 2008, the Panel Study of Income Dynamics at University of Michigan found that over any given two-year stretch about half of all families experienced some decline in income. And the downturns were becoming progressively larger. In the 1970s, the typical drop was about 25 percent. By late 1990s, it was 40 percent. By the mid-2000s, family incomes rose and fell twice as much as they did in the mid-1970s, on average.
What Romney and the cheerleaders of risk-taking free enterprise don’t want you to know is the risks of the economy have been shifting steadily away from CEOs and Wall Street — and on to average working people. It’s not just income and wealth that are surging to the top. Economic security is moving there as well, leaving the rest of us stranded.
To the extent free enterprise is on trial, the real question is whether the system is rigged in favor of those at the top who get rewarded no matter how badly they screw up, while the rest of us get screwed no matter how hard we work.
The jury will report back Election Day. In the meantime, Obama and the Democrats shouldn’t allow Romney and the Republicans to act as defenders of risk-taking free enterprise. Americans need to know the truth. The only way the economy can thrive is if we have more risk-taking at the top, and more economic security below.
By: Robert Reich, Salon, January 17, 2012
“Bait-And-Switch”: When Mitt Romney Ran Bain Capital, His Word Was Not His Bond
America has been learning a lot lately about “the Bain way.” The damning 28-minute video “When Mitt Romney Came to Town,” put out by a pro-Newt Gingrich super PAC, and the new book “The Real Romney,” by Boston Globe reporters Michael Kranish and Scott Helman, have shed light on the strategies that Mitt Romney’s old private-equity firm, Bain Capital, used to generate outsize returns for its investors.
Make no mistake: Under Romney’s leadership in the 1980s and 1990s, Bain was a top-performing private-equity fund. According to an internal 2000 estimate, the fund achieved annualized returns of an astounding 88 percent from 1984 to 1999 for its institutional investors, including state and corporate pension funds that invest the savings of millions of American workers. It also made a fortune for Romney, whose net wealth reportedly exceeds $250 million.
For Kranish and Helman, the Bain way is an “intensely analytical and data-driven” approach to studying companies, what makes them successful or not, and how to boost their competitiveness.
The video “When Mitt Romney Came to Town” is understandably less sympathetic. To the filmmakers, bankrolled by the Winning Our Future super PAC, the Bain way is nothing less than “turning the misfortunes of others into . . . enormous financial gains.” The film spends most of its time interviewing people who lost their jobs and much of their savings after working at various companies that Bain bought, milked and sold to generate those huge profits.
Yet, there is another version of the Bain way that I experienced personally during my 17 years as a deal-adviser on Wall Street: Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching Wall Street bankers to get its hands on the companies that provided the raw material for its financial alchemy. Other private-equity firms I worked with extensively over the years — Forstmann Little, KKR, TPG and the Carlyle Group, among them — never dared attempt the audacious strategy that Bain partners employed with great alacrity and little shame. Call it the real Bain way.
Here’s how it worked. Private-equity firms are always eager to find companies to buy, allowing them to invest chunks of the billions of dollars entrusted to them and from which they earn hundreds of millions in fees. One ready source of these businesses is Wall Street bankers hired to sell companies through private auctions. The good news is that when a banker puts together a detailed selling memorandum about a company, chances are very high that company will be sold; the bad news is that these private auctions tend to be very competitive, and the winning bidder, by definition, is most often the one willing to pay the most. By paying the highest price, you win the company, but you also may reduce the returns you can generate for your investors.
I never negotiated directly with Romney; he was too high-level for any interaction with me. Rather, I dealt often with other Bain senior partners, who were very much in his mold. In my experience, Bain Capital did all that it could to game the system by consistently offering the highest prices during the early rounds of bidding — only to try to low-ball the price after it had weeded out competitors.
By bidding high early, Bain would win a coveted spot in the later rounds of the auction, when greater information about the company for sale is shared and the number of competitors is reduced. (A banker and his client generally allow only the potential buyers with the highest bids into the later rounds; after all, you can’t have an endless procession of Savile Row-suited businessmen traipsing through a manufacturing plant if you want to keep a possible sale under wraps.)
