February 7, 2012
By Tom Maertens
Mankato Free Press
Recent opinion polls show that less than one-third of Americans have a favorable opinion of Mitt Romney, and almost half, 49 percent, have an unfavorable opinion — a number that skyrocketed 15 percentage points in one month, according to a January ABC News/Washington Post poll.
The cause of this problem is Mitt’s connection to Bain Capital, a private equity firm that he ran for 15 years, and which still pays him the equivalent of $60,000 per day — $22 million per year. Romney claims his firm created jobs and he cites this business experience as his principal qualification to be president, citing companies that survived Bain’s corporate looting such as Staples, as evidence of jobs created.
Private equity firms are not in business to create jobs, however. They buy weak corporations and then pick them clean for a quick profit, after which they walk away rich as the firms and their employees frequently sink into bankruptcy. Their goal is to make money which, in fact, they do by redistributing wealth, not creating it.
Not coincidently, Romney’s proposed tax plan would also redistribute wealth upward by cutting estate taxes along with capital gains and corporate taxes — the way the wealthy get their money — at a cost of $2 trillion, according to the Tax Policy Center.
Lawrence Summers and Andrei Shleifer found back in 1988 that much of the gains for buyout specialists like Bain come from breaking contracts with workers, suppliers and other corporate stakeholders. When they flip companies via leveraged buyouts, they basically take out all the money, throw the workers’ pensions onto a federal agency (the Pension Benefit Guaranty Corporation) and “stiff” the creditors. Their specialty is deal-breaking, not job creation.
As James Surowiecki recounted in the New Yorker recently: Private equity firms pile the target companies high with debt in order to buy them, then use those companies’ equity to borrow even more money, which they use to pay themselves huge management fees and “special dividends.”
The new owner then engages in asset stripping, selling off profitable portions and cutting costs, as Bain did with GS Technologies. Among the cost cutting measures Bain imposed was to cut the hourly rate of employees’ profit-sharing plan from $5.60 an hour to $1.25 per hour. Eventually, they eliminated profit-sharing completely.
These practices allow them to recoup their initial investment while keeping ownership control. Between 2003 and 2007 private-equity funds took more than $70 billion out of their companies. These dividends create no economic value — they just redistribute money from the company to the private-equity investors, while placing the companies, which have been looted and loaded down with debt, in jeopardy of failing.
The Charleston Gazette explained the process: “Bain bought control of Worldwide Grinding Systems, changed its name to GS Technologies, caused the firm to borrow $125 million — then used the borrowed money to give $36 million in dividends to Bain’s owners. The debt helped force GS into bankruptcy and 750 workers lost their jobs. Bain reneged on their medical and pension costs, and the federal government suffered a $44 million loss to cover their pensions.”
As usual when companies are facing bankruptcy, top managers continued to pay themselves bonuses while workers were losing jobs, pensions and medical benefits. The “profit-sharing” all went to the corporate looters.
The Charleston Gazette cited another case: “Bain and Goldman Sachs bought control of a Baxter International medical testing division that was renamed Dade Behring. The new owners slashed research spending and had the firm borrow $421 million — then used $365 million of the borrowed money to buy back Dade shares from Bain owners, quadrupling their investment in them. Bain put a mere $30 million into Dade but got $100 million in ‘management fees.’ Dade was saddled with $1.5 billion debt, went bankrupt, and wiped out 1,500 jobs.”
Bain did even better when it bought American Pad & Paper (AmPad) and Stage Stores. In each case, Bain invested $5 million and collected $100 million in dividends.
The New York Post reported that Bain made $578 million from just five deals: GS; Baxter; Details, Inc.; Stage Stores; and AmPad; all five companies subsequently went bankrupt.
As Warren Buffett has pointed out, there is a real difference between investing and building a company that makes something or provides a service that adds value to the economy, and predatory capitalism that loots and strips to make millions for its executives.
Bain’s approach under Romney was the latter, hardly a recommendation for making Romney president.