splitting hairs over bain capital

When Mitt Romney first started running for president in 2008, the major reason he offered that we should vote for him was his acumen as a business man who knew how to lead us out of our economic doldrums, and the primary piece of evidence he offered in support of that reason was his career as founder and CEO of Bain Capital. 

            What can’t be argued is that, under Romney’s leadership, Bain Capital became one of the most successful private-equity firms in this country, a multi-billion dollar entity that provided almost uninterrupted generous dividends to its shareholders.  What can also not be argued is that a number of the companies Bain invested in, Staples the example most cited, grew into highly successful businesses at least partly as a result of the capital Bain provided and the management it exerted.

            What also can’t be argued is that at least as many companies became little more than short-term cash cows for Bain and either slid ultimately into bankruptcy or emerged from Bain’s tether as a significantly reduced version of their former selves.

            In Romney’s speeches, he talks loudly about the number of jobs Staples and Bain’s other success stories created subsequent to the Bain takeover and styles himself a job creator on the basis of those jobs.  He doesn’t talk much about the companies that Bain forced to shed jobs, or send them overseas, and he talks not at all about those that eventually collapsed, taking not just some but all of their jobs with them.

            Just taken at face value, what Romney seems to be suggesting is that, as head of Bain, he should be given credit for any jobs companies it invested in created, but should be absolved of responsibility for jobs destroyed in other companies it invested in.  Kind of a “have my cake and eat it too” thing.

            There are a couple of things worth considering here.  First, private equity companies like Bain generally target two kinds of companies: those that are relatively small and young and appear to have a business model that could be successful, or those that have reached a point where they are established businesses but find themselves strapped for capital.

            If you look at the companies Bain took over, all of the success stories—especially as success relates to company growth and job creation—fall into the first category.  They were, like Staples, relatively young and small and growing.  To be sure, not all young and small and growing companies that Bain took over grew like Staples, but all of the Bain takeovers that did grow fall into this category.

            On the other side of the coin, you find companies like Dade International, GS Industries or American Pad and Paper, all of which had successful established businesses but lacked the funds to protect themselves from a Bain takeover.  In each of those cases, and many more like them, Bain closed facilities and fired workers to create the illusion of a better bottom line.  At the same time, the Bain management team put huge loans  on the companies’ books, part of which was used to boost the company’s cash reserves and further create the illusion of profitability, and part of which was to pay very sizeable “management” fees to Bain.  In the end, many of the companies simply went bankrupt, largely because of the debt burden forced on them by Bain, and the ones that didn’t, Bain sold at a profit.  In either case, Bain and its shareholders made significant money, while the companies emerged either non-existent or markedly smaller than before Bain took over.

            What’s important here, and needs to be placed in counterpoise to Romney’s campaign claims, is that the business model he created for Bain had no direct relation to the creation of jobs, but a very direct relation to their elimination.  Bain didn’t change Staples’ business model when it made its investment.  It was, to be sure, the infusion of Bain cash that allowed that business model to flourish, grow and create jobs, but the job creation was the result of a Staples business model that was the right idea at the right time.

            With Dade International, on the other hand, Bain took over a company that was established, settled and generating sufficient profit to remain healthy.  In a very short period of time, Bain—not Dade International-- ordered the elimination of nearly 1,700 jobs.  With GS Industries, Bain—not GS Industries—ordered the merger of several steel plants and the subsequent elimination of 700 jobs.

            The second point, and the one that becomes relevant to the much discussed flap about when Romney left Bain, is that Romney founded the company and until 2002 was listed as the firm’s “sole stockholder, chairman of the board, chief executive officer, and president.”

            That is relevant because it means that the Bain Capital business model-- what kind of investments it would seek, how it would make and finance those investments, what fees it would charge for its management services and what degree of management control it would exert over companies it invested in—was created by Romney. 

            He served as its very much controlling head until at least 1999, so the “Romney way”—to coin a phrase—was very much ingrained in Bain Capital when he left.  Nothing that Bain has done since then departs in any significant way from the modus operandi it followed while Romney was actively in charge.   The business model, in other words, didn’t change because the founder left. 

            It was the period between 1999 and 2002 when the most egregious job-killing effects of Bain investments were felt.  It was during that period that Bain essentially took the lead in encouraging—even requiring in some cases—companies to send jobs off-shore or simply reduce employment by eliminating jobs.

           

Romney claims he should bear no responsibility for that because he was no longer in charge but that’s a little like George Bush claiming no responsibility for the 2009 recession because he was no longer president. 

            What Romney created was a company designed to maximize profit for his partners and their investors by doing whatever would maximize the value of their investments.  When that meant eliminating jobs, jobs were eliminated.  When that meant loading otherwise healthy companies with unsustainable debt, debt was undertaken.

            I confess to not understanding what difference it makes whether Romney actually left in 1999 or not until 2002.  The company he created behaved during those years exactly as it had behaved in the 15 years prior to 1999 and there is certainly nothing to suggest that, had the olympics not come along, Romney would have made any changes in that behavior. 

            Nor is there anything to suggest that anything in Romney’s soul has changed.  It’s considered a low blow to call Romney a Gordon Gecko capitalist, but it’s difficult to examine his years at Bain and find very many things he did that Gordon wouldn’t have done—or didn’t do that Gordon would have done. 

            It’s almost impossible to put real numbers on how many jobs Bain investments helped create as opposed to how many they directly killed.  Charitably, we could perhaps call it a wash; less charitably, and probably more accurately, Bain’s net impact on jobs was probably negative.

            Either way, what’s important to note is that while Romney can take credit for having a direct hand in eliminating thousands of jobs, he can at best claim indirect credit for any jobs created.  And while he may indeed have had no direct influence on Bain Capital decisions between 1999 and 2002, those decisions were very clearly in keeping with the business model—and business philosophy—he created for the firm.