For buyers, the goal in these auctions is to be one of the few selected to inspect the company’s facilities and books on-site, in order to make a final and supposedly binding bid. Generally, the prospective buyer with the highest bid after the on-site due-diligence visit is selected by the client — in consultation with his or her banker — to negotiate a final agreement to buy the company.
This is the moment when Bain Capital would become especially crafty. In my experience — which I heard echoed often by my colleagues around Wall Street — Bain would seek to be the highest bidder at the end of the formal process in order to be the firm selected to negotiate alone with the seller, putting itself in the exclusive, competition-free zone. Then, when all other competitors had been essentially vanquished and the purchase contract was under negotiation, Bain would suddenly begin finding all sorts of warts, bruises and faults with the company being sold. Soon enough, that near-final Bain bid — the one that got the firm into its exclusive negotiating position — would begin to fall, often significantly.
Of course, some haggling over price is typical in any sale, and not everything represented by sellers and their bankers is found to be accurate under close examination. But Bain Capital took the art of negotiation over price into the scientific realm. Once the competitive dynamics had shifted definitively in its favor, the firm’s genuine views about what it was willing to pay — often far lower than first indicated — would be revealed.
At such a late date, of course, the seller is more than a little pregnant with the buyer. Attempting to pivot and find a new buyer — which knew it had not been selected in the first place, but was now being called back — would be devastating to the carefully constructed process designed to generate the highest price. Once Bain’s real thoughts about the price were revealed, the seller either had to suck it up and accept the lower price, or negotiate with a new buyer, but with far less leverage.
Needless to say, this does not make for a very happy client (or a happy banker). By the end of my days on Wall Street in 2004, I found the real Bain way so counterproductive that I no longer included Bain Capital on my buyer’s lists of private-equity firms for a company I was selling.
The real Bain way may be nothing more than a clever tactic to eliminate competition from a heated auction in order to buy a business at an attractive price. After all, Bain Capital is seeking the highest returns for its investors. But Bain’s behavior also reveals something about the values it brings to bear in a process that requires honor and character to work properly. If a firm’s word is not worth the paper it is printed on, then its reputation for bad behavior will impair its ability to function in an honorable and productive way.
I don’t know if Bain Capital still uses the bait-and-switch technique when it competes in auctions these days (I’m told that it doesn’t). But that was the way the firm’s partners competed when Romney ran the place. This win-at-any-cost approach makes me wonder how a President Romney would negotiate with Congress, or with China, or with anyone else — and what a promise, pledge or endorsement from him would actually mean.
Would a President Romney, along with a Republican Congress, cut taxes for the wealthy even more than he has pledged to do? Would he not try to balance the federal budget, even though he has said he would? Would he protect defense spending, as he has indicated he would?
I have no idea how Romney might behave in office. I do believe, however, that when he was running Bain Capital, his word was not his bond.
By: William D. Cohan, The Washington Post, January 13, 2012
“Creative Destruction”: Re-Examining The Myth Of No-Fault Capitalism
From all evidence, the issue of economic justice isn’t going away. Break the news gently to Mitt Romney, who seems apoplectic that the whole “rich get richer, poor get poorer” thing is being discussed out loud. In front of the children, for goodness’ sake.
“You know I think it’s fine to talk about those things in quiet rooms,” he told the “Today” show’s Matt Lauer last week. “But the president has made this part of his campaign rally. Everywhere he goes we hear him talking about millionaires and billionaires and executives and Wall Street. It’s a very envy-oriented, attack-oriented approach.”
Actually, those blasts weren’t coming from President Obama. That was Romney’s competition for the Republican nomination, sounding like a speakers’ lineup at an Occupy Wall Street rally.
Now, I predict, will come a furious attempt by the GOP to unring the economic justice bell. Damage control efforts began with Newt Gingrich backing away from his sharp-fanged criticism of Romney’s record at Bain Capital, the investment firm he led. Don’t attack the GOP front-runner for being a ruthless, heartless corporate raider, Gingrich announced, but rather for not being conservative enough.
This admonition came as a pro-Gingrich political action committee continued to blast Romney as a ruthless, heartless corporate raider. Inconsistency, thy name is Newt.
