How Bain Capital Could Sink Mitt Romney

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Poll leader Mitt Romney is getting slammed by opponents for the 15 years he spent at private equity firm Bain Capital. To hear the opposition tell it, Romney is not the job-creator he claims to be, but rather a greedy profiteer.

After winning Iowa by a narrow 0.1% margin, Romney was the New Hampshire frontrunner by more than 10 percentage points, according to most polls. Romney's competitors, however, have edged slightly closer amidst increased scrutiny over the former Massachusetts governor's private equity profit-taking.

Critics – especially fellow GOP presidential hopeful Newt Gingrich – got louder leading into today's (Tuesday's) New Hampshire primary, berating Romney for raking in millions as Bain Capital laid off workers and let companies go bankrupt.

"I don't have much respect if you rig the game so you end up walking off with all the money," Gingrich said Tuesday on Bloomberg Television. "[H]e's got some very big questions to answer."

Bain Capital: Capitalists or Corporate Raiders?

Romney co-founded Bain Capital in 1984, a spinoff of management consultant firm Bain & Co. He stayed until 1999, except for a brief two-year stint back at Bain & Co.

"Basically Romney got the Bain Capital job because he was 'teacher's pet' in Bain, and Bain Capital was bound to do well because it had all the very smart people finding deals and having ideas about how to run companies," said Money Morning Global Investing Strategist Martin Hutchinson. "Initially, it focused on venture capital, which genuinely creates jobs, like its work at Staples Inc. (Nasdaq: SPLS), but later it moved to leveraged buyouts, which generally don't create jobs, and can hollow out the company making it vulnerable to failure."

When private equity companies engage in leveraged buyouts, they usually lay off some of the acquired company's workers, as well as take payments in the form of dividends and fees. The target companies are usually sold.

Romney has been highlighting his Bain successes throughout his campaign. In addition to office supplier Staples, the group invested in Dominos Pizza Inc. (NYSE: DPZ) and retailer Sports Authority. Romney claims that projects like these created 100,000 jobs during his Bain tenure – although Bain has no documentation to prove it.

In the 15 years Romney ran Bain, about 22% of the companies Bain invested in declared bankruptcy or closed within eight years of the firm's initial investment, according to a study by The Wall Street Journal. Bain generated about $2.5 billion from those deals, on investments of $1.1 billion.

Critics Blast Romney

Gingrich has been the most outspoken Romney attacker, painting him as a greedy corporate raider instead of a capitalist businessman.

"Is capitalism really about the ability of a handful of rich people to manipulate the lives of thousands of other people and walk off with the money?" Gingrich asked Bloomberg.

Romney rivals Rick Perry and Jon Huntsman Jr. joined Gingrich in blasting Romney's actions at Bain.

"There is something inherently wrong when getting rich off failure and sticking it to someone else is how you do your business," Perry said Monday in South Carolina. "And I happen to think that is indefensible."

Hutchinson said it's a point the opposing party will run with.

"It's too easy for the Democrats to demonize, especially as President Obama is clearly running on a class warfare platform," said Hutchinson.

While Republican opponents continue to demand that Romney address his Bain Capital activity, Hutchinson said the issues will be much more hurtful if Romney ends up getting the Republican nomination.

"The Bain issue is much stronger for Obama, because the electorate as a whole is more suspicious of millionaires and Wall Street than the GOP primary electorate," said Hutchinson. "Republicans bringing it up are partly warning of Romney electoral weakness."

Private Equity Defends Romney/Bain Capital

The private equity business faces increased scrutiny as the Bain Capital backlash intensifies.

The Private Equity Growth Capital Council is already planning to roll out an image campaign in coming months, according to a report in The New York Times. The group wants to promote private equity as a job-creating industry and dispel misconceptions fueled by the Romney controversy.

"There is a lot of misinformation being spread, purely for political purpose and on both sides of the aisle, as it pertains to private equity," the group's interim President and Chief Executive Officer Steve Judge said in a statement Monday. "While the business model has evolved over time, the fact of the matter is private equity provides capital and operational expertise to companies that are often underperforming or on the brink of failure."

