Romney's Bain And Creative Destruction

       In the past few weeks since the end of the GOP Iowa Presidential caucus, Mitt Romney's stewardship of Bain Capital has again come under question. GOP Presidential candidates Rick Perry and Newt Gingrich, among others, have characterized Bain Capital, in a phrase once popularized by former Clinton Secretary of Labor Robert Reich, as vulture capitalism that destroyed thousands of American jobs while reaping fortunes for predatory investors. In response, Romney and his vast army of corporate defenders, apologists and spin-doctors have denied the allegations and piously claimed that an attack upon either Bain Capital or venture capitalism is nothing less than an attack upon the free enterprise system itself.


Mitt-and-Corporations

       Bain Capital was  founded in 1984 by three partners from the consulting firm Bain &Company, one of whom was Mitt Romney. Today, Bain Capital's website describes the company as "one of the world's leading private, alternative asset management firms whose affiliates manage approximately $66 billion. Our principals are the largest single investor in each of Bain Capital's funds, which aligns the interests of the firm with our investors and the long-term objectives of the management teams"    

       Especially in its early years as a start-up when Romney was actively involved, Bain Capital functioned a  private venture capital firm that profited by acquiring businesses through highly leveraged purchases with equity investor money and thereafter reorganizing the companies, often chopping them up into smaller components and selling-off or outsourcing the components. Bain Capital personified the model of "strip and flip" capitalism that emerged  Reagan era.

      According to a New York Post article by John Kosman ("Romney's past is more a working class zero,"February 20, 2011), "Bain Capital bought companies and often increased short-term earnings so those businesses could then borrow enormous amounts of money. That borrowed money was used to pay Bain dividends. Then those businesses needed to maintain that high level of earnings to pay their debts." Kosman contends that, during his 15 years as head of Bain, Romney "made fortunes by bankrupting five profitable businesses that ended up firing thousands of workers."
 
          Among the troubling examples that Kosman notes:

          (1)   Bain orchestrated a 1994 leveraged buyout of Baxter International's medical testing division and renamed it Dade Behring). The company sold machines and reagents to laboratories. Bain then reduced Dade's research and development spending to 6 to 7% of sales, at a time when its competitors invested between 10 and 15 % to R&D. In June 1999, Dade then used the pledged the savings as collateral to borrow an additional $421 million. Next, Dade used $365 million from the loan to purchase shares from its owners, who were then able to enjoy a 4.3 times return on their investment. In August 2002, Dade filed for bankruptcy.

         (2)   In 1988 Bain placed a  $5 million down payment to purchase Stage Stores, a privately held company, and in the mid 1990s, after an successful IPO, collected  $100 million from stock purchases. The company entered  bankruptcy in 2000.

        (3)   In 1992, Bain Capital acquired American Pad & Paper (AMPAD), invested $5 million, and collected $100 million from dividends. The business filed for bankruptcy in 2000.                                                                                                                                                                                                                                                      (4)   In 1993, Bain invested $60 million to purchase GS Industries, and earned $65 million from dividends. GS entered bankruptcy in 2001

       (5)   In 1997, Bain invested $46 million to acquire Details, and earned $93 million from stock sales. The company was bankrupt by 2003.

Kosman concluded that "Romney's Bain invested 22 percent of the money it raised from 1987-95 in these five businesses, making a $578 million profit."

        In a recent article, David Wren of the Myrtle Beach Sun News ("Romney's Bain made millions as S.C. steelmaker went bankrupt," January 14, 2012)  reports that Bain's involvement with GS Industries was even worse than Kosman reported. Under Mitt Romney's stewardship in the 1990s, Bain Capital "more than doubled its money on GS Industries Inc. - the former parent company of Georgetown Steel... even as the steel manufacturer went on to cut more than 1,750 jobs, shuttered a division that had been around for 100 years and eventually sank into bankruptcy." Wren further notes that, although Bain Capita spent $24.5 million to acquire GS Industries in 1993, by the end of that decade its partners had earned $58.4 million in profits from its investment, and had "earned multimillion-dollar dividends from GS Industries and annual management fees of about $900,000. But by the time GS Industries filed for bankruptcy protection in 2001, it owed $553.9 million in debts against assets valued at $395.2 million."

      To counter these examples of corporate plundering that resulted in the destruction of thousands of jobs, Romney and his defenders invoke the concept of creative destruction, which they argue is a dynamic process central to capitalism. Creative destruction, according to the mythology, involves relentless competition as a result of which new business are created, existing businesses are changed, reorganized or closed based upon their ability to compete, innovate, adapt, and to bring new products to the marketplace. Hence, in the long run, according to its advocates, the free enterprise system rewards the winners, punishes the losers, and creates a more efficient, productive and prosperous economy for everyone.

        As one example of the innovative and creative side of this process, Romney cites Staples as a successful business that was created by Bain's start-up capital. Staples is a nationwide chain that supplies office products that, since its inception, has continuously increased its market share. Romney claims credit for the 100,000 or so jobs he contends Bain's investment created.  
     
        The argument in favor creative destruction, however, is not persuasive since the evidence contradicts the theory. The past decades show ever increasingly consolidation among businesses and decreasing domestic competition. The continued atrophy of businesses in the face of low-cost, often state-subsidized foreign competition, especially among those that actually manufacture  goods, has led to the attendant loss of millions of well-paying jobs. The demands of the financial sector and quest for immediate short-term profits irrespective of the long-term consequences have now become the proverbial tails that wag the dog. As a consequence, economic inequality has increased, social mobility declined, and the middle class has begun its descent into penury. Bain Capital and venture capital in general have been instrumental as facilitators of this invidious process.

       Staples is precisely a case in point. Its "success" has led to the demise of perhaps thousands of small, often family- operated paper goods and stationary stores across the United States that, for generations, provided a comfortable living for families and enabled owners and their children to realize the American Dream. Staples has replaced these jobs and the income provided to these family-run business with thousands of minimum wage jobs that provide few, if any, benefits and no job security.

        The activities of Bain Capital during the decades since its inception demonstrate the metamorphosis of American capitalism during the last decades of the twentieth century and the first decade of this new century. The classical market economy model which theorized a vibrant, decentralized system of freely competing small business that created new opportunities, new products and new jobs has been replaced by a new paradigm in which largely unregulated monopolies and oligopolies have been permitted to plunder and denude companies of their value to enrich corporate raiders and shareholders, while research and development, concern about the well-being of employees,and commitment to long-term viability become, at best, secondary concerns. The maximization of profit, no matter how short-sighted, no matter how disproportionate to the effort invested, has become the raison d'etre.   

        If capitalism represents a system of economics in which decisions about the resources of the public are made in private, isn't it time, given the increasing economic inequality and the appalling lack of social mobility in the United States, to begin a discussion about the need to create a more humane alternative? Perhaps the "European entitlement system" in the Western social democracies that Mitt Romney consistently condemns offers at least one alternative model that actually does attempt to tend to the welfare of all citizens and that does try to consider the public interest.

 

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