Mitt Romney’s Bain Capital was very good at making money for Mitt Romney.
At the same time, it loaded companies Bain bought with debt, borrowed even more money to pay dividends to Mitt Romney and destroyed or outsourced lots of jobs. It even raided pension funds. Then Romney turns around and holds himself up as a “successful businessman.”
Sure, he was successful in terms of making money for himself. But this was at the expense of workers who lost their jobs at previously successful companies when they went bankrupt—a debt loaded on them by bank-borrowed money that went directly into Romney’s pocket.
Here’s how a private equity fund such as Bain Capital works: It picks a successful company and then takes it over with a leveraged buyout (LBO). The money borrowed from a bank to pay off the owner or stockholders does not become the debt of Bain Capital. It becomes the debt of the company that was taken over.
You might ask, “Why would a bank even loan money to place a company in debt for the purposes of being taken over by Bain Capital which does not even assume the debt?” Well, it’s for the same reason that so many subprime loans were available. The bank does not continue to hold the debt. It offloads it to investors such as pension funds so the bank doesn’t really care. They have no skin in the game.
Why not loan Mitt Romney money to take over companies? There’s good money in those commissions.
Pension funds show up again and again as the fall guys in Wall Street machinations. They are the dumb clucks who keep trying to make up for the fact they are 50% underfunded by entering into sucker bets and losing even more money. And since Romney and Bain do not assume the debt themselves, they don’t care if the overleveraged company goes bankrupt since, if it does, they lose nothing. That company is just a money conduit for Romney since, as soon as they take it over, they have the company borrow even more money in order to pay Romney a dividend.
You might ask, “Why would the owners of a company or the shareholders sell out to Bain Capital?” Because Bain offers them a really good deal, that’s why. After all they don’t care if they overpay. They’re using OPM, other people’s money. It’s all based on a loan to the company they intend to take over, not a loan to Bain itself. Bain takes hardly any risk at all. So much for the risk takers that Romney eulogizes.
Romney pioneered the strategy of having a company Bain took over in a leveraged buyout borrow even more money to pay himself a dividend. So now the company is staggering under a huge load of debt and in many cases they can not keep up with the payments. In 1994, Bain bought medical equipment manufacturer Baxter International. After a merger with another company, it became known as Dade Behring. Bain then reduced R&D investment because Bain’s game plan was to only hold the company for five years or so. So why invest for the long haul? The money borrowed from banks for the LBO was usually for five to eight years with small monthly payments and a big balloon payment at the end. About five years after Bain had acquired Dade, it was looking to get out. But not before it drained even more money from Dade and placed the company and its workers in even more jeopardy.
Bain froze the workers’ pension benefits and converted them from a defined benefit plan, in which employees were entitled to 75% of the average of their last three years’ salaries, to a cash-balance plan in which they would get a lump sum equal to what they were owed in 1999. Workers were furious. They threatened to sue, but never went through with the lawsuit because they were fearful of losing their jobs. Dade saved $10 to $40 million with this stratagem. The very month Dade did the conversion, it used the projected savings as the basis to borrow $421 million placing Dade in even more debt.
The result was that Dade paid Bain and its partner, Goldman Sachs, the entire amount as a dividend. Bain and Goldman had only put down $81 million to buy the company in the first place. Yet, in June 1999 they received $365 million from the dividend—a gain of 4.3 times their initial investment. Consequently, Dade’s debt more then doubled to $871 million in order to make this huge payment to Bain and Goldman.
Romney had left operational management of Bain that year, though his disclosures show that he owned 16.5 percent of the Bain partnership responsible for the Dade investment until at least 2001. In order to make their loan payments, Dade had to cut not only R&D but also the core of the company. It sold off assets and fired workers. Nevertheless, the whole thing came crashing down in 2002 when Dade filed for bankruptcy protection. It was the end of Bain’s and Goldman’s involvement with Dade. They had looted the entire company, raided the pension fund, albeit indirectly, and caused mega job losses. They had ruined a previously successful company.
Nevertheless, Romney could turn around calmly, face the cameras and proclaim himself a “successful businessman” for having made hundreds of millions of dollars for himself and his investors. Bain and Goldman had made a $280 million profit on an investment of only $85 million. Is this what America is all about? Is this what freedom consists of? Romney seems to think so.
Later, Dade emerged from bankruptcy and, after increasing its investment in R&D, went on to become a successful company probably because Romney and Bain were no longer in the picture.
Bain used the same playbook with several other companies: invest in a small down payment; get a bank loan (which the bank resells to other investors) for a leveraged buyout (in which the company, not Bain, assumes the debt); and then, after taking ownership, get another bank loan to pay Bain a huge dividend while saddling the company with even more debt.
As a result of these tactics at least six companies filed for bankruptcy between 1992 when Romney took over Bain Capital and 2004. The reason that Romney wants us to believe that he had nothing to do with Bain after 1999 is that most of these companies filed for bankruptcy between 2000 and 2004.
Nevertheless, according to SEC filings Romney was sole owner and operational manager of Bain until 2001. During this period there were several multimillion-dollar investment deals, bankruptcies and a spate of layoffs and overseas job shifts at Bain-owned companies.
No wonder Romney doesn’t want to release his tax returns. They would show that Romney took dividends from several companies that went bankrupt during this period including Stage Stores, Ampad, GS Industries, Dade Behring, DDi and KB Toys. Mitt Romney, the successful businessman, doesn’t want you to know how he profited from driving companies bankrupt and destroying jobs. In any event, Bain made more than 20 percent of its money in its 1987 to 1995 funds from five companies that borrowed money to pay Bain dividends or buy back shares that later collapsed.
Since balloon payments on many of the loans taken out by private equity funds are due in the next few years, the eventual collapse of those companies could trigger the next big financial crisis. If Mitt Romney is elected President, it will be just in time to deal with that.
This article relies on the book, “The Buyout of America” by Josh Kosman (sub-title: How Private Equity Will Cause the Next Great Credit Crisis) and the Vanity Fair article, “Where the Money Lives,” by Nicholas Saxson.
Latest posts by John Lawrence (see all)
- Student Loan Debt: The Only Debt You Can’t Discharge in Bankruptcy - September 30, 2014
- Questioning San Diego County Pension Fund’s Excessive Risk - September 23, 2014
- Corporate Deserters Seek to Continue Doing Business in the US While Paying Taxes to Foreign Governments - September 16, 2014