If the spotlight on the industry does uncover wrongdoing, it could affect legislation regulating firms' profits that's being debated in Washington.

"Private equity could lose its "carried interest" tax break, where the fees on fund gains are treated as capital gains for tax purposes," said Hutchinson. "It's quite close in Congress, and industry lobbyists could be weakened by this."

The Bain Capital effect on private equity and Romney's road to the White House can be measured as the New Hampshire primary results come in tonight.

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  1. Rich | January 11, 2012

    I can only say that I hope the Republican nominee is chosen early on versus later. The real focus should be getting Obama out of office, not eating your own. I will vote for ABO (Anybody But Obama) in 2012.

  2. patrick donnelly | January 11, 2012

    romney should tell how when hw was gov of ma he came stopped a rail project to new bedford put the funds to a new project to get rid of a rotary for cape cod then went on the campain trail for president i think he ran just to get the word governor as a title then he baseicly walked away never was a real gov but he did what all scum money lovers do he payed back his pals by moveing all the $$$ from new bedford to his pals on cape cod the rail project is still being done but slowly as $$$ is found to finish it my veiw of him a bum with $$$ he got by screwing up working folks

  3. D. Fayette | January 12, 2012

    Sure, jobs may have been trimmed, that is part of making an old company efficient again. If Bain bought something for $1.1 billion, and sold it for $2.5 billion, there must have been some value to what they did with the assets they handled. Clearly someone saw greater value in the final product. More than likely, if Bain had not invested in the companies, those companies would have gone bankrupt sooner than they did, and the jobs would have been lost even sooner. If it was all about saving jobs, we'd still have a huge industry for making the horse drawn carriages, and each ATM would require a bank teller, and so on, and so on. I doubt any job that was efficient was cut…just wouldn't make any sense to cut a job that created more value than it cost.

  4. KatieAnnieOakley | January 12, 2012

    My husband worked in the corporate offices of KB Toy Stores in Pittsfield, Massachusetts. It was run very much like a family; everyone knew everyone else. It was generally a fun place to work…

    In 1999, KB was poised to be taken public or sold; it was owned at that time by Consolidated Stores. It was considered, in market-speak, to be a "Cash Cow". Consolidated notified KB Toy Stores employees it was going to offer either an IPO or direct sale in April 2000; employees, including us, were amassing cash to make it an employee-owned company. Instead, the IPO / sale ended up being "delayed…".

    Late that year, the new CEO of KB Toy Stores, along with Bain Capital bought KB via an LBO (leveraged buyout). This means Bain borrowed against the assets of KB – in order to purchase it! Then, less than two years later in 2002, the new KB Toy Stores "Directors" (most of whom were placed by Bain Capital) "authorized" an 83 million dollar "stock redemption" in order to "repay" Bain – and another 34 million dollars to "bonus" themselves! The CEO of KB Toys alone got over 18 million!

    Less than two years after that major drain of company assets, and now buried under massive debt, in January 2004 KB filed for Bankruptcy. Bain said it was because of "market competition from Walmart", etc. – but that is not the case; KB Toy Stores were mall-based; K-mart and Toys R' Us had been in business and their competition for dozens of years. They didn't "compete" in the same markets as Walmart.

    Bain crippled KB Toys to the point of having to declare another Bankruptcy, this second time a liquidation Bankruptcy – and by early 2009, that was the end of KB Toys.

    It's well known Mitt still drew monies / had a financial interest in Bain Capital after he left in 1999. Mitt Romney is a VULTURE CAPITALIST!

    I will soon be writing a post that delves much deeper about this story at the blog I frequent.

    • Tony | January 18, 2012

      Katie:

      Hello. I'm a reporter at a Financial Times publication for corporate board directors. I'm reporting today on the legal problem that board members can get into known as fraudulent conveyance.

