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

At Bain Capital, Romney used the tax code to redistribute wealth from taxpayers to his investors and partners.

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And here's the key point: the target company's debt payments increase significantly, and those debt payments are then written off, reducing its tax burden significantly. This subsidy increases short-term revenues – at the expense of long-term debt – and that, in turn, is paid out in dividends to Bain's investors and a fat stream of management fees that Romney and his partners skimmed off the top.

(The industry-standard structure of these deals is known as “2 and 20.” Management gets 2 percent of the capital that they invest as a fee, and 20 percent of the profits that the fund realizes. That 2 percent represents between 2-4 times what the average management fees for a mutual fund usually run, and is collected regardless of how the fund does.)

Josh Kosman, author of The Buyout of America, How Private Equity Is Destroying Jobs and Killing the American Economy, told Mike Konczai that a typical leveraged buy-out deal decreases a target-company's tax burden by half. A recent study by researchers at the University of Chicago estimated that the average tax benefit of these companies' increased debt-loads in 1980s equalled “10 to 20 percent of firm value,” which, as Konczai noted, “is value that comes from taxpayers to private equity as a result of the tax code.”

This is important to understand as it lays bare the defenses Romney's spinmeisters have employed to fend off criticism of his past as what Rick Perry called a “vulture capitalist,” and Newt Gingrich described as a business based on "figuring out clever legal ways to loot a company." (Let's pause here to savor the hypocrisy: a Texas teachers pension fund, one of the largest in the state, is an investor in Bain, and all of its trustees are Perry appointees, and Gingrich himself sat on a board of Forstmann Little. A major competitor of Bain Capital.)

First, those criticizing what private equity funds like Bain do are not assaulting the “free enterprise” system. To the contrary, they are calling out a gamed tax system which guaranteed that Romney and his partners would make healthy profits, regardless of whether the companies they acquired went belly-up. Romney claims that he took risks and shouldn't be criticized for reaping the rewards, but the game Bain played was in fact antithetical to the free-market model.

Second, one need not be “envious” of Romney's fortune to be bitter about the means by which it was accrued. Contrary to the line Romney and his flacks have adopted, critics are not begrudging him riches won by hard work and prudent investment. Bain is deserving of our opprobrium for its rent-seeking at the expense of workers at the companies it bought out and through a series of tax subsidies, and Romney's hypocrisy in suggesting that he was simply a free marketeer must be called out.

Romney talks a lot about “creative destruction” – about how he made the hard decisions that would allow troubled, inefficient firms to grow. But Bain's interest was to its investors, and it flipped companies quickly, reaping huge profits and often leaving them saddled with debt – often high-interest debt financed with “junk bonds” – that they struggled to service.

That short-term focus didn't necessarily serve its acquisitions well. Another steel mill, one Romney doesn't discuss on the campaign trail, is South Carolina-based GS Industries. Bain acquired the company for $24.5 million in 1993, and by the end of the decade Bain estimated that its partners had made $58.4 million on the deal, including “multimillion-dollar dividends” and “annual management fees of about $900,000,” according to the Boston Herald. Bain left the company saddled with over a half-billion in debt, and it filed for bankruptcy in 2001.

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