October 01
Male, Jewish, in my extremely early sixties, married with kids (well, at this point I guess that should be "kid"). Thanks to Lezlie for avatar artwork - sort of a translation of my screen name. "Salaam" is peace in Arabic, hence the peace sign. (No, my name doesn't mean "hunk of meat" and yes, the pun is intentional.)


Koshersalaami's Links
NOVEMBER 4, 2012 1:00AM

Romney and Business: What Bain Capital Really Does

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I never really understood what Mitt Romney did at Bain Capital. I was reading Kemstone's latest piece about Romney (there's probably a link to it if you look to the right in my Favorites column) and he provided a link to a September article in Rolling Stone by Matt Taibbi explaining this, along with links to a response and to Taibbi's response to the response.

Here's the address of the article:

Being as one of the things I do best is turning tech into English, I'm going to try to explain what I learned in something other than financial jargon. My source for what I didn't already know is the Taibbi article. What I'm about to explain apparently isn't what Bain Capital started out doing, at least not solely, but it is what they developed into, and Romney was heavily involved in this process. They started out in venture capital (investing in startups), then switched to buying existing companies.

A lot of companies are publicly traded. That means anyone can buy stock in them, and it typically means that the majority of the stock is publicly traded rather than in the hands of someone inside the company.  So, if someone manages to buy enough stock, they can control the company.

That's what Bain Capital does, but it doesn't do it mostly with its own money. It puts down a portion of the money (the size of the portion varies), and borrows the rest from a bank. This is called a Leveraged Buy Out, or LBO.

How do they make sure enough stock is available? Usually by offering more per share than the company is trading at; then, stockholders think it's a good deal and are willing to sell.

How do they make sure they don't get fought really hard by executives inside the company? They give those few executives monster bonuses, essentially getting them to sell their employees out.

Once they own the company, they can make the company do whatever they want. What they want is mainly two things:

1. They want the company to pay back the loan that they borrowed from the bank to buy the company. This saddles the company with huge debt it didn't need and often can't quite afford, and of course it isn't the company that needed the loan in the first place.

2. They want the company to pay them enormous management fees.

If politically necessary, they can add enormous dividends to stockholders to that list.

So they're essentially milking the company. Do they provide management advice? Of course, but it isn't typically worth the debt plus fees.

What are they advising the company to do? Well, the first thing is to put itself into a position to be able to pay off all this new debt. How? By laying off people, typically a lot of people. Also by selling off assets. And by reducing costs in general by any means necessary, such as by sending jobs to cheaper labor in China.

Does the company survive? Sometimes. And yes, it's better for Bain when the company survives, but what's most important isn't the company's survival, it's getting their investment out quickly so that Bain and the bank gets return on investment whether the company survives or not.

This is what Romney means by "business experience."

He isn't the solution. Actually, he's the problem.

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creating jobs, my ass

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When every aspect of 'the game' of any capitalist enterprise is filtered ONLY through the filter of "profit" a lot of bad shit goes down.

Get business (bribery) out of government, insist that government set rules that change the primary filter from 'profit' to 'social good', and you'll have a whole new ball game.

If corporations want to be "people", fine. Just make sure that those "people" are "good citizens." And no more of this shit of 'fining' corporations who break the rules; they just add the fines into their costs and recover the money from their customers. Jail the damned CEO's and senior management and strip them of all wealth without mercy. After all, they were perfectly willing to strip all others in society of their wealth and positions. Turn about is fair play.....

That is precisely what I would like to see.

Sooner or later we'll be able to make it unavoidably simple. This is as close as I can get on first try.
I read an interesting comment that said the finance and banking sector is vital to the economy at some given size, but if it grows beyond the optimal size, it starts being a drain on the economy.

I think that's what we have. Finance guys with not enough to invest in started creating assets out of parking meters or leveraging up companies that didn't need it and taking too high a toll.

My guess is Bain became an LBO specialist because there was too much money chasing too few good start-ups to invest in.

The people like Romney, who've made $20M from this have nothing better to do with their money than spend it on politics. I mean really, how many houses do you need? How many cars and yachts? At some point, your sixth house seems more like a hotel than a home because you're never there and you don't remember your staff's names.
But what I have yet to see is a good policy proposal for curbing abuse and dealing with the practices that have so grossly widened inequality.

I don't think taxation is the route. It's too easy to dodge, as proved by the millions Mitt has in his IRAs.
This is a clever evaluation.
Terrific, straight-forward explanation. Thank you, Kosh.

What people will say is that this is legal, and thus they can do anything they want. Not realizing that they use government subsidies, sometimes, when the company goes bankrupt.

