Saturday, January 14, 2012

Bain: Crony and Phony Capitalism

In the world according to Romney
In this land of milk and honey
Selective memory is best
When belief is put to the test
Though now Mitt’s berated
For saying it’s jobs he created
When in fact he destroyed them
And pensions were crème de la crème
Still, he denounced us as envious
And not himself as devious

All the recent political theater of the Republican primary season makes Broadway and Hollywood seem real. One must suspend disbelief in order to endure a single debate and watch them each push and shove to enter and exit stage far right. Finally, on last Sunday’s performance, “Bain” and “Romney” were used to form a sentence. Romney has touted his extraordinary ability and experience in creating jobs. Let us look at that startling claim to see where it could possibly have arisen. His competitors questioned Mitt’s boast and yet it has been the lynch pin of his campaign. What happens when a company like Bain enters the door of a struggling corporation? It depends. If you are speaking about Bain Venture Capital, then Bain might provide money to expand business or encourage new sector entry or growth. On the other hand, if it is Bain Capital Private Equity at the door, look for a leveraged buyout by a known raider. Also look for the dark side of capitalism where employees are merely pawns that might be fired to enrich Bain. Bain will acquire and then disassemble the company and sell the pieces. It will also examine those assets for potential changes. Normally, a pension fund is a liability in accounting terms since that money is owed employees at some future date. Private equity firms don’t view pensions that way. Those firms, or vulture capitalists, as Rick Perry called them, see pension funds as assets to be saved from the clutches of employees and used for Bain’s profits. That is what happened when Bain bought GST Steel in Kansas City. Bain took much of the pension money for its profit and then the government agency Pension Benefit Guaranty Corporation had to bail out the pension fund at the expense of American taxpayers. This should not be used as a boast, but a source of shame for Bain and Romney. Is it capitalism to push liabilities to the government or is it greed and corporate socialism?

The current Romney charge that criticisms of his profiteering are “envy” and not righteous indignation pours salt in the wound that he created. It actually condemns criticism and makes it appear that anybody noting the pain he has caused in thousands of families is due to envy of the people so affected and not to Romney’s unique ethics. In effect, he is also claiming that criticism of his ethics is a criticism of capitalism itself. It is not. It is a criticism of Phony Capitalism that pretends to be taking risks to generate profits, but instead is transferring risks to workers and to the government. It is also heartless because those were real people whom he fired and they supported real families living real lives of suffering and pain that Romney has never experienced. His attempt to express identification with people getting pink slips by saying that he feared a pink slip in his life is an creepy joke given that he has never had to fear any economic threat. Let me cite a few examples.

GST Steel eventually lost all 750 jobs in Kansas City and in no small part because Bain and Romney saddled CST with debt and Bain and Romney essentially confiscated $44 Million from the CST pension fund that later had to be made up by taxpayers through the US government Pension Benefit Guaranty Corporation (PBGC). That is a federal bailout going into profits for Bain and the loss of jobs for the steelworkers. Think about it. While corporations normally regard pension funds as liabilities that must be funded, Romney’s Bain saw pension funds as an asset. In accounting, they are on opposite sides of the ledger. In reality, not all the money Romney took was returned by PBGC, so workers each lost about $400/month in their eventual pension benefits. No wonder Romney likes firing people. It means money in his pockets. Romney boasted of creating 100,000 jobs, (80% through Staples), although Bain has never verified that number. He speaks of net/net meaning that all losses have been subtracted from spinoff jobs “created.” Hmm. Romney neglects to mention that the 750 jobs at GST Steel resulted in a cascade of lost jobs at the energy companies and the supply companies that did business with GST. Look closely. Bain and Romney issued bonds after purchasing GST (changing the name from Armco). While making improvements, they also took $36 Million as a dividend to Bain. That is the nature of private equity. Private equity does not create jobs. It creates profit unrelated to jobs. Venture capital is completely different. It may actually create jobs. The jobs lost at GST, were lost by Bain Capital Private Equity, the vulture side of Bain. To show you the balance of business, only about 2.3% of Bain’s business is done by Bain Venture Capital. In other words, vulture capital does over 97% of the business for Bain. Romney has not differentiated between the two nor has he indicated the huge imbalance toward vulture capitalism. Additionally, Bain took its profits directly while socializing losses (as in socialism) by increasing local taxes, increasing borrowing costs for others and using the Pension Benefit Guaranty Corporation to pay greatly reduced pensions to fired workers Was it legal? Yes. Was it ethical? Hmm. Did it create jobs? Probably not here in the USA.

Without going through all the details, Bain essentially did the same maneuver on Ampad by going in and charging Ampad for consulting and having them purchase lots of other office supply companies. In 1992 Bain bought Ampad for $5 Million. In 1993, Ampad had debt of $11 Million. By 1999, Ampad was in debt by $400 Million. Highly leveraged? Worse, Ampad was paying Bain high management fees along the way. Hundreds of employees were laid off and Ampad was put into competition with Staples for the same market while having less purchasing power. Who bankrolled Staples? Why it was Bain, of course. Conflict of interest you say? Not exactly, if your sole interest is making money, there can be no conflict of interest. Are not layoffs and bankruptcy problems? Not for Bain. Bain sold stock and the nearly 400 layoffs were simply a cost of bad management for which Bain was highly rewarded with a profit of over $100 Million. Jobs were outsourced and Bain made money without creating a US job.

Taxes? The Congress in its wisdom taxes profits from raiding companies like Bain Capital Private Equity at 15% not the 35% that you might assume. You may be wondering why “Mittens” has not divulged his tax returns despite calls to do so. He has compared his situation to that of the late Ted Kennedy who had his money in a blind trust meaning that if he divulged his tax return, he would have to reinvest his money in order to avoid interest conflicts in his Senate decisions. Mittens holds no government position so that, even if he had a blind trust then there would be no conflict of interest. How dare you ask? Besides, what if he paid no taxes? That is none of your business.

Now we hear cries from Senator McCain and others that attacking Mittens Romney is directly attacking our fundamental capitalist economic system. I don’t think so. Even the idea that Romney was picking winners and losers while having taxpayers pick up the tab flies against the advertised strength of capitalism of being rewarded for risk without government. Romney has scalded Obama for bailing out GM and Chrysler and yet jobs were saved and workers shared in the process of reducing demands to ensure survival instead of another bankruptcy. He has yet to take responsibility for his heartless creating of weak companies and then devouring the highly leveraged carcasses he created. Employees had no role except as victims. Crony Corporate Socialism as practiced by Romney and Bain should not be confused with Capitalism. Mussolini would love Romney for his corporatism, but we must call it what it is and it does not create jobs. It is essentially high finance with other people’s money. Remember Wall Street that was too big to fail but was bailed out by GW Bush? Conservatism or Corporatism?

Mittens says that any criticism is Romney Envy? No, he really does not get it. Maybe people felt fear or even hate, but envy? Maybe people envied their outsourced jobs? Governor Romney paid corporations incentives for moving to Massachusetts at the expense of taxpayers and the losing states. Mittens needs to level with us and admit that he created lots of profit for himself and Bain, but please, spare us the phony economics lesson on jobs. Just think of this on a national scale. Ouch.

George Giacoppe
13 January 2012

No comments: