Greed and Debt: The True Story of Mitt Romney and Bain Capital

[buckets]

Im saying explain how using debt to make a profit in a niche market makes Mitt Romney an expert at saving the USA from the debt his party has rallied around as the single most important problem America faces economically. Seems to me that all we have done for 35+ years is use debt to save the government and households (and farms and some businesses)- and that is our problem. Mitt typifies that problem, according to his record in business.

Obama's opponents trash him for using debt to hold the economy up. what;s the fucking difference?

Ok, there are several things wrong with this post. Mitt's business record proves he is capable of taking underperforming and sometimes distressed firms and making them profitable. Mitt and Bain are good at this, they are really fucking good at it. If you want to look at the few times acquisitions he oversaw went south then fine, but you have to understand that he was wildly successful more often than not.

And for the differences, first we are talking about private enterprise versus the federal government. Private enterprise is for profit, if you're not profitable you go bankrupt. What is the federal government's purpose? Can the federal government go bankrupt? For a private equity buyout, you need to find a third party to lend to you and despite what some journalists imply this money is not free flowing. There is massive amounts of diligence and approvals that go into lending this money. If you want to blame anyone for crippling these companies with debt, blame the lenders for lending the debt in the first place. The government can control interest rates and artificially drive demand to its debt. The US government is such a large and unique entity that no one really knows what happens if our debt hits an unsustainable level. If debt hits that level at a private entity, you closed the doors and move on (and actually more often than that a company is restructured and carries on after bankruptcy). In fact, I don't even really know how you compare the two.

And not all debt is evil. A private firm's most efficient and optimal capital structure almost ALWAYS includes some portion of debt. This is going to blow your minds: debt is CHEAPER than equity. Holy shit, fancy that.

 

[buckets]

What I don't understand is why people want to focus on Mitt's time at Bain Capital which is by far the most successful and impressive part of his adult life. His most comparable experience was as governor and he sucked dick at that, so why don't people just focus on him sucking at actually being in charge of a government?

 

[WakeandBake]

Ok, there are several things wrong with this post. Mitt's business record proves he is capable of taking underperforming and sometimes distressed firms and making them profitable. Mitt and Bain are good at this, they are really fucking good at it. If you want to look at the few times acquisitions he oversaw went south then fine, but you have to understand that he was wildly successful more often than not.

And for the differences, first we are talking about private enterprise versus the federal government. Private enterprise is for profit, if you're not profitable you go bankrupt. What is the federal government's purpose? Can the federal government go bankrupt? For a private equity buyout, you need to find a third party to lend to you and despite what some journalists imply this money is not free flowing. There is massive amounts of diligence and approvals that go into lending this money. If you want to blame anyone for crippling these companies with debt, blame the lenders for lending the debt in the first place. The government can control interest rates and artificially drive demand to its debt. The US government is such a large and unique entity that no one really knows what happens if our debt hits an unsustainable level. If debt hits that level at a private entity, you closed the doors and move on (and actually more often than that a company is restructured and carries on after bankruptcy). In fact, I don't even really know how you compare the two.

And not all debt is evil. A private firm's most efficient and optimal capital structure almost ALWAYS includes some portion of debt. This is going to blow your minds: debt is CHEAPER than equity. Holy shit, fancy that.

you missed my point. Romney holds his record out as his number one qualification to be the President. His skill is using debt and layoffs to make a profit and save a flagging business. How does this qualify him to save a flagging economy while simultaneously reducing its debt? I'm not saying he can't necessarily do it, but he is saying is going to do it by reducing debt and increasing employment. I don't see how his Bain experience demonstrates this ability, but he and some of you apparently do.

 

[WakeandBake]

What I don't understand is why people want to focus on Mitt's time at Bain Capital which is by far the most successful and impressive part of his adult life. His most comparable experience was as governor and he sucked dick at that, so why don't people just focus on him sucking at actually being in charge of a government?

They focus on it because he and his party hold it up as his central qualification. He runs away from his government record.

