Bain Capital must seem like a Frankenstein monster to Mitt Romney’s campaign. Like Mary Shelley’s creature, it’s stalking its creator just as he’s about to claim the thing he loves most. But Bain Capital—and Bain capitalism—isn’t Mitt’s creation. It was sewed together from the corpses of dead ideals and shocked into life in Washington’s political laboratories.
Mitt’s monster was created by a broken system that has let politicians in both parties create an artificial, destructive and exploitative form of pseudo-capitalism—and then get rich from it. Romney’s campaign will survive, but the monster will go on destroying lives and dreams.
Conservatives and self-described “centrists” speak about “Bain capitalism”—a k a “vulture capitalism”—as if it were the inevitable result of immutable economic laws. But it’s only been around for 30 years or so, since government policies in taxation and bank regulation made it possible. That’s right: Government, not free enterprise, made Bain capitalism.
And what government has made, government can un-make.
The “Bain Bailout”
They’re calling it the “Bain Bailout”—although Bain didn’t receive any actual funds. But when a Federal regulator took over a failing New England bank, it decided to “forgive” several million dollars for loans that Bain had received from the bank.
Conservative Care and Feeding Of The Bain Capitalist Monster
Here are some ways conservative government policies help foster Bain Capital-style “vulture capitalism”:
- Bailouts that insulate financiers from losses from bad loans or investments
- An absence of regulation that offers an opportunity for vulture capitalists to avoid disclosure and other rules that publicly traded companies must follow
- The repeal of the Glass-Steagall law, which eliminated the wall separating consumer banking from Wall Street speculation
- Tax breaks on capital gains, management fees and “carried interest” mean Wall Street dealmakers pay a lower tax rate than the workers at the companies they strip-mine and often lay off for profit. And they don’t have to provide a social good—such as a created job—to get the tax break.
Why? Nobody’s been asked to explain. But that decision reflects a long history of cozy relationships between regulators and the financiers who might one day pay them a hefty salary after they’ve left government service.
If the millions in ‘forgiveness’ were intended to make sure that jobs stayed in New England, it backfired. As we’ll see, job creation is used a lot to justify government actions that make a few people rich without creating any jobs—and often destroy them.
Money for Nothing
Bain and Company was a Boston-based management consulting firm, and in many ways one of the better ones, until CEO Bill Bain decided to create an investment firm and asked Mitt Romney to run it.
Management consultants make a good living, but they aren’t usually able to stockpile the hundreds of millions it takes to become a serious investor. So where did Romney and his associates come up with the money to become serious players?
They didn’t. They invested other people’s money. Their venture didn’t really take off until relaxed enforcement of banking regulations made it possible for them to get into “leveraged buyouts”—investments of borrowed money—in a big way. They moved aggressively into private equity—investments in privately-held corporations which aren’t subject to disclosure rules and other requirements that publicly traded companies must meet.
Investment funds are typically expected to have some ‘skin in the game’ by putting up some of their own money, but in Bain’s case that was almost always a sham. Dade International is a perfect example: Romney and associates ‘invested’ $30 million in Dade. But they also demanded $100 million in management fees from the company, which means their actual investment was negative $70 million.
The money that Romney & Co. borrowed doesn’t go onto their books, either. It’s charged against the companies they buy with it. In Dade’s case, the company wound up saddled with $1.5 billion in debt—plus Bain’s $100 million management fee, of course—and went bankrupt. Roughly 1,700 people lost their jobs—but Bain walked away with $242 million in stock sales that Dade had ‘borrowed’ (under Romney’s management) to pay.
Somebody got “skinned” in this deal, but it wasn’t Romney. Bain did lose its remaining shares during the bankruptcy proceedings, however, after creditors accused Romney and his associates of “professional mismanagement” and “unjust enrichment.”
Now there’s a concept that’s due for a comeback. “Unjust enrichment” is generally held to apply legally whenever someone got wealthy at the expense of others without compensating them, and without doing anything substantial to earn it. (One legal definition describes it as the acquisition of wealth or property “by chance, mistake, or without any personal effort.”)
In the world of highly-leveraged investors like Bain Capital, unjust enrichment isn’t jut a legal term. It’s a way of life.
The enrichment process for players like Romney accelerated dramatically during the deregulation fervor of the go-go 1990s. Romney and his ilk were allowed to borrow more and more money from third parties, use them to buy up companies, and skim the cream for themselves.
