Matt Taibbi on Mitt Romney's Crooked, Dirty Game
Republican White House challenger Mitt Romney has said in an interview that a Federal Reserve boost to the economy would do little to create US jobs in the short term.
The following is a transcript of HuffPost Live, in which host Ahmed Shihab-Eldin interviews Rolling Store editor Matt Taibbi about his latest piece exposing the ugly ways Mitt Romney built his massive forture. The transcript has been edited for clarity.
Ahmed Shihab-Eldin: In case you didn’t know this particular factoid, both governor Mitt Romney and President Obama have each raised well over half a billion dollars in this election. Even worse, the total amount spent on this election year will surpass $2.5 billion. To me, that’s a lot of money. But a question that comes up often is why aren’t more people — more Americans, more politicians — speaking up about this. Someone who’s speaking up is Rolling Stone’s contributing editor, Matt Taibbi, who’s joining us to talk about his latest article. Matt, this is your article, thank you for joining us.
Matt Taibbi: This is how private equity deals work, and this is what most people don’t understand. When a company like Bain wants to take over a company, let’s say, like KB Toys, what they do is — it’s very similar to the process of getting one of those no-money-down mortgages — you put down a tiny amount of money, in the case of Bain, you put down about 5 percent of his own cash, $18 million. He financed the other $302 million that he got, and what he did was he went to a bank and you’re borrowing against the assets of a company you don’t own yet. So what you do is you say to the bank …
Ahmed Shihab-Eldin: Which is legal.
Matt Taibbi: Which is totally legal. But what you do is you say to the bank, ‘I’m going to take over this company,’ or ‘I’m going to take over some company, and when we do that company is going to be indebted to you.’ So they borrow $300 million. With that money, and his money, you buy a controlling stake in the company that you’re trying to take over, and once you do that, the debt that you yourself took out becomes the debt of the company that you have taken over. And this is very poorly understood by most people. Now there’s the other problem, now if you’re KB Toys, you’ve borrowed $300 million and you owe the bank. And you haven’t done it to buy new equipment or open new stores or do research and development, all you’ve bought with that $300 million is …
Ahmed Shihab-Eldin: Debt.
Matt Taibbi: Yes, and the privilege of being managed by Mitt Romney, that’s really all you’ve bought.
Ahmed Shihab-Eldin: Privilege.
Matt Taibbi: Exactly. And so now you have to cut costs, you have to tighten your belt a little bit. And the way that you deal with that is you have Mitt Romney tell you where the costs have to be cut, and whom to fire. For the privilege of doing that, they charge you another fee. So now, not only are you paying debt service, but you’re paying management fees to the PE company that could be as much as 7, 8, 9, 10 million dollars a year.
Ahmed Shihab-Eldin: So you lay out a case and even now I think I’m having more understanding, but what I’m not understanding — I’m understanding what Mitt Romney’s done, and you’re right to point out that it’s several companies. But I have to ask you Matt, why is this happening? We said it was legal. Why do people do this? Why do we allow this to be legal? Is it just to maximize profit at all costs?
Matt Taibbi: I think there’s a line of thinking, and look, not all private equity deals end in disaster. Sometimes they’re actually a good thing. One of the things that private equity companies do extremely well, is they’ll look at a landscape and say, ‘Here are three companies that do essentially the same thing, they’re occupying too much market space between them, let’s buy all three of them, roll them all up, eliminate the duplicate of overhead, create a new company and eliminate all that waste,’ — which is harsh because it ends up in a lot of jobs being lost. But sometimes you end up with a leaner, meaner company as the result of that. And there are plenty of success stories in private equity. But what people have to understand is that private equity companies do not exist to turn around companies. That is not their function. Their function is to make a profit for their investors and for the private equity firm, and these things are at cross-purposes.
Ahmed Shihab-Eldin: I feel as though Romney himself has actually been forced to outline that very thing. It is ultimately about making a profit for investors, or someone in his campaign kind of admitting that that is the intent.
Matt Taibbi: Well, yes and no. He wrote a book called Turn Around, and he's pitched himself as a guy who is going to turn around America because that's what he does, is turn around companies. But that's not really true. When you take over these companies, you have all these tools at your disposal that allow you to extract value from the company without the company succeeding. You can force them to take out a bank loan and pay you a dividend. There's all these different things you can do.
Ahmed Shihab-Eldin: So there’s multiple alternatives…
Matt Taibbi: Right. And so you can succeed in a private equity deal without turning a company around. And that’s a critical distinction that people don’t get.