 

[DeacMan]

Ok, there are several things wrong with this post. Mitt's business record proves he is capable of taking underperforming and sometimes distressed firms and making them profitable. Mitt and Bain are good at this, they are really fucking good at it. If you want to look at the few times acquisitions he oversaw went south then fine, but you have to understand that he was wildly successful more often than not.

And for the differences, first we are talking about private enterprise versus the federal government. Private enterprise is for profit, if you're not profitable you go bankrupt. What is the federal government's purpose? Can the federal government go bankrupt? For a private equity buyout, you need to find a third party to lend to you and despite what some journalists imply this money is not free flowing. There is massive amounts of diligence and approvals that go into lending this money. If you want to blame anyone for crippling these companies with debt, blame the lenders for lending the debt in the first place. The government can control interest rates and artificially drive demand to its debt. The US government is such a large and unique entity that no one really knows what happens if our debt hits an unsustainable level. If debt hits that level at a private entity, you closed the doors and move on (and actually more often than that a company is restructured and carries on after bankruptcy). In fact, I don't even really know how you compare the two.

And not all debt is evil. A private firm's most efficient and optimal capital structure almost ALWAYS includes some portion of debt. This is going to blow your minds: debt is CHEAPER than equity. Holy shit, fancy that.

Imagine that, we actually have someone here who understands what the phrase "the public is the lender of last resort means". It means selling equity is more expensive than debt to a business owner.

 

[WakeandBake]

as for "evil" debt, I goes you are saying that private debt that is handed down to unwitting workers to make private profits for private investors is not evil, but national debt to pay for health care for elderly Americans is evil debt.

 

[WakeandBake]

Imagine that, we actually have someone here who understands what the phrase "the public is the lender of last resort means". It means selling equity is more expensive than debt to a business owner.

I see. So being good at using debt in the private sector to make profits makes you a debt-buster in the public sector.

 

[Strickland33]

What I don't understand is why people want to focus on Mitt's time at Bain Capital which is by far the most successful and impressive part of his adult life. His most comparable experience was as governor and he sucked dick at that, so why don't people just focus on him sucking at actually being in charge of a government?

He was a pretty good governor. I have no idea what you're talking about...

 

[DeacMan]

I see. So being good at using debt in the private sector to make profits makes you a debt-buster in the public sector.

You are displaying a rather odd naiveness about how business works when it comes to obtaining capital and the cost of the same. I thought you were a bit more grounded in some pretty basic broad principles in this regard. Maybe not.

I made no comment whatsoever whether being good at financing business in the private sector makes you a debt buster in the public sector. I was merely noting the difference between selling equity vs. borrowing funds and what a business owner would typically prefer to do. Equity deals come at a higher price to the business owner. There may be other reasons a business owner would want to sell equity vs. borrow from a lender. But typically the cost to the owner is higher in an equity deal. That's all I said. An acknowledgement to what buckets said - which is true.

If you want to have a conversation about the differences between borrowing in the private sector and borrowing in the public sector, I'm happy to do that as well. Or I'm happy to leave that to buckets.

 

[RJKarl]

Bake, Strick and everyone, you guys don't get it. DeacMan knows more than everyone else. What he says cannot be challenged.

 

[WakeandBake]

You are displaying a rather odd naiveness about how business works when it comes to obtaining capital and the cost of the same. I thought you were a bit more grounded in some pretty basic broad principles in this regard. Maybe not.

I made no comment whatsoever whether being good at financing business in the private sector makes you a debt buster in the public sector. I was merely noting the difference between selling equity vs. borrowing funds and what a business owner would typically prefer to do. Equity deals come at a higher price to the business owner. There may be other reasons a business owner would want to sell equity vs. borrow from a lender. But typically the cost to the owner is higher in an equity deal. That's all I said. An acknowledgement to what buckets said - which is true.

If you want to have a conversation about the differences between borrowing in the private sector and borrowing in the public sector, I'm happy to do that as well. Or I'm happy to leave that to buckets.

what a business owner prefers vis a vis debt and equity is all good and fine. But Romney himself says that this his experience with leveraging companies to save them qualifies him to save the US economy, which happens to already be leveraged. The vague platform he laid out to do this involves massive cuts to revenues and massive cuts to spending that will somehow magically reduce debt and reduce unemployment, leaving economists and business owners nationwide scratching their heads.