I read another fun article this week about Romney's so-called blind trust and an autoparts maker called Delphi. Anne Romney was in on buying Delphi, which mad steering columns for GM cars. They extorted bailout money from GM by threatening to withhold the parts from them, then closed the plant and sent 25,000 union jobs to Mexico.

Heck of a family, there. Here's the article.
The Mafia have a name for that interest. It's called the "Vig" and it comes with two broken knees!
Thanks for commenting.

I've only just figured out what the guy was doing - I just had a vague sense he was profiteering before. I haven't had time to figure out what to suggest about regulating it yet.

It's absolutely the moral equivalent of the mafia, actually worse, because it ruins way, way, way more lives.

I'll get to that link, thanks. The question isn't whether this is legal, the question is how someone who does this could be considered patriotic under any circumstances. This guy's two days away from close to half the country saying he should be President.
I keep thinking that legal doesn't equal moral, which I forgot to say in my comment.
No, Phyllis, it doesn't. If you want to have a long conversation about the distinction, go see Herr Rudolphus der Rude.

It's like any other model of reality:
The idea behind law is to codify justice. It's not always successful for two reasons:

1. The people writing laws miss the mark, because hitting it precisely isn't easy.

2. The people writing the laws are influenced by people who are using the law to avoid justice rather than promote it (like the laws that allow what Bain Capital does).

One of the reasons we keep the jury system is to allow justice to overrule law when they come in conflict. That's not what most people will say about the purpose of the jury system, but that is something it actually does. Sometimes.

Always remember that the ultimate object of law is to codify morality, so it is ultimately morality that takes precedence, though that typically involves legal consequences.
I read the Taibibi articles, Kosh, and you provide an admirably succinct and clear summery. Thanks. How can anyone think this kind of predatory, looting behavior is a qualification for public office? Is this the mentality we want brought to goernment "service"?
Some people think Romney is a snake oil salesman. According to fact checkers, that is inaccurate. In truth, Romney, through Bain Capital, invested in an American snake oil manufacturer and loaded it up with debt. In order to pay the debts, the snake oil manufacturer cut costs by only using oil from foreign snakes and then transferring the snake oil bottling operation to China. Then Romney sold his stake at a big profit and the company is stuck importing the snake oil back to the U.S. and trying to sell it to the same American workers who used to produce the snake oil but are now laid off.

Takes a lot of chutzpah, if you ask me. Even worse, some people are buying it.
I read the Tabibi article a couple of weeks ago and I think you've summed it up pretty well kosh. You've described how it works in the worst cases but there are others where that sort of takeover actually leads to an improvement in its operations. However, Bain seemed to opt for more of the former.
That's not what they did at all. I also looked into Bain Capital, and I did so ONLY for the years that Romney was at the helm.

When they did perform leveraged buyouts, they did two things:

1. created jobs (even in their capacity as "corporate raider" there was a new gain of 100 jobs for the companies they "raided")

2. immediately, post restructuring, sold these companies to larger companies, as far as I can tell, ALWAYS to the benefit of the formerly failing entities, and MASSIVELY to the benefits of their investors (in a time when everyone was making money, the 90s, Bain Capital outperformed other Equity funds, as well as the S&P 500, by 20%...if you know anything about how these things work, then you know that number is HUGE.)

I love when I'm 3 weeks ahead of the pack and get ignored, but some dude who read one article and follows it with no additional research, and just so happens to be completely wrong in all of his conclusions, gets the whole group of sycophants in here to applaud his efforts.

Kosh, may we please copy+ paste this into email, then cc all the ppl we know who have yet to vote? We can ask them to forward it to their coworkers and friends. I would've simply linked to this post if it weren't for Open's crazy error messages and loused up mechanism.

Also, may I reiterate herein: Bain Capital recently bought a number of voting booths, which it has strategically placed in certain swing states, including CO. Time to monitor our own votes and how they will be read, tabulated.
Just a reminder
Peace, friend!

I'm curious as to what Malcolm said. I've run into him here and there around OS, and I don't find him to be too stupid at all. Is there any chance that a "spin" is being put on Romney's Bain Capital activities? It's awfully easy for strong lefties to attribute great crimes to any/every one who makes a lot of money.

From where I sit, outside the fray, I see far too many people, on both sides of the aisle, putting spin on the "other guys" actions to a ridiculous point. I'm as ready as anyone to tar-n-feather the bastard if he was really responsible for great wrongdoing. But I'm a tad hesitant to do so unless it is justified.

