Wednesday, November 16, 2011

New York Times Takes on Mitt Romney’s Bain Capital Practices

The Story Everybody Knew Was Coming

The history of Mitt Romney is that he became a very wealthy man by participating in leveraged buyouts of companies on behalf of a company called Bain Capital.  The procedure was very simple.  You find a company that is not doing well but has a good basic business. You borrow a lot of money to buy it, and if it does well and survives you make a huge rate of return, because you put in very little of your own money.  If it does not make it, well, you lose very little because that’s all you put in.

Of course in this kind of arrangement the target company incurs a large amount of debt.  And this debt may prevent an otherwise healthy company from making it.  In that case the creditors, and more importantly the employees are the big losers.  So if a company like Bain Capital does a lot of these deals, some of them are going to go south.

The New York Times has an in depth story on Bain Capital’s adventure with one company.  The company was Dade International

By the time the Harvard M.B.A.’s from Bain were finished, sales at the medical company, Dade International, had more than doubled. The business acquired two of its rivals. And Mr. Romney’s firm collected $242 million, a return eight times its investment.

But an examination of the Dade deal shows the unintended human costs and messy financial consequences behind the brand of capitalism that Mr. Romney practiced for 15 years.

At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. 

It’s a long story, but the punchline is this.  Mr. Romney and his associates raided and plundered the company, taking hundreds of millions out and forcing the company into bankruptcy and the loss of jobs for its employees.

They extracted cash from the company at almost every turn — paying themselves nearly $100 million in fees, first for buying the company and then for helping to run it.

That alone was not enough.  In order to really cash out they had the company borrow huge sums, not for expansion but to pay out to Mr. Romney and his friendly (?) co-investors.

In April 1999, it pushed Dade to borrow hundreds of millions of dollars to buy half of Bain’s shares in the company — and half of those of its investment partners.

Bain pocketed the $242 million. Goldman received $121 million. Top Dade executives got $55 million, records show. The total payout to shareholders reached $420 million — nearly as much as the purchase price for Dade.

Of course borrowing money and paying it out to investors is business suicide.

Creditors, unsettled by deteriorating finances and high debts, began to pounce. More layoffs followed. And in August of 2002, Dade filed for bankruptcy protection.

And while Mr. Romney’s company never admitted doing anything wrong, in the end

The creditors threatened litigation against Bain and its investment partners, accusing them of “professional negligence” and “unjust enrichment,” according to bankruptcy documents. Bain and the other investors argued that the claims were baseless, but agreed to forgo about $68 million owed to them by Dade. And seven years after buying the company, Bain forfeited its remaining ownership stake.

Executives like Mr. Romney and others who made huge money from this never see that they did anything wrong.  When asked to comment on job losses Mr. Romney

he explained in an interview with The New York Times in 2007, when asked about layoffs at the companies he bought.

“Sometimes the medicine is a little bitter,” he said, “but it is necessary to save the life of the patient.”

But here is a person who might not agree with Mr. Romney

Christopher Gregory for The New York Times
Arsenio Muñiz Rosado, who lost his
job in Puerto Rico, tried
several times to commit suicide.

Soon after Dade bought the DuPont unit, it closed a plant in Puerto Rico; all but a few of its nearly 300 workers were laid off.

Arsenio Muñiz Rosado, a 51-year-old father who had spent 23 years at the plant, starting out as a groundskeeper, sank into a debilitating depression. Still jobless six months after he was let go, he tried to commit suicide with a bottle full of Xanax pills. It was the first of several attempts.

For all intents and purposes, he said of the plant, “I died in there.”

Thus in one case the bitter medicine Mr. Romney was talking about was suicide pills for one worker whose job was sacrificed for Mr. Romney’s millions. 

It would be wrong, and The Dismal Political Economist does not argue that people like the folks at Bain Capital intended to harm companies and employees.  They didn’t.  The problem is that their greed and rapaciousness has lead them to a position where they just don’t care.  If they can make millions and not harm anybody, that’s fine.  If they can make millions but thousands of people lose their jobs and their economic security, that’s ok too.

This was the attitude behind the Bush Tax Cuts, for example.  In order to generate massive tax cuts for the wealthy the policy was to provide for small tax cuts for middle and low income tax payers.    Of course, today even this pretense of caring for someone other than themselves has disappeared.  The Republican mantra on taxes is that there should be more tax cuts for the wealthy, and tax increases for those who are paying little or not taxes. 

It is interesting that in some of his policies Mr. Romney does favor the middle income groups over the wealthy.  This is because "Political Mitt" has no taken over "Business Mitt" now that Business Mitt has made hundreds of millions for Political Mitt to use to run for the Presidency.  Of course, Mr. Romney will not release his tax returns on any detailed financial information, so maybe Business Mitt is still in the background doing his thing.  After all,  greed is a difficult trait to be rid of.


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