By most accounts, Bain was a relative laggard in the ruthlessness department. Other private-equity firms were far more brazen in the way they bought troubled companies, laid off workers, stripped away assets and fattened investors’ bank accounts. While Romney’s claim to have created 100,000 jobs looks like a gross exaggeration, it’s true that Bain stuck with companies such as Staples and Sports Authority and helped them grow.
But as for heartlessness, well, it comes with the turf, right? Bain was just serving as an instrument of “creative destruction,” and if workers lost their jobs, if they had to raid their children’s college funds to pay their mortgages, if perhaps that money ran out and they ended up losing their homes, in the long run they’ll still be better off. Or the country will be better off. Or something.
In any event, capitalism means never having to say you’re sorry. Perish the thought that anyone would critically examine this ethos except in a “quiet room.”
But to the horror of radical free-market ideologues, the myth of no-fault capitalism is under scrutiny. No one is arguing against markets, which are indeed the best way to create wealth and thus the best weapon against poverty. No one is arguing that investors who risk their capital in a company should not be able to reap rewards. What the ideologues ignore, however, is that workers also have “capital” at risk — in the form of mind and muscle, creativity, loyalty, years of service. Why is this investment so casually dismissed?
The first of the Republican candidates to raise the fairness issue was Rick Santorum, who spoke in debates of the pain many families were suffering because of economic dislocation. This was before his strong showing in Iowa, so no one was paying attention.
Then Gingrich and Rick Perry picked up the theme in an attempt to slow Romney’s march to the nomination. Whether they meant what they said or were just being tactical, the effect was to open a discussion of economic fairness and justice that will be hard to squelch.
The next logical step is to look at the results being produced by the radically deregulated, no-fault capitalism that has been practiced in this country since the Reagan revolution. Overall, we’ve had tremendous growth and low inflation. But we’ve also seen rising inequality and falling mobility. Middle-class incomes have stagnated, upper-class incomes have skyrocketed, and rags-to-riches stories are now less likely than in most of the “European social democracies” Romney holds in such disdain.
We have failed to keep pace with other industrialized societies in public education, and rather than offer relevant retraining to employees displaced by innovation and globalization, we leave them to their own devices. As a result, we’re starting to lose not just basic manufacturing jobs but also high-value-added, knowledge-based jobs to countries where workers are more qualified.
Government has played a huge role in guiding the nation through previous economic upheavals — after World War II with the GI Bill, for example. It can and should play such a role now.
That’s my view, at least. Thanks to the Republican candidates, of all people, we’ll get to hear what President Obama and his eventual opponent think.
Unlimited Contributions Give “Super PACs” Power To Change Presidential Race
With the South Carolina primary less than a week away, residents of the state are being bombarded with a barrage of political advertisements funded by Super PACs.
“It’s coming in fast and furious,” said Randy Cable of South Carolina’s conservative talk radio station WORD.
Cable said that Super PACs are buying up a majority of his station’s air time.
“They’re a game changer,” Cable told Rock Center Special Correspondent Ted Koppel in an interview scheduled to air Monday night.
This election season is the first presidential race to feel the influence of Super PACs, political action committees that can receive unlimited money from individuals, corporations and unions. Some of these Super PACs have morphed into powerful outside organizations working solely on electing a presidential candidate of their choosing. While a campaign supporter can only donate $2500 directly to a presidential candidate, he or she can donate unlimited amounts of money to a Super PAC supporting the same candidate.
“The Super PACs are outspending the candidate committees two to one at this point in time,” Cable said. “The ones that are buying the most [air time] are going to have the biggest impact. You know, just like in the world of business and advertising, politics goes the same way. Those that spend the most have the biggest impact.”
Every major GOP presidential candidate has a Super PAC supporting their campaign. Super PACs are supposed to operate independently of the candidates, meaning they can’t communicate directly with the politicians and their campaign staff. Super PACs have been effective even with the communication barrier, because they are often run by people who already know how the candidates think. A look at whose running the Super PACs reveals a roster of former staffers and advisers to the presidential candidates.
Carl Forti, a former political director for Mitt Romney, helped launch the ‘Restore Our Future’ Super PAC in 2010. The Super PAC supports Romney’s campaign for president.
