Wayne O'Leary

Bain As In Pain

Bain Capital, the private-equity investment firm co-founded by Mitt Romney and run by him for 14 years, has literally become the bane of his existence. Left, right, and center, political opponents have begun hammering the Republican front-runner for this past association — and for good reason.

It must have come as a surprise to the prospective GOP nominee. For most of two decades (from 1984 to 1999, with a brief hiatus in 1991-92), Bain Capital was not only the focus of Romney’s life, but the making of him in more ways than one. The Bain years produced his personal fortune (estimated at $250 million), shaped his political-economic outlook, and eased his entry into public life. For reasons that will become clear, they should also bar him from occupying the presidency.

Bain Capital is an offshoot of the Boston management-consulting firm Bain & Company, whose head, William Bain, hired Romney shortly out of law and business school. A spin-off run independently by Romney on behalf of his mentor, Bain Capital was initially a venture-capital operation; as such it helped start Staples Inc., the eventual office-supply giant, by contributing financially to the new company and providing it consulting expertise. If things had stopped there, Romney’s business career would be less problematic.

However, not content with earning consulting fees and investing seed money in promising ventures — by creating jobs, in other words — Mitt and his Bain Capital colleagues jumped feet first into the seamy new world of “leveraged buyouts” (LBOs), an amoral product of the greedy ’80s. LBOs are what private-equity partnerships now mostly do.

The concept is simple: Equity firms seek out solvent but struggling companies; purchase low-cost majority interests in them with borrowed (leveraged) money, using the companies’ assets as collateral; create outside-investment funds guaranteeing the firms a percentage share of returns; and then go about wringing short-term profits from the acquisitions prior to eventually selling them off.

Wealth creation under private-equity LBOs — job creation never enters the picture — is accomplished partly by stripping away company divisions or projects that are either not immediately profitable or lack near-term moneymaking potential (hence the disparaging description of equity firms as “chop shops”) and partly by reducing labor costs through mass layoffs of workers considered nonessential by the equity-management teams.

If the restructured, lean-and-mean companies make money for investors and survive to be sold, that’s an obvious win; if they make money for their fund managers in the short run, despite the debt load taken on to acquire them, and then go bankrupt (a common occurrence), that’s all right as well. The Bain Capitals of the business world, which have already milked them dry by means of excessive management fees and prematurely declared dividends, make out either way.

The companies and their workforces are not always so lucky. To call Bain Capital’s particular track record spotty is to be kind. Wall Street Journal investigators found that of those firms acquired by Bain under Romney’s tenure, over a fifth (22%) later went bankrupt or, more accurately, were forced into bankruptcy by the massive debt generated from borrowing to cover acquisition and dividend costs, which were assumed under law by the companies themselves. Among Romney’s victims were paper-products supplier Ampad and retailer Stage Stores in 2000, steel manufacturer GS Industries in 2001, medical diagnostics company Dade Behring in 2002, and electronics maker DDi in 2003.

A decade later, candidate Romney, in his self-proclaimed role as “job creator,” is bruiting about extravagant claims that he produced 100,000 jobs as head of Bain Capital. The figure keeps changing; it’s lately swelled to 120,000 under the pressures of campaigning. The truth is nobody, least of all Mitt, knows how much net employment, if any, Bain’s “creative destruction” spawned.

We do know that Romney’s claims of job creation rest largely on actions taken during that brief window in time, the mid-1980s, when Bain was actually in the venture-capital business and helped finance the genesis of Staples, its most high-profile success. So, how many of Staples’ current 90,000 jobs did Mitt the venture capitalist actually generate? Arguably, not many. According to Fortune magazine’s Dan Primack, Romney’s direct role in the fledgling company ended nearly two decades ago, long before it rose to prominence as a significant employer.

There are other “known unknowns” (to quote Donald Rumsfeld) about the Romney employment legacy at Bain Capital. While specifics about jobs lost under Bain downsizings are hard to come by, they do exist. One case was the aforementioned Dade Behring, which delivered an eightfold return on investment to Bain, eliminated over 1,000 jobs in the process, and then cut countless others during the bankruptcy that followed Bain’s profitable exit from the scene. Romney himself admits there may have been 10,000 jobs sacrificed during his Bain restructurings, hastening to add (without evidence) that many times more were produced.

Presumably, the sacrificed workers were at least able to collect unemployment benefits. Romney did slightly better when he left the private sector in 1999. Bain, which still exists — it ranks as the fourth-leading US private-equity firm with $66 billion in assets — presented its favorite son with a gilt-edged retirement package. In lieu of a pension, Bain made Romney a silent partner in all its operating profits through 2009, guaranteeing him an annual share of returns worth millions of dollars, plus the option to participate in the firm’s ongoing investment funds.

Best of all, Mitt pays little in the way of taxes, the pattern throughout his business career. A quirk in federal tax law, the “carried interest” loophole, has for years allowed active private-equity managers to pay most of their taxes at the ridiculously low 15% capital-gains rate normally reserved for unearned investment income (a scandal in its own right), rather than at the higher graduated income-tax rates established for salaried earners or professionals providing services.

This low rate applies as well to the Romney “retirement” investments, including those reportedly residing in Bain’s offshore tax shelters, if and when they come under the purview of the IRS. You might think this would be cause for sheepish second thoughts on Romney’s part; you would be wrong. As Mitt titled his 2010 economic manifesto celebrating the capitalism he practiced: “No Apology.”

From The Progressive Populist, March 1, 2012

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history.