Back in 2007, Republican White House hopeful Mitt Romney declared that taking a big payment from a company that later failed "would make me sick, sick at heart." If so, Romney by now must be badly in need of a quadruple by-pass. Because as the New York Times became just the latest to report, through massive consulting fees, sales of stock and, most perversely, dividend payments, Romney and his partners at Bain Capital reaped whirlwind profits even when the companies they acquired collapsed.
Back in January, McClatchy offered this primer on how private equity firms like Bain Capital work, at least on paper. As candidate Romney explained at a GOP debate back in June 2007, "Don't forget that when companies earn profit, that money is supposed to be reinvested in growth."
But as the New York Times documented Friday, large sums of that money were going to Mitt Romney and his Bain colleagues whether their portfolio companies were profitable or not. Put another way, Bain won either way:
Bain structured deals so that it was difficult for the firm and its executives to ever really lose, even if practically everyone else involved with the company that Bain owned did, including its employees, creditors and even, at times, investors in Bain's funds.
Cambridge Industries, which filed for bankruptcy in 2000 after amassing $300 million in debt, is hardly unique when it came to Bain's "win even when they lose" business model:
Yet Bain Capital, the private equity firm that controlled the Michigan-based company, continued to religiously collect its $950,000-a-year "advisory fee" in quarterly installments, even to the very end, according to court documents.
In all, Bain garnered more than $10 million in fees from Cambridge over five years, including a $2.25 million payment just for buying the company, according to bankruptcy records and filings with the Securities and Exchange Commission. Meanwhile, Bain's investors saw their $16 million investment in Cambridge wiped out.
"Traditionally," Josh Kosman wrote in his 2009 book The Buyout of America, "cash-rich public companies have paid dividends to lure and reward investors." But private equity firms, he explained, stand this process on its head:
Fourteen of the largest American private equity firms had more than 40 percent of the North American companies they bought from 2002 until September 2006 pay them dividends. In thirty-two of the eighty-three case, 38 percent, they took money out in the first year.
Mitt Romney was a pioneer of this strategy. His private equity firm, Bain Capital, was the first large PE firm to make a serious portion of its money not from selling its companies or listing them on the stock exchange, but rather by collecting distributions and dividends, which in this context is the exact opposite of reinvesting in a company. Bain Capital is notorious for failing to plow profits back into its businesses.
Just how notorious was first detailed by the Times five years ago during Mitt Romney's first presidential bid:
One transaction, involving the medical diagnostics company Dade Behring, took place in 1999 as Mr. Romney was leaving the firm, and the other, involving KB Toys, occurred about two years later. Bain and its co-investors extracted special payments of over $100 million from each company, enabling Bain to make a healthy profit even before re-selling the businesses -- a practice known as "getting back your bait." Lenders say Bain is one of the firms that has taken the most in such payments, which companies usually make by taking on additional debt.
Both Dade Behring and KB Toys soon suffered dips in their business. Unable to meet the burden of their debts, each filed for bankruptcy and laid off thousands of workers. Bain Capital spokesmen have said the company did nothing improper.
Mr. Romney, who remains an investor in Bain Capital, said he had not been involved in those decisions but acknowledged that such payments became part of the buyout business "very early on."
It's with good reason, as President Obama recently explained of PE firms like Bain, "Their priority is to maximize profits, and that's not always going to be good for businesses or communities or workers." But while "these Bain Capital guys were agents of the shareholder-value revolution", as one analyst but it, that didn't stop shareholders of KB Toys and Stage Stores from suing Bain Capital over the firm's profit maximization at their expense. (A settlement was reached in the KB Toys case.)
During tenure as CEO from 1984 to 1999, Bain invested in 40 companies in the U.S. While seven later went bankrupt, the Times found that "In some instances, hundreds of employees lost their jobs. In most of those cases, however, records and interviews suggest that Bain and its executives still found a way to make money." That mirrors a January 2012 analysis by the Wall Street Journal, which revealed:
Bain produced stellar returns for its investors--yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.
Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.
Mitt Romney may claim that he had not been directly involved in the Dade and KB death spirals or others before and since. But as a damning New York Times examination showed in December, Romney still reaps millions of dollars annually from Bain:
Though Mr. Romney left Bain in early 1999, he received a share of the corporate buyout and investment profits enjoyed by partners from all Bain deals through February 2009: four global buyout funds and 18 other funds, more than twice as many overall as Mr. Romney had a share of the year he left. He was also given the right to invest his own money alongside his former partners. Because some of the funds and deals covered by Mr. Romney's agreement will not fully wind down for several years, Mr. Romney is still entitled to a share of some of Bain's profits.
Some of those profits came from companies like the now-shuttered KB Toys and Clear Channel Communications, which axed 2,500 employees after its purchase by Bain.
"It is one thing that if I had a chance to go back I would be more sensitive to," Mr. Romney said. "It is always a balance. Great care has got to be taken not to take a dividend or a distribution from a company that puts that company at risk." He added that taking a big payment from a company that later failed "would make me sick, sick at heart."
If Mitt Romney becomes the 45th President of the United States, it will be the American people who would become sick at heart. While Paul Krugman predicted "I think Ireland is America's future if Romney is president," his fellow Nobel Prize winning economist Joseph Stiglitz warned, "The Romney plan is going to slow down the economy, worsen the jobs deficit and significantly increase the likelihood of a recession." Or as Mark Hopkins of Moody Analytics summed it up:
"On net, all of these policies would do more harm in the short term. If we implemented all of his policies, it would push us deeper into recession and make the recovery slower."
To put it another way, if Romney wins, America loses. Of course, that sickening result is one Mitt Romney knows all too well.
(This piece also appears at Perrspectives.)