Bipartisan Support for Romney's Business Past Should Scare Us All
In recent weeks there have been multiple exposés documenting how Mitt Romney’s private equity firm, Bain Capital, both outsourced jobs and made a massive profit while bankrupting one of the companies they own.
And just a couple of weeks ago, “Sterling” was how former President Bill Clinton described the Republican nominee for president’s track record as a businessman. Clinton was just the latest in a chorus of high-profile current and former Democratic elected officials who came to the defense of Romney and private equity in the face of criticism from outside observers, and most importantly, from President Obama’s re-election campaign. Just as Romney’s record at private equity super-power Bain Capital was becoming the central focus of the national campaign narrative, Newark Mayor Cory Booker, co-chair of the DNC platform committee, and Massachusetts Governor Deval Patrick, co-chair of the Obama reelection campaign went on national television to defend the honor of Romney, Bain Capital and private equity.
In the era of the 99%, these comments were seized on by cable news hosts and reporters across the country. A “Dems defending big business and Mitt Romney” story certainly had some “man bites dog” appeal – but it struck many as downright shocking that prominent Democrats would not just “bite man,” but in fact “bite THE man,” as their comments undercut one of Obama’s key attacks and points of contrast with Romney.
While the Obama campaign – and pundits everywhere - may have been stunned by comments from these normally supportive allies, I wasn’t surprised at all. Back in 2007, while directing the Service Employees International Union’s campaign to hold the private equity industry accountable for their damage to our economy, I learned all too well how deep the relationship between current and former government officials and this little-known segment of the financial industry really runs. My experiences interacting with the titans of this industry were so eye-opening, I kept a diary of my meetings so I wouldn’t lose any of the fresh insights and disturbing details of those exchanges.
When Clinton, Booker, Patrick and others defended Bain and Romney, I was instantly transported back to a 2008 meeting I had with the Private Equity firm KKR and two of the chief operatives for the industry – former Speaker of the House and Democratic presidential candidate Dick Gephardt and former RNC chair and George W. Bush campaign manager Ken Mehlman. We had been pressing KKR to adopt a social responsibility code that protected the rights of workers in companies they purchased and owned, and as part of the campaign had released a series of videos with Brave New Films that can be found at warongreed.org. One of the videos highlighted that KKR’s Henry Kravis made $51,000 an hour and owned numerous homes, and contrasted this with the low pay of workers at Toys 'R' Us, HCA and other companies KKR co-owned with Bain Capital. Sitting in the room watching two former rivals, Mehlman and Gephardt, working together, throwing aside years of ideological and partisan differences to defend and represent KKR, was a startling example of Private Equity’s reach and influence.
The relationship between government, politicians, and private equity is a non-partisan love affair spanning nations and continents. Until Mitt Romney’s rise to the national stage, this tryst largely took place out of the sight of the public, as many elected leaders would exit government to join the boards or payrolls of some of the world’s largest PE firms. This is a conflict and confluence of interests that alone should cause alarm. But Romney and private equity titans aren’t satisfied with just influencing government. Romney’s bid for the presidency represents PE’s first attempt at a complete leveraged buyout of the White House. It’s another turn in the famous revolving door and might be the greatest unspoken danger of this election.
In a time when Wall Street misdeeds crashed the global economy and there seems to be a new scandal breaking daily about executive bonuses, insider trading, and JP Morgan’s billion dollar gambling loses, it is worth looking at the special role PE plays in the economy and how it operates. I won’t attempt to summarize the broad analysis that many people have done, including the recent New York Times article document how Bain made a profit while bankrupting a company and the Washington Post article on Bain outsourcing of jobs to other countries They are just two of the most recent articles that document how private equity has destroyed jobs and loaded companies with debt, while stripping them of assets and bankrupting them, and how PE still wrests huge riches for itself from those companies. Instead, I want to focus on a few numbers that tell the story of how the PE business model negatively influences the larger economy and jeopardizes the economic health of the nation.
A few facts about private equity from 2000 to 2010:
$1.7 trillion was spent by Private Equity on leveraged buyouts. Private Equity companies rolled up a total of a trillion in debt making these purchases.
25 percent of the private equity capital used for these leveraged buyouts, $283 billion, came from public employee pension fund investments. While Romney and others in the PE industry have railed against public employee retirement benefits, they have used the accumulated capital of those funds to finance their purchasing spree.
Six of the ten largest employers in America became owned by Private Equity firms. Some of these companies, like the private hospital chain HCA, rely on government reimbursement from Medicaid and Medicare.
The companies they bought avoided $250 billion in taxes because of the deductibility of interest. They borrow 60-90% of the cash needed to finance purchases. Interest payments are treated like other expenses and are deducted from earnings, leading to a huge tax break since their business model is built on running up debt.
The individual private equity partners avoided another $10 billion hiding behind the “carried interest exemption” that lets them pay a 15% tax rate, far below what most of us are taxed on income.
The buyout boom and special tax breaks were key drivers in growing inequality, as they sucked huge amounts of money from firms they bought through leveraging up debt, stripping assets and using fancy financial manipulations like dividend recapitalizations (more on this trick in the future ) to add more debt and pay themselves extra bonuses.
The PE business model is based on squeezing taxpayers from two ends at the same time. On the one hand, they avoid hundreds of billions in taxes through special tax deals only available to the already-super-rich—severely limiting the resources government has to address the economic crisis and the priorities of the country. On the other hand, they feed on taxpayer dollars to finance and fund the companies they purchase and operate by buying companies like Bain’s HCA hospital chain, that receive huge Medicaid and Medicare reimbursement, and using publicly financed public pension funds for capital. While in the short run, this business model--avoiding taxes and feeding off of tax dollars--may make PE barons extraordinarily rich,it is an unsustainable model that in the long run leaves taxpayers holding the debt bag and the PE guys holding the money bags.
Despite the negative impact on the rest of us, the allure of becoming part of this global economic elite is so seductive and powerful that it draws politicians, both Democratic and Republican, to defend private equity. Politicians know that when they leave the office they can join the other former heads of state that went to work for private equity firms upon leaving government--including Clinton, Tony Blair, George H.W Bush, and John Majors. They can join former Vice President Dan Quayle, former Senator Tom Daschle, and former Secretary of the Treasury John Snow, who also went to work for PE, like government officials from around the globe.
So I wasn’t surprised when current and former politicians defended private equity. And none of us should be surprised by what Romney and the PE guys will do, if in addition to controlling six of the ten largest employers in the country, they take control of the White House. The only way to stop them is to become more financially literate and demystify how these guys really make their riches and the consequences for the rest of us. Looking more deeply at the PE business models, their tax breaks, “dividend recapitalizations”, “club deals” and all the other ways they manipulate markets and disadvantage the rest of us is critically important if we believe in addressing growing political and economic inequality, and rebalancing the economy of the country.
But more importantly, I hope that as we better understand the dangers of the private equity model, we can figure out how to stop a leveraged buyout of the White House.