What the Bain Debate is Really About

The 2012 presidential election may go down as one of the strangest political seasons in recent memory, for the simple reason that the influence of the financial sector in politics, policy and the economy has caused Republicans to sound like Democrats and Democrat to sound like Republicans — usually with confounding results.

When Republicans sound like Democrats, like Newt Gingrich attacking Mitt Romney's record at Bain Capital [1], they tend to start arguments they can't win. When Democrats start sounding like Republicans, like Cory Booker defending Bain Capital [2], they tend forfeit arguments they could win. That's because, in both cases, the politicians are arguing about the wrong things, in order to avoid the real argument  — the one America needs to have, and Americans need to win; the argument over what kind of economy we will have going forward.

Gringirch's attack on Romney's record confused many conservatives [3], who equated it with an attack on capitalism itself. Newark Mayor Cory Booker [2] echoed the concerns of confused conservatives when he called the Obama campaigns ads attacking Romney's record at Bain Capital a "nauseating" attack on private equity, labeling them a distraction. "It's either going to be a small campaign about this crap or it's going to be a big campaign, in my opinion, about the issues that the American public cares about," Booker said.

What Booker, Democrats like him, and conservatives now lauding his diatribe ignore or don't realize is that the issues affecting voters don't come much bigger and don't get much more real than the kind of capitalism Bain represents.

Bain Capitalism

As Digby [4] said, if Romney is going to run on his Bain Capital record and tout his private equity background as his main qualification for the presidency, then his track record at Bain is fair game. I summed up that track record in my original post about his brand of "vulture capitalism." [5]

A former managing partner at Bain, in an interview with the Los Angeles Times, made it clear that job creation was never the point at Bain [6].

Bain managers said their mission was clear. "I never thought of what I do for a living as job creation," said Marc B. Walpow, a former managing partner at Bain who worked closely with Romney for nine years before forming his own firm. "The primary goal of private equity is to create wealth for your investors."

[7] Under Romney's leadership, Bain certainly created wealth for its investors, no matter what happened to the companies it acquired or the the people worked for them. The Wall Street Journal's revealing look at Romney's time at Bain [8] shows that 22% of the companies Bain invested on under Romney's watch either filed for bankruptcy, reorganized, or closed their doors — sometimes with substantial job losses. As Pat Garofalo [9] pointed out, that's nearly one fourth of the companies Bain invested in.

Some failed so badly that Bain lost its investments. That didn't put a damper in returns, though. Bain produced about $2.5 billion in returns for its shareholders, out of just $1.1 billion invested. (Romney did alright, too. His campaign estimates his take during his term at Bain as anywhere from $190 million to $250 million. That's enough for a lot of $10,000 bets [10].)

The LA Times piece makes it clear that Bain and its investors profited, no matter what happened to the companies in its portfolio. According to the Wall Street Journal, 70% of Bain's returns came from just 10 deals. The LA Times article notes that "Four of the 10 companies Bain acquired declared bankruptcy within a few years, shedding thousands of jobs." Still, Bain profited in eight of those ten deals, including three of the four that went bankrupt.

That's the way "vulture capitalism" [11] (as I like to call it) works. Bain and its shareholders profited in the end, no matter what else happened.

That's the part of the story that the Gingrich movie seems to tell: what else happened. We know what happened on Wall Street when Mitt Romney came to town. A few people — Mitt Romney included — made a lot of money. Now we know what else happened on Main Street when Mitt Romney came to town.

What happened to those companies and the people who worked for them begins to read like a casualty list: 1,700 jobs lost at Dade International [12], more than 700 jobs lost at GS Industries [6], 200 jobs lost at American Pad and Paper (Apmad) [13]. After a while, it's easy to forget that these numbers represent the lives of real people, whose job loss sent shock waves through their families and communities; people like Donny Box and Randy Johnson. 

It's also easy to miss the point that this is just how the brand of "head I win, tails you lose" capitalism [14] Bain practiced under Romney's leadership is suppose to work; as the Obama campaign illustrates in a new video [15] and slideshow [16] about how Bain made $100 million on its $5 million investment in Ampad, even while sending the company into bankruptcy and its 1,500 employees to the unemployment line. Bain Capital made profits no matter what happened the companies in its portfolio. Nearly one fourth of the companies Bain invested in during Romney's tenure either went bankrupt, reorganized, or simply shut down — often with significant layoffs. Seventy percent of Bain's profits came from just 10 deals, four of which resulted in bankruptcy. 

"Extracting Value"

Romney's factually challenged, incredible shrinking claims of being a "job creator" at Bain notwithstanding, his former Bain colleague got it exactly right. Bain wasn't in the business of creating jobs, and Romney wasn't in the business of creating jobs. Bain's mission, and Romney's job as its chief, was simply to "create wealth" for its investors. Period. 

Bain Capital and Mitt Romney were in the business of creating even more wealth for its already-wealthy investors. They were apparently very good at it, too. But the kind of wealth Bain and Romney worked to create isn't the kind of wealth that leads to more widely shared prosperity. It's not the kind of wealth that grows the economy [17], according to the CBO. Nor is it the kind of wealth that leads to job creation, according to Moody's Analytics, because it doesn't get put back into the economy to support existing jobs or spur job creation by boosting demand. The wealthy don't spend their tax cut windfalls [18], but save them and invest them in the stock market instead; putting their money to work making money, rather than putting their money to work keeping people working and putting people to work. 

The success or failure of the companies in its portfolio were beside the point. When he's not claiming the mantle of "job creator," Romney casts himself and Bain as "fixers" who acquired "broken" companies and made them better —more efficient, and more profitable. But that wasn't the point at Bain. To some extent, Bain and Romney profited from practices that were more about extracting value from its acquisitions than "fixing" them. (The language about "extracting value" is even repeated in some of Bain's own material.)  

