By: Eugene Robinson, Opinion Writer, The Washington Post, January 16, 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.
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
Mitt Romney’s Miserly Concern For The Poor
“I’m concerned about the poor in this country,” Mitt Romney said the other day. “We have to make sure the safety net is strong and able to help those who can’t help themselves.”
I perked up at those words, because they were something of a departure from his usual stump speech and because they happened to come on a day when I had written about the dire implications of Romney’s proposals for the social safety net.
I don’t question his sincerity. The problem: This fine sentiment doesn’t square with his actual policies.
Consider Romney’s support for the budget plan crafted by Wisconsin Rep. Paul Ryan and passed by the Republican House. It would cut Medicaid spending by $700 billion over 10 years, reduce food stamps by $127 billion and cut in half the funding of Pell Grants for low-income college students.
As Fox News’s Chris Wallace usefully pointed out in an interview with Romney last month, “You would cut all of these programs, Governor, that people depend on, and a lot more than that.”
Romney, in response, focused on his proposal for Medicaid. He would turn the program over to the states and allow funding to grow at inflation plus 1 percentage point — significantly less than the historical growth of health-care costs.
“By doing that, you save an enormous amount of money,” Romney said. “I happen to believe that states can do a better job caring for their own poor, rooting out the fraud and waste and abuse that exists within those programs.”
Wallace: “But you don’t think, if you cut $700 billion in aid to the states, that some people are going to get hurt?”
Romney: “By cutting welfare spending dramatically, I don’t think we hurt the poor. In the same way, I think cutting Medicaid spending by having it go to the states, run more efficiently with less fraud, I don’t think will hurt the people that depend on that program for their health care.”
Really? Reforming welfare to encourage work was a good idea, but for those who need temporary help, benefits are increasingly inadequate. Adjusting for inflation, benefits are now below the 1996 level in all but two states. And turning the program into a block grant has meant that states, reeling from the impact of the recession, have been unable to respond adequately to increased needs.
That history is hardly reassuring about Romney’s plan to cut hundreds of billions from Medicaid. But the welfare analogy isn’t the only cause for concern. The Congressional Budget Office (CBO), analyzing the Ryan cuts, found that states “would face significant challenges in achieving sufficient cost savings through efficiencies to mitigate the loss of federal funding.”
So much for Romney’s mythical world in which huge cuts can be accomplished with zero harm to the poor and disabled.
Instead, according to the CBO, states would face a menu of unappetizing choices. If they did not want to raise taxes or reduce other spending, they would have to choose among cutting already low provider payments; reducing the benefits that the program covers; or throwing people now eligible for help off the program.
The impact of Romney’s approach on the safety net would go far beyond Medicaid. The brutal arithmetic of his stated plan to cap spending at 20 percent of gross domestic product — while, unlike Ryan, increasing defense funding — is that safety-net programs would have to be chopped significantly beyond where even Ryan would take them.
Romney’s tax plan would exacerbate the unfairness. He would continue the Bush tax cuts for the wealthiest Americans and provide extra breaks that would primarily help the rich. According to a new analysis by the nonpartisan Tax Policy Center, taxpayers with incomes of $1 million or more would see an average tax cut of $287,000 compared to letting the Bush tax cuts for the wealthy expire.
At the same time, Romney would do away with recent increases in the child tax credit and the earned-income tax credit — provisions that help low-income families. As a consequence, between 16 and 20 percent of those with incomes of $50,000 or less would actually see their taxes rise under a President Romney.
In other words, Romney would spend hundreds of billions for a tax cut whose benefits flow overwhelmingly to the wealthiest Americans, even as he would cut even more from programs that help the most vulnerable.
Those skewed priorities are hard to square with Romney’s stated concern, however heartfelt, for the poor. The man from Bain Capital needs to take another look at his figures.
“Your God Is My God”: What Mitt Romney Could Say To Win The Republican Nomination
Governor Mitt Romney has yet to persuade the religious conservatives in his party that he is fit to be President of the United States. However, he could probably appease the Republican base and secure his party’s nomination if he made the following remarks prior to the South Carolina Primary:
My fellow Republicans,
I would like to address your lingering concerns about my candidacy. Some of you have expressed doubts about my commitment to a variety of social causes—and some have even questioned my religious faith. Tonight, I will speak from the heart about the values that unite us.