Koppel asked Forti, “Some of the research I’ve read on you and your organization suggests that you may by the end of this political year have spent four hundred million dollars on the campaign. Is that fair? Does that seem reasonable?”
Forti responded by saying, “Potentially. Well, that seems a little high probably, but between the different entities it may be three hundred, three-fifty.”
Of those criticizing the millions raised by Super PACs, Forti said, “There’s a lot of criticism leveled at Super PACs, but we’re just operating under the laws as provided.”
The Citizens United Supreme Court decision in 2010 allowed the unique political action committees to form. In the case of Citizens United against the Federal Election Commission, the Supreme Court ultimately ruled that the government could not limit political spending by corporations.
Some of this election year’s most negative advertising has come from Super PACs, giving candidates a way to effectively attack an opponent without having the blame pinned directly on them.
At a press conference held Monday morning in South Carolina, Republican presidential candidate Jon Huntsman cited the negative tone of this year’s campaign when he announced he was dropping out of the race.
“This race has degenerated into an onslaught of negative and personal attacks not worthy of the American people and not worthy of this critical time in our nation’s history,” Huntsman said.
Political analysts say that an anti-Newt Gingrich ad run by ‘Restore Our Future’ during the lead-up to the Iowa Caucuses significantly impacted Gingrich’s one-time lead. Gingrich finished fourth in the caucuses.
“We learned in Iowa, if you unilaterally disarm, you might as well not run. If you allow other candidates to have a scorched earth, multimillion dollar ad campaign and there’s nothing that responds, they simply, by constant defamation drive you down,” Gingrich told Koppel.
Following Gingrich’s finish in Iowa, a Super PAC supporting the former Speaker of the House called ‘Winning Our Future,’ received a $5 million donation from wealthy casino owner Sheldon Adelson. In South Carolina, ‘Winning Our Future’ has launched anti-Romney advertisements.
While Gingrich has publicly denounced the negative advertisement, the Super PAC supporting him continues to run the ad that paints Romney as a greedy businessman and attacks his record from his days at venture capital firm Bain Capital.
“We’re now entering a world where until the laws are changed, every serious campaign will have one or more Super PACs. They will spend an absurd amount of money and it will virtually all be negative. That’s a fact,” Gingrich said. “Given the playing field right now, you have no choice.”
The power of the Super PAC has been mocked by comedian Stephen Colbert, host of Comedy Central’s ‘The Colbert Report.’ Colbert created his own Super PAC and recently handed over control of it to Jon Stewart, renaming it ‘The Definitely Not Coordinated with Stephen Colbert Super PAC.’
Colbert handed over control to form an exploratory committee about a possible presidential run in South Carolina. His Super PAC also launched a satirical anti-Romney advertisement that likened the former Massachusetts governor to a serial killer, implying that Romney killed businesses.
Colbert talked to Koppel shortly before he relinquished control of his Super PAC.
“It would be stupid to be in the 2012 campaign or want your voice heard in the 2012 campaign and not have a Super PAC,” Colbert said. “I mean, the RNC, the DNC, those organizations really don’t mean much anymore. Karl Rove has more money than the RNC.”
Back in South Carolina, the advertisements seem to be getting nastier by the day as the million dollar donations continue to pour in.
“These Super PACs don’t have reputations to protect, so I think that there is a tendency for them to get nastier in the ads that they run and they don’t have the same restraints operating on them as candidate committees do,” said Ellen Weintraub, a commissioner for the Federal Election Commission.
Weintraub and the FEC are tasked with regulating the Super PACs. Weintraub said that a key difference between the PACs and the candidate committees is that the Super PACs do not have to disclose their donors as often. The first time that many of the Super PACs will disclose their donors will be at the end of January, which means that voters will have cast their vote in several key primaries before knowing who is behind the advertisements that flooded their televisions and radios.
“At some point, you have to step back from the regulations, you know, take your face out of the book and see the forest for the trees,” Weintraub said. “And I think for a lot of people out there, seeing the massive amounts of money that are being raised and spent by groups in the candidates’ names effectively on the outside, and seeing that these groups do appear to have some kind of connection to the candidates. I think it’s going to raise a lot of questions for the public.”