I know the kind of things I was said to be doing when I was a landlord.... "Because that's the way you fuckin' landlords operate."
I also know that what was said was simply not true. But there is just no way that you can tell someone they are wrong when they "know" that they are right. Especially if they've never dealt with you personally in their life.

If Malcolm can provide links to info that supports his position, those who've been smearing Romney may need to re-think the things they're saying. There are plenty of very good reasons to not vote R & R without bringing bullshit into the game. Y'know?

Poor Woman,

Sky & Malcolm,
Depends when at Bain. When it specialized in venture capital, sure. Later, less so. The examples given by Taibbi didn't reflect that.

Return on investment isn't what we're worried about when running for President; exporting jobs is. You can increase short term profits by laying off people and you can increase long term profits by sending production offshore. If you 're going into politics, you've got to worry about the fate of Americans. Romney came from both a political and business background and knew better.

I don't have a specific reason to think Taibbi had an axe to grind, though I don't know him
just Phyllis,
I followed your link. Thank you. It leads to part of an article. The whole article is here:
Thanks for a streamlined easy to follow explanation of what Mitt's had his mitts in.
You're more than welcome.

There's more bad stuff, but this is enough. (For more bad business stuff, see the link in the above comment.)
sky - I did provide I said, I looked into this quite a while ago, but because what I found ended up showing Romney in a positive light (not my intent, trust me), I was ignored and some shit about what a lying asshole Romney is graced the home page (hard hitting journalism right there).

It's on my page somewhere. You're free to not read it and not verify my sources like no one else does.

Kosh - When SOLELY acting in the capacity of what you would classify as a CORPORATE RAIDER, and only in the years Romney was there, Bain was a net creator of jobs - American Jobs (only +100 in this role, but these are companies on the verge of failure which just happen o have a balance sheet which makes them attractive for takeover and restructuring)

That's not counting their role as venture capitalists (the numbers go way up at that point).

Also, you might not be concerned about return on investment from your president, but I am.

Freeway system - pretty good return on investment, no? Electrical infrastructure and public works projects. I absolutely want someone, for those things directly under the purview of the executive ofice, to get me the best return for my tax dollars.

Why don't you? You usually seem very reasonable and well thought out on things such as this. You're not here, though, and I find it peculiar.
Thanks, Kosher! This piece explains what Bain did in a far more succinct and accessible way than the Taibbi article. It's a shame so many swing voters won't even bother to get the basic gist of it.
@poor woman - they didn't "buy" the booths. they donated them. apple can do the same for obama...or starbucks...or whomever (donate to districts in these states which more heavily favor the president).

you guys act like obama is less likely to manipulate things from the seat of power he hols that a guy who while disgustingly rich, is not even in the top 10 most wealthy people in this country, and therefore has nothing close to the power of the sitting president to unfairly influence an election.

Does the sand get in your hair when you bury your head, or do you wear a shower cap or a do rag or something?
I wasn't criticizing you for not having a solution, my comment is that I haven't seen anywhere any policy proposals that I think address the problem. Ending too big to fail and letting some banks fail would probably help. But it doesn't address the overall problem of a small number of very privileged people extracting too much from the economy.
I'd like to see the links, so maybe I should go over to your blog and check them out. If I'm wrong, I'm wrong, or perhaps I should say if Mr. Taibbi is wrong, he's wrong.

It's not that I think return on investment isn't important but I think how it is weighed compared to the priority of keeping jobs in the United States shifts if you're thinking about running for public office. If bottom line is 100% of your concern, sending jobs offshore is sometimes the logical thing to do, even though it's a short term solution in that while it saves you money it also erodes your customer base and, if that solution is common enough, the American economy suffers. I find it difficult to believe that an American, particularly one with a father who was so major in both politics and corporate management, could suddenly shift gears in terms of regarding the preservation of American jobs as a low priority to regarding them as a high priority because he happened to be running for national office. If one is going to claim business experience as an asset, one has to be prepared to accept one's priorities while in business as a liability, because we're talking about different aspects of the same experience. Does that clarify my position somewhat?

That may initially be up to us, and for us to contact public officials once we have something to recommend.
I suppose, but let's assume that you've had more than 1 career in your life as well. Perhaps the goals of each one were as wildly opposite as corporate finance and government, but I would have to imagine that one prioritized X over Y, and in doing either job, the priorities of the other weren't necessarily conducive to success of either.

I believe Mitt Romney is a tax cheat, and like all the others in his income class, he took the Tax Amnesty in 2010 and this is the reason for his refusal to provide that year's income tax statements.