That's what Bain Capitalism is about: "extracting value" with no investment in the fate of the companies in its portfolio, the people who work from them, or the communities that rely on them.

"What This Job Is All About"

Cory Booker called the debate over Bain Capital a "distraction" that threatened to make the election a "small campaign" about small ideas, instead of a "big campaign" about "the issues the American public cares about." In his remarks at yesterday's NATO summit, President Obama made the case [19] for why Romney's record at Bain Capital is relevant to a "big campaign" about "issues the American public cares about." (And he managed it without even calling Booker a "jackass." [20])

… [T]he reason this is relevant to the campaign is because my opponent, Governor Romney, his main calling card for why he thinks he should be President is his business expertise. He is not going out there touting his experience in Massachusetts. He is saying, I’m a business guy and I know how to fix it, and this is his business.

And when you’re President, as opposed to the head of a private equity firm, then your job is not simply to maximize profits. Your job is to figure out how everybody in the country has a fair shot. Your job is to think about those workers who got laid off and how are we paying for their retraining. Your job is to think about how those communities can start creating new clusters so that they can attract new businesses. Your job as President is to think about how do we set up a equitable tax system so that everybody is paying their fair share that allows us then to invest in science and technology and infrastructure, all of which are going to help us grow.

And so, if your main argument for how to grow the economy is I knew how to make a lot of money for investors, then you’re missing what this job is about. It doesn’t mean you weren’t good at private equity, but that’s not what my job is as President. My job is to take into account everybody, not just some. My job is to make sure that the country is growing not just now, but 10 years from now and 20 years from now.

So to repeat, this is not a distraction. This is what this campaign is going to be about -- is what is a strategy for us to move this country forward in a way where everybody can succeed? And that means I’ve got to think about those workers in that video just as much as I’m thinking about folks who have been much more successful.

The president is off to a good start on taking the debate where it needs to from here; from the particulars of Romney's record at Bain Capital to what it represents, and the economic choices facing America. But, as I pointed out before, the business practices of companies like Bain mean profit for the investor class, and pain for the 99%. Now, president Obama needs to make it personal [21].

This is pretty good, but I think it's going to have to get a lot more forceful. Obama has this habit, which you learn as a writer over time is really unconvincing. He very often makes an assertion without illustrating it, without saying why. It leaves listeners confused because he hasn't really put meat behind the assertion.

But he is on the right track here. I don't think this is such a difficult needle to thread. In fact he could get a lot more emotional mileage out of this sort of thing. Like how? Like so:

"The people who lost their jobs because of Mitt Romney's creative destruction, those are precisely the people the president has to think about most. Those are the people who write the letters that I read every night before I go to bed. Those are the people who need my help the most of all. Mitt Romney and his fellow investors will mostly be just fine. I think about the other people. Governor Romney says, explicitly, has said many times, of lost jobs, that's capitalism, that's just the way it goes. Do you want a president who watches an American factory shut down and says, 'Well, that's capitalism?'"

Choosing Capitalism

"Do you want a president who watches an American factory shut down and says, 'Well, that's capitalism?'"

It recasts Romney's answer to questions about bankruptcies, shutdowns, and layoffs Bain left in its wake as a Rumsfeldian "stuff happens" [22] response to the economic consequences of Bain's practices. Stuff doesn't just happen. Stuff happens because other stuff happens. The debate is basically about whether we should regulate some stuff in order to keep it from happening, and what we should do about the stuff that happens as a result. 

We are, as E.J. Dionne [23] writes, not in the middle of a national argument about capitalism versus "socialism," but a much needed discussion about what kind of capitalism we want.

The Bain conversation has already been instructive. Romney’s friends no less than his foes have had to face the fact that Bain’s purpose was never about job-creation. Its goal was to generate large returns to Bain’s partners and investors. It did that, which is why Romney is rich.

Romney wants to focus on the positive side of his business dealings that did create jobs. He wants to brag about the companies Bain helped bring to life, among them Staples, Sports Authority and Domino’s.

That’s fair enough. But having made an issue of Bain on the plus side, he also has to answer for the pain and suffering — or, as defenders of capitalism like to call it, the “creative destruction” — that some of Bain’s deals left in their wake.

This leads naturally to the question of how creative the destruction wrought by our current brand of capitalism actually is. Since the dawn of the leveraged buyout era three decades ago, many friends of capitalism have questioned whether loading companies with debt as part of these deals is good for companies and for the economy as a whole.

What's the alternative to the "vulture capitalism" practiced by firms like Bain Capital? What it's called varies, I've heard it called "Inclusive Capitalism" and "the New Economy movement." [24] It's components are just beginning to take shape, as more people envision a capitalism that better spreads the benefits of the "productivity revolution," [25] that regulates the worst of capitalism's "creative destruction," [23] and incorporates a safety net to catch those left behind [26] by the market.

This may be another debate in which President Obama could benefit from following Vice President Biden's lead.

Vice President Biden’s speech last week in Youngstown, Ohio [27], drew wide attention for its criticism of Romney as someone who just doesn’t “get it.” But when Biden moved beyond Romney, he offered an energetic broadside against the new world of finance, and he picked the right venue to make his case: a noble blue-collar town that has been battered by the winds of globalization and economic change.

“You know the difference between having an economy that makes things that the rest of the world wants, and having an economy that is based on financialization of every product,” Biden told his listeners. “You know the difference between an economy . . . that’s built on making things rather than on collateralized debt, creative credit-default swaps, financial instruments like subprime mortgages. That’s not how you build an economy.”

This campaign isn't just about Bain, or Mitt Romney's past. It's about our future. It's about the kind of new economy we want to build.