With the relaxing of the Glass-Steagall law that had separated banking from investment brokerage, and ultimately its repeal altogether, banks were able to lend Bain-type investors millions of dollars of their customers’ money, too. Some of the money that Bain borrowed to buy companies could have belonged to the workers who lost their jobs as a result. And when those over-leveraged banks finally collapsed, every taxpayer’s money was used to rescue them.
How’s that for “unjust enrichment”?
Why do you think Mitt Romney won’t release his tax returns? This Fox Business article is almost certainly correct: because he has saved millions of dollars through the tax loophole known as “carried interest.”
Income on investments is frequently taxed at 15%, instead of the higher rates paid by cops, firefighters, nurses, or anyone who works at a job to earn their income. Conservatives defend that break by saying that this encourages business investment and therefore creates jobs.
There’s an obvious answer to that: You got your break; where are the jobs? But in the case of leveragers like Romney, here’s the real irony: They get this enormous tax break even though they’re not the ones investing the money. They’re given a percentage of the fund’s earnings, typically 20 percent, and get to collect their share of the fund’s earnings at this lower rate. Even their management fee—usually 2 percent of the total investment, or thereabouts—is taxed at the lower rate, although it’s clearly a service fee and not investment income.
Conservatives love to sneer at deductions for solar panels or electric cars as ‘tax expenditures,’ implying they’re just forms of government spending to advance policy goals. But the capital gains tax and related cuts are far greater ‘expenditures,’ and they’re stated purpose is also to promote a policy goal—more jobs.
Yet nothing in these tax breaks actually requires anyone to create a job. That’s why Romney & Co. were able to slash jobs as easily as they created them. They made money either way, and they were able to take advantage of this huge tax break either way.
That’s not an accident of fate. That’s the result of deliberate political decisions and acts of Congress.
Bain Capitalism vs. Capitalism
There’s a reason why investors like Warren Buffett dislike private-equity sharks like Romney and Bain. Buffett recently told Time magazine that “I don’t like what private-equity firms do in terms of taking out every dime they can and leveraging [companies] up so that they really aren’t equipped, in some cases, for the future.”
Progressives who cast Buffett as an Occupy-style reformer are likely to be disappointed. He’s an old-school capitalist of the first order. (Although he did have a great line after Gingrich said that Occupy protesters should “get a job”: “Maybe they can be historians for Freddie Mac too and make $600,000 a year.”
Buffett doesn’t oppose Bain Capital because he’s a socialist. And with $45 billion to his name, he certainly doesn’t ‘envy’ Mitt Romney, as Romney said of his critics the other day. Buffett loathes what Romney’s Bain represents because he believes in real capitalism. Everybody I know who’s worked with him says the same things: He does his research, he expects people to work hard, and he invests in companies so that they’ll have long-term success.
If Not Mitt …
The “Bain capitalists,” on the other hand, are only worried about the next quarter’s earnings, so they can suck the maximum amount of money out of the company and move on to their next leveraged buyout.
God didn’t make the world that way, and neither did evolution. The Bain capitalists exist because we’ve allowed our politicians to create them.
If Mitt Romney had never been born, someone else would have done exactly what he did. And for all we know, somebody just like him might be the leading contender for the Republican nomination. Mitt Romney is the symptom, not the disease, and there are a lot of people waiting to take his place.
System of a Down
Newt Gingrich had it exactly right when he called it “crony capitalism.” We’re living under a government of the crony capitalists, by the crony capitalists, and for the crony capitalists.
But Gingrich was exactly wrong when he said that the problem lay solely with Romney’s character. There are a lot of people with Romney’s character defects. As long as Bain capitalism exists, there will be Romneys and Bain Capitals to exploit it. Maybe that’s why I don’t condemn them personally as much as other people do. If your life’s goal is to make money, then you’ll exploit the system you’re given.
In fact, Romney would have been fired if he had done anything else. The company was called “Bain Capital,” not “Bain Employment.” Say what you will about Mitt (and I’ll probably agree), but the real problem lies much deeper than his character.
The system is the real monster.
Bain Capital and its breed were created by government policies. To end them, we have to change the policies. But to change the policies we have to change the politicians. And to change the politicians, we have to change the political system.
Politics created this monster, and politics can send it back to the graveyard. Americans should demand no less.