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.
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.