September 5, 2012
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It’s too bad he’s such a successful journalist, because it looks like Matt Taibbi would have made an incredible banker. He’s latest bet--that people would be willing to read a 8,000-word explanation of the business model of Bain Capital, Mitt Romney’s private equity firm--has paid off epically. As the September cover story of Rolling Stone, the article has already racked up 64,000 likes on Facebook and an incensed army of readers who now know the secret to Romney’s “shimmering pearl of perfect political hypocrisy.”
Sure, Taibbi’s article saddled them
with a dictionary-worth of industry acronyms that they’ve now got bouncing around in their brains, but who knows when someone’s going to put a gun to your head and demand to know the difference between a CDO and and an LBO?
Well, actually, Taibbi says that time is now. According to the article, either we wise up to Romney’s game, or, as Romney himself warned, succumb to “a prairie fire of debt.”
Taibbi’s thesis is simple: Mitt Romney is a manipulative liar who is leveraging our fear of debt to win the election. That much, so far, is nothing new. But wait--here’s the catch. Romney’s private equity firm and, indeed, the entire new piracy economy that he “built” (to borrow the theme of Romney’s platform), is based on creating more and more debt for average Americans.
As Taibbi writes, “Mitt Romney is one of the greatest and most irresponsible debt creators of all time. In the past few decades, in fact, Romney has piled more debt onto more unsuspecting companies, written more gigantic checks that other people have to cover, than perhaps all but a handful of people on planet Earth.”
To vote for Romney, then, is to vote for debt and the subsequent fire-induced death itself.
To damning to be true, you think? Well, it might be worth delving into how private equity actually works, which constitutes the bulk of Taibbi’s article.
First off, he’s quick to distinguish private equity from the last few generations of rich white folks who got fabulously wealthy off other people’s hard labor and then ran for president. These people, Taibbi says, at least left something in their wake.
“In the old days,” he writes, “making money required sharing the wealth: with assembly-line workers, with middle management, with schools and communities, with investors. Even the Gilded Age robber barons, despite their unapologetic efforts to keep workers from getting any rights at all, built America in spite of themselves, erecting railroads and oil wells and telegraph wires. And from the time the monopolists were reined in with antitrust laws through the days when men like Mitt Romney's dad exited center stage in our economy, the American social contract was pretty consistent: The rich got to stay rich, often filthy rich, but they paid taxes and a living wage and everyone else rose at least a little bit along with them.”
That’s not, however, the Romney business model. Instead, his involves borrowing money to buy a company, then transferring that debt to the newly acquired company, and then asking for some more money from the company before flying off to the Cayman Islands.
As Taibbi writes, “Here's how Romney would go about "liberating" a company: A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent. ... But here's the catch. When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt.”
But what’s in it for Romney, one might ask? Well, as the new company is drowning in debt payments, Bain is luckily lurking around, instructing them how to cut costs--which usually involves restructuring, a fancy-pants word for firing a bunch of people. And in exchange for that golden advice, Bain charges the company a whole bunch of management and consulting fees.
According to Taibbi, this business model is nothing new. “Fans of mob movies will recognize what's known as the "bust-out," in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company's credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money. Reduced to their most basic level, the leveraged buyouts engineered by Romney followed exactly the same business model. ‘It's the bust-out,’ one Wall Street trader says with a laugh. ‘That's all it is.’”
Of course, there’s a whole lot more to the story, like the fact that the geeky private equity people were sort of like a cult (some called them “Bainies”) and that their returns for investors really weren’t all that great--especially not good enough to justify the devastation left in Bain’s wake. Taibbi interviews some devastated toy manufacturers who fell victim to the P.E. machine, digs back into Romney’s history to find some dirty money floating around, and explains how this whole private equity industry is subsidized by the federal government. For those juicy details you’ll have to read the whole article.
But just in case you were worried that, really, Romney is a threat only to the also pro-business Obama machine, think again.
Taibbi writes, “Obama ran on "change" in 2008, but Mitt Romney represents a far more real and seismic shift in the American landscape. Romney is the frontman and apostle of an economic revolution, in which transactions are manufactured instead of products, wealth is generated without accompanying prosperity, and Cayman Islands partnerships are lovingly erected and nurtured while American communities fall apart.... It's a vision of society that's crazy, vicious and almost unbelievably selfish, yet it's running for president, and it has a chance of winning.”