I believe he has chosen to pander to a class of people who I would also like to pander to, but my definition of pander includes swift and repeated kicks to the balls, so I don't know if they would enjoy it the way I would go about it.

And, after looking into more than a few things about him, I don't believe he would be the most horrible president in the world, and given what I know of the current president, it is possible he may even be better than his predecessor, should he win on Tuesday.

I ain't votin' for him, but I ain't scared of him, either.
You don't need to look far when looking at Bain. Look at Bain capital's website. It describes itself as a "private equity" firm. Read the Wikipedia entry on private equity firms and think about it.

Buying a company outright is only affordable if the company is tiny. This is how they invested in Staples, when the founded wanted a few million to open his first store. Or if the stock price is in the fractions of pennies because the company in or near bankruptcy.

When private equity firms buy big companies, they use LBOs, leveraged buyouts. In essence, the target firm borrows money to buy itself. In return for arranging the deal, the LBO firm gets equity (ownership) in the new firm. Bain often puts in management consultants to streamline and this is where Mitt makes his claim as a turnaround specialist. The newly private firm does fine as long as it can make the debt payments.

When a firm is owned by shareholders, when the revenues of the firm decline, it can cut dividends. The value of shares decline. With debt, a fixed sum has to be paid, regardless of the state of the economy and the firm's revenues. So, if the firm is going through a bad patch and can't make its debt payments, it goes into bankruptcy.

Now if you look at Mitt's time at Bain, he started doing LBOs when the economy was booming and got out around the time a recession started. So if you view the state of Bain's acquisitions at the time Romney said he left (not the date he actually gave up control), you get a lot more successes.

But the issue is twofold:
1) if you borrow too much, a small downturn can push you into default on your loans. The debt loading happened under Mitt's management, so the defaults and bankruptcy are a result of his strategy, despite the fact that they occurred after he left.

2) The bigger issue is that an LBO is changing the ownership of a company. In and of themselves, LBOs do nothing to add value to the economy. Because they are so highly leveraged (the amount of debt to money invested) LBO deals can be profitable for the investor even if the firm isn't profitable.
Malusinka - except, they sold off the heavily indebted companies to larger entities like Siemens for the debt buyout +.

He's not dumb. He knew, even then, that the gravy train wouldn't keep rollin' forever, and he also made sure to have an acceptable, diversified risk portfolio such that his investors were protected, which was, of course, his ethical duty to do.

No one likes the defense lawyer who defends accused rapists either, but their role in society is no less important and no less noble than the person who prosecutes them (convicted rapists should be kicked in the nuts daily by their victims until that person's foot hurts more than the other person's nuts do, I believe...)
I'm not afraid of his capabilities. I don't think he was an awful governor - after all, he invented Obamacare, along with the Heritage Foundation - but I think he was a better governor than president for the same reason Bush was a better governor than president: He had no choice but to work with the opposition.

I don't think lack of honesty is symmetrically distributed in this presidential campaign. This isn't to say that I think President Obama is completely honest, but I don't constantly find myself screaming at howlers like I do Romney, like that whole bit about blaming Obama's awful relationship with the Republicans in Congress on Obama - that man bent over backward to try to work with those guys and ran into continuous opposition that was just crazed. An extremely moderate president, I'd say from my standpoint an annoyingly moderate president, was treated for four years like he was five feet left of Lenin.

I am afraid of the prospect of him as President, not just for social reasons, but because income has polarized to the point where the pandering we're talking about has become economically dangerous, and he is a bigger panderer in this respect than Obama is. The more concentrated wealth becomes, the less well the economy will work; in fact, it may become concentrated to the point where the wealthy's investments start to fail because most of them are ultimately dependent on consumer spending. I also think that he's too much of a class warrior, and I am afraid of the consequences of having another "let them eat cake" guy in the White House.
People (who may be innocent) need to be defended when accused of crime, so defense lawyers have a role to play.

Companies need to raise capital, so there's a role for venture capitalists and bond specialists. These roles have existed in various forms for centuries. Neither the economy nor society needs LBOs. The entire concept hasn't been around for long and they really got going in the 1980s. It's essentially financial manipulation, not wealth creation.

So, in that sense, it's more like lawyers chasing ambulances and doing their best to convince people who were in random accidents to find someone with deep pockets to sue.
I agree with Malusinka on this.

I'd also like to make it quite clear that I don't demonize people I don't like or disagree with to the point where I blame them for stuff they're not responsible for or don't give credit where credit is due. I don't think I'm slandering Romney, not because I don't think that he in particular doesn't deserve it but because I don't want to participate in that activity under any circumstances.

