Mitt Romney Wouldn't Know a Free Market If It Bit Him on the Ass

The lion's share of the wealth Mitt Romney accumulated during his years at Bain Capital was extracted not only by laying off workers and raiding their pensions, but by using what conservatives call “big government” to redistribute wealth from taxpayers to Bain's investors and partners.

Bain Capital was not in the business of creating jobs, or even saving companies over the long-term. Its model had a relatively low rate of success; a study by Deutche Bank found that 33 out of 68 major deals cut on Romney's watch lost money for the firm's investors. Its richest deals made up for the flops, however, and Bain's partners were guaranteed hefty fees regardless of how the businesses they “restructured” ultimately performed.

Romney and his partners then exploited a loophole in the tax code that allowed them to pay just 15 percent of their growing fortunes in taxes – a rate less than what many of their companies' employees forked over to Uncle Sam.

“By and large, [government] gets in the way of creating jobs," Romney said during a GOP debate last year. But, as the Los Angeles Times noted, “during his business career Romney made avid use of public-private partnerships, something that many conservatives consider to be 'corporate welfare.'"

On the campaign trail, Romney often touts a successful investment in an Indiana steel company called Steel Dynamics, but he doesn't mention that the firm had taken advantage of “generous tax breaks and other subsidies provided by the state of Indiana and the residents of DeKalb County, where the company's first mill was built.”

But that's a small part of the public largesse Bain enjoyed. Most of the big money the firm brought in during those years was extracted through “leveraged buy-outs,” a reality that Romney doesn't like to talk about on the campaign trail. Instead, he wants to talk about Staples, which was one of a small handful of Bain's venture capital deals. The 89,000 people employed at the office supply chain go a long way toward the campaign's dubious and unsourced claim that Bain “created 100,000 jobs” under Romney's tutelage. But venture capital represented a small share of Romney's deals, and it's important to understand the distinction between venture capital and leveraged buy-outs.

You won't hear much criticism of venture capital deals like Bain's investment in Staples. It's a very basic free-market transaction – investors put money into a company at its early stages in exchange for a share of the company. If the start-up doesn't pan out, the investors lose their stake; if it grows and matures, they make healthy profit, usually when the company goes public or is sold off. In venture capital deals, investors only make a profit when the company that receives their cash does well.

Leveraged buy-outs are a different creature entirely. Leveraged buy-out firms became so closely associated with the most rapacious and unsustainable form of capitalism in the 1980s, that the entire industry rebranded itself as “private equity” to escape the stigma.

Leveraged buy-out artists also deal with risky companies – usually those struggling to stay afloat – but they don't actually take on much risk themselves as they structure the deals so they profit whether the target company becomes healthy and grows or collapses, often under the weight of debt piled onto it by the private equity firm itself.

Here's how the deal works. The leveraged buy-out firm will put down a fraction of the cost of buying an ailing company. The balance of the transaction is borrowed, but the debt goes onto the books of the target company, not the private equity firm – the struggling company basically finances the lion's share of its own sale.