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Monday, July 16, 2012

Bain, socialism and Romney's magical IRA

These days, if you want to read the case for socialism, don't go to Socialist Review. Visit Bloomberg.

O, Canada! Remember when Roberts save Obamacare and all of those right-wingers said that they were moving to Canada because the U.S. had become too socialist? We all got a good laugh from those threats -- after all, our friends to the north suffer under the burden of a real socialized health insurance plan. They also have high minimum wages and lots of other good stuff.

Guess what? Bloomberg says that those frozen Red bastards also have higher incomes.
According to data from Environics Analytics WealthScapes published in the Globe and Mail, the net worth of the average Canadian household in 2011 was $363,202, while the average American household’s net worth was $319,970.

A few days later, Canada and the U.S. both released the latest job figures. Canada’s unemployment rate fell, again, to 7.2 percent, and America’s was a stagnant 8.2 percent. Canada continues to thrive while the U.S. struggles to find its way out of an intractable economic crisis and a political sine curve of hope and despair.
Bain, again. Bloomberg's headline sounds like something you'd read in The Nation:
Romney’s Bain Yielded Private Gains, Socialized Losses
The story itself offers this revealing account of Romney, the early years:
In 1986, in one of its earliest deals, Bain Capital acquired Accuride Corp., a manufacturer of aluminum truck wheels. The purchase was 97.5 percent financed by debt, a high level of leverage under any circumstances. It was especially burdensome for a company that was exposed to aluminum-price volatility and cyclical automotive production. 
Forty-to-one leverage is casino capitalism that hugely magnifies gains and losses. Bain Capital wisely chose to flip the company fast: After 18 months, it sold Accuride, converting its $2.6 million sliver of equity into a $61 million capital gain. That deal, which yielded a 1,123 percent annualized return, was critical to Bain Capital’s early success and led the firm to keep maximizing the use of leverage.
Here's my naive question: If you're a new-ish private equity firm like Bain, run by a guy whose chief claim to fame is being the son of a famous politician, how do you get a bank to go along with that level of leverage? How do you gain entrance to the club where things like that happen?

The deal was by no means a sure money-maker. If Bain put up only 2.5 percent of the money, then I don't see what Romney's company brought to the table. Which bank lent Mitt Romney that kind of money, and why?

Aside from Romney, his early partners were wealthy El Salvadoran creeps, an Ecuadoran ambassador (I think), and that very strange Floridian who later purchased Bebe Rebozo's mobbed-up bank. Others joined up later, but those were the ones who were there at the start. We discussed all of this a few days ago.

Now let's say you own a bank, and lets say these guys march into your office and announce: "We want to buy a company that makes aluminum wheels. We don't know anything about making car parts, and we're not sure we can make a profit. Nevertheless, we want you to put up ALL the money. Or nearly all."

Would you take that deal?

Maybe I just don't understand the world of finance. But as I understand it, whenever Romney got these huge loans, he somehow managed to put the debt onto the books of the companies he bought. Then he would run the companies into the ground while making sure that he and his cronies got paid huge fees.

Look at how Bain treated GS Industries, a steel mill acquired for $8 million:
Bain Capital increased the company’s debt to $378 million on operating income of less than a 10th of that amount. Some of this was used to pay Bain Capital a $36 million dividend in 1994. That degree of leverage was excessive in light of the cyclicality and capital-intensive nature of the steel industry.

By the time the company went bankrupt in 2001, it owed $554 million in debt against assets valued at $395 million. Many creditors lost money, and 750 workers lost their jobs.
What I want to know -- being very, very naive about such matters -- is why the banks kept giving Mitt Romney what amounted to free money. They won't give you free money, and they certainly won't give free money to me.

By the way, the guy who wrote this article for Bloomberg runs his own private equity firm. So I'll be very amused if some libertarian calls him a bolshie.

That magic IRA. Bloomberg gives us a disquisition on that most mysterious item in the Romney ledger, his $102 million individual retirement account.
How did he do it, given the relatively small amounts that the law permits to be contributed to such a plan on an annual basis? Romney has not explained this conundrum, and seeing as he wants to become president, he would be wise to start talking -- if for no other reason than there might be many Americans who would like to emulate what he did.
The writer, William D. Cohan, details every theory advanced so far as to how Romney pulled it off. Alas, none of the theories offer anything like a full explanation.

Felix Salmon of Reuters thinks that Romney put Bain Capital shares in his IRA.
So up until now, the theory has been that Mitt Romney pumped his retirement accounts full of A shares, which often had aggressively low valuations when they were first issued. If those valuations turn out to have been unreasonably low, that could create issues in an IRS audit.
We now know that Mitt Romney, individually, was the sole shareholder of Bain Capital when he took leave of all day-to-day responsibilities in 1999 to concentrate on running the Salt Lake City Olympics. And he remained the sole shareholder of Bain Capital through 2002. So here’s the thesis, taken directly from Henry Blodget: that Romney filled up his retirement account with shares of Bain Capital itself, rather than shares in its funds, or in its portfolio companies.

This would also help explain why it took Romney three years to disentangle himself from Bain Capital:
Romney legally remained the CEO and sole owner of Bain Capital until 2002, Conard added, because he was intensively negotiating his exit deal with the partners at the firm. Conard summed up Romney’s position this way: “‘I created an incredibly valuable firm that’s making all you guys rich. You owe me.’ That’s the negotiation”.
Blodget has some very good questions about how Romney managed to set things up so that he was the sole owner of the company: one would imagine that other Bain Capital partners would also have had an ownership stake, not to mention Bain Consulting. But it seems that Bain Capital was a Romney entity, and that he then just handed out fees and carry to various stakeholders, while retaining all of the equity in Bain Capital for himself. When he left, then, he wasn’t just retiring from Bain Capital, he was actually selling the company to its partners.
Wait. Didn't Romney set up yet another company, called Bain Capital Investment Partners or something? Just who was running which Bain?

And who are these partners? Are we talking about the jerks from El Salvador, who were there are the beginning? Are they still around? Or was Bain acquired by other jerks?

At any rate, if I understand Mr. Salmon -- and if we try to square what he says with what the Romney camp says -- Romney was not involved in the day-to-day stuff between 1999 and 2002, when Bain was trampling KB Toys and other companies underfoot. But he still owned Bain. And the shares were being socked away in that IRA, in order to avoid the tax man.

Finally: The public option. A few years ago, this blog proposed a wacky solution to our financial worries: Socialize (much of) finance capitalism, while keeping industrial capitalism on a laissez faire basis. No more Bains, no more Goldman Sachs, no more AIGs. If you want to make a million, make a shoe.

Looks like I'm not the only one promoting this idea.





Nota bene: If there are any errors in this post, they will be revised retroactively. Hey, all the cool kids are doing it...
Comments:
Yep. Yep. Marx really meant to say 'public ownership of the means of credit creation'. All these wars and awful history over a typo.
Seriously, that solution is needed.
 
Such a kidder you are. As you know, Marx didn't say that. I did.

Since the whole system would depend on a thriving industrial base, a socialized credit system would be devoted to the true advancement of domestic industry -- not to the sort of scams that we associate with the name "Goldman Sachs."

There will be no incentives to "creatively destroy" our factories and farms and steel plants and such. Since industry will remain in private hands, and all economic progress will depend on the health of the industrial base, there will be a countervailing power opposing governmental intrusion at every step. The government will, in fact, have little reason to intrude upon private industry, and every reason to encourage entrepreneurship.

If such a system is put into place, feel free to refer to it as Cannonism. I won't take offense.
 
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