I've seen this phenomenon in business before. It has to do with a disagreement on what the Rules of the Game are more than with not playing by the rules, though my experience is that people who believe the rules are looser and more forgiving than most other people have a tendency to tolerate rule bending way more in their direction than the other way.
The parallel is that both the lawyer and the Chairman of a publicly held company hold the same ethical obligation to do what they do when in the short term, it may not seem like the most beneficial thing to society.

Do I really need to grab all the success stories from LBOs which have been to the overwhelming benefit of the newly private company, or do you have the same google that I do, thus saving me the trouble of a search?
I would assume you'd find some LBO's that worked. I'm not saying none did. I am saying there are apparently some pretty big ones that are closer to the model I described that were handled by Bain between the time they moved from startups to LBO's and the time Romney gave up operational control. He may not have been 100% dirty but he was far from clean.

Yes, there are legal functions all over the place that are distasteful. Have a conversation with Jonathan Wolfman about the ACLU some time, particularly about Skokie. This is a point made by a lot of people, including John Adams, who once defended someone accused of being a British spy because no one else would represent him. Adams, incidentally, won that case.

However, it's one thing to be the ACLU agreeing to defend American Nazis in Skokie because everyone deserves representation. It's quite another to sign on as in-house counsel for the KKK. You don't sign on as in-house counsel to the KKK if you intend to run for office, unless maybe you live in David Dukes' district. Romney was a class warrior and I think he's gambling on most people simply not understanding the stuff he did.
I find none of what you described as distasteful when taken in context of a legal system (of course I find it personally distasteful).

Right now, you enjoy (somewhat) free speech. So does the local pornographer. It's a side effect. Every right has them (2nd amendment has Chuck Heston and so on...).

The right, in and of itself, is important enough to protect is seedy underbelly.

We've got a Congress to make laws and an SEC to enforce this particular type...make LBO illegal.

Here's the problem with that, though, the market will figure out another instrument to use to accomplish the same goal. You don't like it, you don't like Capitalism.

That's fine. I got my issues with it as well, but I'm just sayin' - don't hate the playa. Hate the game. (ask you kid if you need help translating)
I find none of what you described as distasteful when taken in context of a legal system (of course I find it personally distasteful).

Right now, you enjoy (somewhat) free speech. So does the local pornographer. It's a side effect. Every right has them (2nd amendment has Chuck Heston and so on...).

The right, in and of itself, is important enough to protect is seedy underbelly.

We've got a Congress to make laws and an SEC to enforce this particular type...make LBO illegal.

Here's the problem with that, though, the market will figure out another instrument to use to accomplish the same goal. You don't like it, you don't like Capitalism.

That's fine. I got my issues with it as well, but I'm just sayin' - don't hate the playa. Hate the game. (ask you kid if you need help translating)
I think I can figure out about the "a" substitution for "er," particularly given that I grew up as a New Yorker and I still drop a lot of my R's, particularly final ones but not only those.

Pornography is legal but pornographers don't normally get elected President.

The problem at the moment is that campaigns are so expensive that candidates need to go to people or corporations with serious money to get elected, and the result of those debts is legislation that keeps the SEC from acting on stuff like LBO's. It's not just enforcement that's the issue, it's the lawmaking process. Sure, capitalism means there will be loopholes, and fighting them can be a perpetual battle, but we do good by winning some of it without having to win all of it, which is basically impossible anyway. The influence I'm talking about nearly sent the country into default, which frankly scared the crap out of a lot of investors, investors who are still mainly voting for the guys who almost did this. But that's the stupidity of my alllies, who couldn't take advantage of an opening you could drive the Queen Mary through.
LBOs are often successful. The technique would have died if it didn't make money for the LBO artists. But, to have a success story, you need a credible narrative about what would have happened if the target company didn't undergo an LBO. Would the parent have sold it by other means? Would new management have turned it around?

LBO specialists look for companies with potential which aren't living up to their potential. In the normal course of business, one would expect the shareholders to recognize a problem and change the management. To make the argument that an LBOs success was due to the fact it was an LBO, you need to convincingly argue that the company could not have been turned around some other way.

Failing that, LBOs (and Bain and Romney) are vulnerable to criticisms of the technique.
Kosh, I just came across this article by chance and it really burned me up because I was telling people all of this in writing here on Open Salon BEFORE the election, and no one paid any attention. That's why I've stopped posting anything online, except for the odd comment now and then. It is too god damned frustrating.
The trick is that you really, really have to translate it completely out of financialese. Some of us don't speak it. You're fluent in it and I've seen you forget what civilians won't know.