      I've read your statement about your husband having been put out of work because of Bain Capital. I wonder if you could tell me whether the board directors at either KB Toys or Bain were ever charged with any wrongdoing.

      I would like to speak with you if you have a few minutes. Please call me on Wed or Thurs at 212-542-1236.

      All the best.

      Tony Chapelle
      Senior Reporter
      Agenda Newsletter – A Financial Times service
      1430 Broadway
      New York, NY 10018

      • Les | April 25, 2012

        Hi:

        I'm wondering if you had a link to the specific part of the "New York Fraudulent Conveyance Law" that talks about creditors having a responsibility to ascertain whether or not potential debtors can repay a loan before issuing them a loan.

        Economist Michael Hudson refers to this in various places, but I can't find it referenced in the actual law, and Mr. Hudson doesn't have a citation, either.

        Thanks.

      • KatieAnnieOakley | September 6, 2012

        I didn't get this message until today – months later. I found it while I was doing further research on the Bain Capital fiasco that seems to be defining Mitt Romney.

        I am speaking to someone now at PoliticusUSA regarding what happened – and yes, I *DO* believe that an intricate "manipulation" of board members was done ( I do NOT want to be pigeon-holed by or into saying "fraud"). But yes – there is a definite problem with certain persons being ethics-challenged…

        Find me at Politicalgates.blogspot.com

  5. womanforpaul | January 13, 2012

    Ron Paul, a patriot, who has honorably served his country, defends both the constitution and civil liberties, and is for peace and prosperity. Dr. Paul has the wisdom, foresight, honesty and integrity to be president.

    Dr. Paul believes spending and deficits are destroying this country. Dr. Paul's budget plan would save $1 trillion in the first year. Besides the spending cuts, there are other issues of importance to voters. For conservatives, Dr. Paul scores an A+ on all of them: Second Amendment protection, pro-life record, right-to-work, pro-business, anti-tax, states' rights, you name it.

    Dr. Paul also believes America should have the strongest national defense on earth — which he believes begins with not trying to constantly police the earth. Right now, our government puts our best and bravest in harm's way on a regular basis for questionable reasons and with no discernible notion of victory. This is not supporting the troops. It's abusing them. Dr. Paul wants an end to this absurd, costly policy.

    The voters have declared Dr. Paul the alternative to the liberal, flip flopping Mitt Romney. The other candidates are simply irrelevant. In the New Hampshire Primary, Dr. Paul received more votes than all the supposed Anti-Romney (Santorum, Gingrich, and Perry) candidates combined.

    The question for Republican voters is not whether they can afford to vote for Dr. Paul – it's whether they can afford not to.

    America Needs Ron Paul.

  6. Alan Haubenstock | January 17, 2012

    According to your article, Dr. Paul is pro-life. I heartily disagree with this policy. I believe women
    should have a choice

    Every child should be a wanted child. If you don't like abortion, don't have one, but don't prevent
    others from doing so.

  7. Coachwad | May 24, 2012

    Definition of how private equity makes its profits, and the sole reason that Private Equity exist, to make profit. Job creation at a Private equity firm is not job 1, and happens only as a potential by product in some circumstances

    Risk other people’s money
    Buy a company to squeeze higher profits
    Cut workers, pay and benefits to squeeze higher profits out of the company
    Use company as collateral to borrow lots of money to inflate profits
    Company pays back investors immediately
    Sell company for more than they bought it for
    Equity Managers Pocket 20% of the sale even though they never risked their own money
    Equity Managers don’t risk a dime and only pay 15% capital gains tax

    This is what the values that America represents and aspires to? The man in charge of this business model a good American of high moral character? Whos leadership in this business endeavor makes him a good candidate for POTUS? A business model that concerns itself and takes into account the human assets(see fellow taxpaying Americans, generational lower middle class and working towards poverty as the rich get richer)? Who worries about the person that spends their whole adult lives toiling for 1/10,000th of the profits made by PE and their investors? If you believe that this type of company creates jobs as a function of its existance, you are naive at best.

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