So how do political advertisements get so nasty? Unlike consumer advertisements, political ads do not have to be vetted by the Federal Trade Commission.
“I mean it’s actually more difficult to sell somebody white bread than it is to sell a president getting into the White House,” said Linda Kaplan Thaler, an advertising executive.
Thaler is behind campaigns like Wendy’s advertising campaign and the Toys R’ Us popular jingle, ‘I Don’t Want to Grow Up.’ Thaler said that when it comes to consumer advertising, it’s about building a love for the brand. With politicians, it’s different.
“You know, when it comes to politics, it’s not so much about, you know, that I have to love the candidate I’m voting for. It’s very often, I have to dislike him the least,” Thaler said.
By: Jessica Hopper, Rock Center, January 16, 2012
Romney’s Genuine Capitalist Bona Fides Could Be His Downfall
Say what you will about him, Mitt Romney is the real thing: a Wall Street guy to his bones, a numbers whiz who took a small start-up, Bain Capital, and helped turn it into a $65 billion giant among private-equity firms (which is what we now call the the old corporate-raiding leveraged-buyout buccaneers we used to think of as “barbarians at the gate” back in ’80s; in case anyone was wondering, they’re now allowed inside the gate). Romney actually is, in other words, what Newt Gingrich and Rick Santorum and Rick Perry can only talk about in the abstract: he’s a real capitalist.
And now we find that he gets paid like one too. To the surprise of very few, the GOP’s nominee presumptive acknowledged on Tuesday that he pays about 15 percent in taxes, far less a percentage than the average middle-class American, thanks to a host of tax breaks proffered by what Warren Buffett once critically called “our billionaire-friendly Congress.”
But Romney’s biggest political problem right now is not that he is at loggerheads with his fellow Rich Guy, St. Warren of Omaha, who has generously demanded that the billionaire-friendly Congress ask more of the super-wealthy in taxes (which Romney vehemently opposes). Buffett doesn’t command that many votes. Romney’s biggest problem is determining whether the mood of the country has really shifted against the financial plutocrats as much as the Occupy Wall Street movement might indicate.
I think it has, and Romney will have a lot of self-defense to do in the general election.
As much as they might have annoyed their conservative base, Gingrich and Perry were on to something when they attacked Bain Capital in South Carolina. The anti-Wall Steet anger cuts across party lines. It’s not so much the kind of activities that Romney and Bain were engaged in; Bain is really just feeling the blowback from anger on both left and pight. Bain may sometimes destroy jobs, but when it fails at a venture, at least it loses money.
Yet the public may no longer be interested in making the distinction between Wall Street firms that follow the rules and those that don’t. The reason that what Gingrich and Perry are saying resonates goes back to Wall Street’s offenses over the last decade with subprime mortgage securitization. The issue here is not really about the ordinary “the rough and tumble of market capitalism,” as The Wall Street Journal‘s Gerald Seib suggested at the debate last night. Most Americans don’t have a problem with that. The issue is really the corruption of market capitalism represented by the massive fraud that Wall Street banks got away with, for which they were then bailed out by the federal government with no questions asked. All this has aggravated, for average Americans, the frustration they already feel because of the record levels of income inequality that exist in our economy.
That’s why the public is likely to get its dander about Romney’s 15 percent. It is an issue that unites conservatives and liberals, OWS protesters and tea partiers alike. As I wrote in my 2010 book Capital Offense, both the left and the right were justifiably offended by the way the American system of capitalism — real capitalism, that is, the way it’s supposed to work — was subverted during the subprime era. Liberals were appalled by the rampant destruction of social equity, and the rigged way so much wealth was amassed in the hands of the 1 percent; conservatives were outraged that the system didn’t work the way it was supposed to: in other words, if you fail, you die.
So Romney’s biggest problem may not be his robotic campaign style, or the tin ear that lead him to bet Perry $10,000 (presumably at low tax rates) at one point. His biggest problem may be his golden resume. Given the mood of the country, Romney may have a tougher time persuading the public he’s the One during the general election season than he thinks.
By: Michael Hirsh, Chief Correspondent, National Journal; Published in The Atlantic, January 17, 2012
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