Mitt Romney touts his business experience as his best qualification for being our President. Bloomberg.com published an excellent article by Anthony Luzzatto Gardner detailing Romney’s investment strategy at Bain Capital. And Mr. Gardner is someone who actually knows what he’s talking about – he works at Palamon Capital Partners, a private equity fund based in London, and was director of European affairs in the U.S. National Security Council in 1994-95. His conclusion of Romney’s style of economics?
What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.
What’s less clear is how his skills are relevant to the job of overseeing the U.S. economy, strengthening competitiveness and looking out for the welfare of the general public, especially the middle class.
Bold emphasis is mine. Bain Capital made 67 investments under Romney’s leadership, but just 10 of these investments produced around 70% of the firm’s profits. And four of those 10 investments ended up with the company acquired going bankrupt. But even in the investments that ended in bankruptcy Bain almost always made a profit, while employees, creditors, communities, and federal, state & local governments suffered the losses. There’s a saying in Las Vegas that “the house always wins”. Under Romney’s leadership, Bain Capital was the casino and always won – usually at the cost of others.
In 1986, in one of its earliest deals, Bain Capital acquired Accuride Corp., a manufacturer of aluminum truck wheels. The purchase was 97.5 percent financed by debt, a high level of leverage under any circumstances. It was especially burdensome for a company that was exposed to aluminum-price volatility and cyclical automotive production.
Forty-to-one leverage is casino capitalism that hugely magnifies gains and losses. Bain Capital wisely chose to flip the company fast: After 18 months, it sold Accuride, converting its $2.6 million sliver of equity into a $61 million capital gain. That deal, which yielded a 1,123 percent annualized return, was critical to Bain Capital’s early success and led the firm to keep maximizing the use of leverage.
Another example of Romney’s Casino Capitalism was it’s investment in American Pad & Paper, which it acquired in 1992 by financing 87% of it’s investment. Under Romney’s Bain Capital ownership Ampad borrowed heavily to make acquisitions and pay Bain Capital $60 million in “dividends”. Ampad’s debt, which was only $11 million when Bain acquired it, rose to $444 million by 1995. The company’s annual operating cash flow was only $4.7 million, but it’s interest expense on all that debt was $14 million. Ampad did the only thing it could and went public, offering an IPO in 1996. The company used the proceeds to reduce debt – AND pay Bain $48 million for a portion of it’s stake. Over the next 6 years Bain charged Ampad over $18 million in various fees, while it ran debt back up to over $400 million. Unable to pay the interest expense of all that debt and drain of cash paid to Bain Capital in fees and dividends, Ampad was forced into bankruptcy. Several hundred jobs were lost, secured lenders got less 50 cents on the dollar, and the hapless unsecured creditors got around 2/10ths of one cent on the dollar. But Bain Capital reaped gains of $107 million on it’s initial investment of only $5.1 million. Privatized Gains, Socialized Losses.
Romney’s Casino Capitalism was still rolling the dice with a winning hand when it acquired Dade International in 1994. Bain Capital more than tripled Dade’s debt of the next five years, from $300 million to $902 million. Some of the debt was used for acquisitions, but much of it was used to repurchase Bain’s equity for $242 million – more than 8 times Bain’s original investment. Dade was left in such a weakened condition with so much debt it had to file for bankruptcy in 2002. About 1,700 people lost their jobs, while Bain Capital claimed capital gains of $216 million, and eightfold return on investment. Privatized Gains, Socialized Losses.
In another Bain investment that ended in bankruptcy, Bain purchased GS Industries and quickly ran up it’s debt. In year alone Bain forced GS Industries to pay Bain a $36 million “dividend“. Bain’s initial investment? Only $8 million. When GS Industries was forced into bankruptcy750 workers lost their jobs and most creditors lost money. And Bain had left the company’s pension plan severely underfunded, requiring the government backed U.S. Pension Benefit Guaranty Corp. to step in and cover the $44 million shortfall. Privatized Gains, Socialized Losses.
Mr. Gardner concludes:
Success, entrepreneurship, risk taking and wealth creation deserve to be celebrated when they are the result of fair play and hard work. President Barack Obama is correct in distinguishing the patient creation of value for the benefit of investors through genuine operational improvements and growth — the true mission of private equity — from the form of rigged capitalism that was practiced by some in the industry in the past when debt was cheap and plentiful.
While Bain Capital wasn’t alone in using financial engineering to turbo-charge its returns, it was among the most aggressive under Romney’s leadership. Enriching investors by taking leveraged bets isn’t a qualification for a job requiring long-term vision and concern for public welfare. It is appropriate to point that out to voters.
Mitt Romney touts his business experience as his best qualification for being our President. I say: You must be joking.