First, on the subject of gay rights, let me make my position perfectly clear: I am as sickened by homosexuality as any man or woman in this country. It is true that I wrote a letter in 1994 where I said that “we must make equality for gays and lesbians a mainstream concern,” and for this I have been mocked and pilloried, especially by Evangelicals. But ask yourselves, what did I mean by “equality”? I meant that all men and women must be given an equal chance to live a righteous life.
Yes, I once reached out to the Log Cabin Republicans—the gays in our party. Many people don’t know that there are gay Republicans, but it is true. Anyway, in a letter to this strange group, I pledged to do more for gay rights than Senator Edward Kennedy ever would.
Well, Senator Kennedy is now deceased—so I don’t have to do much to best him and keep my promise. But, more to the point, ask yourselves, what did I mean by “rights”? I meant that every man and woman has a right to discover the love of Jesus Christ and win life eternal. What else could I have meant? Seriously. What could be more important than eternal life? Jesus thought we all had a right to it. And I agree with him. And I think we should amend our Constitution to safeguard this right for everyone by protecting the sanctity of marriage.
I don’t have to tell you what is at stake. If gays are allowed to marry, it will debase the institution for the rest of us and perhaps loosen its bonds. Liberals scoff at this. They wonder how my feelings for my wife Ann could be diminished by the knowledge that a gay couple somewhere just got married. What an odd question.
On abortion—some say I have changed my views. It is true that I once described myself as “pro-choice.” But again, ask yourselves, what did I mean? I meant that every woman should be free to make the right choice. What is the right choice? To have as many children as God bestows. I once visited the great nation of Nigeria and a met woman who was blessed to have had 24 children—fully two-thirds of which survived beyond the age of five. The power of God is beyond our understanding. And this woman’s faith was a sight to behold.
Finally, I would like to address the scandalous assertion, once leveled by the Texas Pastor, Robert Jeffress, that my church—the Church of Jesus Christ of Latter-day Saints—is “a cult.” In fairness, he almost got that right—the LDS Church is a culture. A culture of faith and goodness and reverence for God Almighty. Scientology is a cult—this so-called religion was just made up out of whole cloth by the science fiction writer L. Ron Hubbard. But the teachings of my Church derive directly from the prophetic experience of its founder, Joseph Smith Jr., who by the aid of sacred seer stones, the Urim and Thummim, was able to decipher the final revelations of God which were written in reformed Egyptian upon a set golden plates revealed to him by the angel Moroni. Many of you are probably unfamiliar with this history—and some of you may even doubt its truth.
I am now speaking to the base of our party, to the 60 percent who believe that God created this fine universe, and humanity in its present form, at some point in the last 10,000 years. Let me make one thing absolutely clear to you: I believe what you believe. Your God is my God. I believe that Jesus Christ was the Messiah and the Son of God, crucified for our sins, and resurrected for our salvation. And I believe that He will return to earth to judge the living and the dead.
But my Church offers a further revelation: We believe that when Jesus Christ returns to earth, He will return, not to Jerusalem, or to Baghdad, but to this great nation—and His first stop will be Jackson County, Missouri. The LDS Church teaches that the Garden of Eden itself was in Missouri! Friends, it is a marvelous vision. Some Christians profess not to like this teaching. But I ask you, where would you rather the Garden of Eden be, in the great state of Missouri or in some hellhole in the Middle East?
In conclusion, I want to assure you all, lest there be any doubt, that I share your vision for this country and for the future of our world. Some say that we should focus on things like energy security, wealth inequality, epidemic disease, global climate change, nuclear proliferation, genocide, and other complex problems for which scientific knowledge, rational discussion, and secular politics are the best remedy. But you and I know that the problem we face is deeper and simpler and far more challenging. Since time immemorial humanity has been misled by Satan, the Father of Lies.
I trust we understand one another better now. And I hope you know how honored I will be to represent our party in the coming Presidential election.
God bless this great land, the United States of America.
By: Sam Harris, Sam Harris Blog, January 15, 2012
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