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The business that enriched Romney

If Mitt Romney wins the Republican Party nomination for president, which seems likelier every day Herman Cain opens his mouth, the narrative for Romney's 2012 run is pretty clear. He will tout his credentials as a savvy businessman who should be given the reins of the American economy because he knows how to create jobs.

What Romney won't tell you is that what he really knows how to do is create massive amounts of wealth for himself and his partners. Jobs, however, are another matter.

Romney founded the private equity firm Bain Capital in 1984, and owned the firm from approximately 1992 to 2001. During that time he made a fortune while thousands of employees in some of the businesses Bain acquired lost their jobs.

Romney's firm's actions are detailed in the highly illuminating 2009 book by financial reporter Josh Kosman, The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy. The chapter that focuses on Romney and Bain Capital is aptly titled "Plunder and Profit."

Private equity firms operate through leveraged buyouts. They create limited partnerships to buy companies, usually pretty healthy ones since it's the only way to initially attract financing, then burden the companies with debt while trying to make the balance sheets look good, often by cutting costs such as workers or their benefits, to flip the companies within five years for a profit.

Private equity firms put a relatively small amount down, say 20 percent, and the companies they are buying borrow the rest from banks, making them responsible for repayment. Suddenly a company that had a reasonable debt load, if any, is subjected to crushing repayment obligations.

According to Kosman the only reason this works is a major tax loophole that allows the interest on these loans to be tax deductible.

Now, when a business borrows money for capital equipment or a major expansion it makes sense for the government to encourage that investment by making the interest tax deductible. But here the debt is just so some clever rich guys can buy a company with little financial risk to themselves. By deducting the interest on the debt, the company sharply reduces its tax liabilities and can use that money to make its debt payments.

Got it so far? Spend little, borrow big, avoid taxes and get control of a lucrative asset.

Now the fun starts. To make a company look more profitable and valuable to a potential buyer, Kosman says, the companies are managed for short-term gains. Private equity firms often do this by making "deep cuts in spending on current operations and on research to develop new products." Employees get fired. Reinvestment in the company is shortchanged — just the opposite of expanding economic growth and job opportunity.

Inventively, Romney's Bain Capital also figured out another way to make money from the companies it bought: have the companies borrow even more money and use it to pay the owners (themselves) distributions and dividends.

Romney denies that he was part of the decision to extract large sums from businesses that collapsed. But Kosman cites Geoffrey Rehnert, who helped start Bain Capital, who insists that Romney controlled the firm when it collected "enormous distributions from three companies … it drove into bankruptcy."

When companies managed by private equity firms do go bankrupt, as many do, crippled by debt and gouging, the private equity firms have already made a tidy profit from high transaction fees, management fees and dividend payments. It's the employees and creditors who lose big.

While there may be cases where Bain Capital ended up improving some businesses as Romney claims (his campaign website lists Staples, Domino's Pizza and The Sports Authority), Kosman told me that " a significant amount of the money that Romney's firm made was off companies that ended up going bankrupt." Kosman's book lists American Pad & Paper, Dade Behring, a lab equipment manufacturer, and Stage Stores, among others.

"Millions for me, a pink slip for thee," is the business playbook of many private equity firms, and Romney was one of their savviest players.

The business that enriched Romney 11/12/11 [Last modified: Saturday, November 12, 2011 3:31am]
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