Wednesday, February 1, 2012

Is Mitt Romney a Vulture Capitalist?

Mitt Romney as a result of yesterday’s convincing defeat of Newt Gingrich has again established himself as the odds-on favorite to win the Republican nomination for president.  But even so, Gingrich has vowed to stay in the race until the convention.

One of the issues raised by Gingrich is about Mitt Romney’s former position at Bain Capital.  Romney has cited his business background as making him uniquely qualified to create jobs.  Gingrich’s response was to ask how Romney can create jobs when at Bain Capital, he made a career out of destroying them.

If you haven’t already, I invite you to check out the 28 minute video When Mitt Romney Came to Town.  It is compelling watching but in fairness, it was produced by Newt Gingrich’s super PAC so it may well be tainted with bias.

But what is the truth behind what Romney’s detractors call Vulture Capitalism?  Because these transactions are so complicated, it’s hard to say for sure.  Romney says that he created 100,000 jobs.  But he hasn’t presented any supporting evidence.

A Wall Street Journal article Romney at Bain: Big Gains Some Busts tries to come up with some answers.

Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.


Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.


Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.

What is perhaps the most controversial is Bain’s use of the Leveraged Buyout which is defined and explained in this Investopedia article.

Definition of 'Leveraged Buyout - LBO'  
The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.  
Investopedia explains 'Leveraged Buyout - LBO' 
In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds usually are not investment grade and are referred to as junk bonds. Leveraged buyouts have had a notorious history, especially in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company's operating cash flows were unable to meet the obligation.  
One of the largest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion for the acquisition. 
It can be considered ironic that a company's success (in the form of assets on the balance sheet) can be used against it as collateral by a hostile company that acquires it. For this reason, some regard LBOs as an especially ruthless, predatory tactic.

There seems to be a pattern that the companies that failed did so because of overwhelming debt imposed on them by the acquiring company.  In addition, companies with these large amounts of debt have far more difficulties dealing with down markets.

But what was the idea of Bain taking over these companies?  Unless one is incredibly na├»ve, it was first and foremost with the idea of making money (preferably big money).  If workers lost their jobs and perhaps their pensions from their companies going bankrupt, that’s just a part of capitalism where according to Romney, there have to be winners and losers.  But all too often Bain made a handsome return from management fees whether the company did well or not.

While there is no accusation of Romney and Bain doing anything illegal, there is a question of conscience and empathy.  If I were to cause the loss of hundreds or even thousands of jobs to make a nice payday, I would feel terrible about it.  But then I’m just a bleeding-heart liberal.  Mitt Romney doesn’t seem to even give it a second thought.

So what this is ultimately about is whether Mitt Romney has compassion for those of us who are not wealthy like him.  Today, he make a curious remark saying that he is not concerned about the poor since they already have a safety net while at the same time supporting the Ryan Budget Plan which would not only make cuts in that same safety net, but also lower taxes on capital gains to zero.  So for those who are outraged at Romney paying only 14% on his submitted income tax return, his taxation rate under the Ryan Plan that he favors would be close to zero on all of the millions that he earns mostly from capital gains.

Assuming he gets the Republican nomination, voters this fall will have to decide if Mitt Romney is looking out for the interests of the 99% or the 1% he is a part ofI think I know!