 

[Tin Cup]

PE firms don't just layer on a lot of debt and that somehow improves their operation. PE firms are really good at day to day management, operational expertise and efficiencies and synergies (great PE buzzword). They find cost-cutting measures and are able to improve margins through more efficient management. Essentially, they are really good at getting more with less. And that is what Romney is running on.

 

[ChrisL68]

Every time rj talks aside to other posters in a thread it makes me want to poke my eyes out. Totally meaningless.

 

[WakeandBake]

ok, fine. I just thought the author of the piece made a good point. Milhouse rejected him out of hand, and being unfamiliar with his work I asked why. But the point was good and no one has demonstrated otherwise - and it gets back to the unfounded notion that a flagging economy requires a "brilliant businessman" to come and save it - which I find preposterous. Governments and their role in economies, and private businesses, are not the same. They are different beasts altogether.

Obama's opponents have seized on the national debt as their number one issue in this election. Obama borrowed a trillion dollars in the form of tax breaks, unemployment/COBRA benefits for workers, government backed loans for business, and some infrastructure projects. For this they have chastised him and blamed him for the state of the economy. ok, fine. Its politics. At the time his opponents were calling for him to do nothing more than lower taxes and austerity measures, recession be damned. I even recall a piece that went around by Peter Schiff (who has been anointed by many on the right as a genius) that called for letting banks fail, removing most taxes, removing most regulations, removing employment laws, raising interest rates, gutting and/or eliminating gov agencies - basically a "reset button" for the US economy. He admitted it would result in an immediate depression, shuttering of many businesses, and skyrocketing unemployment but would be the best thing for the economy "in the long run." Obama and the dems chose instead to borrow the cheap money while they could and attempt to stimulate the economy. Whether it did is still argued to this day, but for many consecutive months now the private sector has clawed out and hired workers every month, albeit slowly.


But when I look at Mitt Romneys supposed "brilliant" business career, I see a man who identified companies in trouble or who were ripe for the picking, gathered investors and borrowed money from financial institutions to take them over, restructured them through layoffs and mergers and selling off capital, and then got out with large fees while the company paid off the debt. It saved many a company, and sank a few too.

How is this any different from what the president did? In the US economy, "investors" are buyers of government securities. They are cheap and there is high demand for them - but for some bizarro reason this has caused some of you to wring your hands and declare the sky is falling and begin shouting about the debt. Krugman and others have said that not all debt is bad and that it is necessary in this time to use debt to right the ship. Conservatives on this board have a conniption fit when he says this, but in theory it is quite similar to what Bain did for flagging companies - gather $ from investors to 'save' companies. You guys get erections over that shit - you love it.

So what are Mitt Romney and Paul Ryan proposing to stimulate demand and lower unemployment that doesn't involve gathering investors (in this case, debt to securities holders) and simultaneously reduce the debt? His platform doesn't add up. It looks like Peter Schiff lite. It will certainly not increase demand and "save" the US economy, at least in the short run.

 

[buckets]

PE firms don't just layer on a lot of debt and that somehow improves their operation. PE firms are really good at day to day management, operational expertise and efficiencies and synergies (great PE buzzword). They find cost-cutting measures and are able to improve margins through more efficient management. Essentially, they are really good at getting more with less. And that is what Romney is running on.

This is correct. I think most people unfamiliar with private equity get caught up in the debt portion of it because of all the sob stories that make the press.

I'm not sure why you keep saying things like:

private debt that is handed down to unwitting workers to make private profits

This just doesn't make sense. It isn't like workers are personally responsible for paying off the debt. Most of the time, they'll never know the difference. And debt doesn't make the profit, IMPROVING the company makes a profit. How do you improve a company? You make it more efficient, you make it better, you find the things that are wasteful and eliminate them, you find things that work well but are underutilized and ramp them up. Does that mean sometimes you have to fire people? Yes, absolutely. As we can see from the weekday participation on the boards, lots of people don't do dick at their jobs. Does it also mean that sometimes you have to hire people? Yes, absolutely. Private Equity firms usually love hiring people because it is a sign of growth.

The big thing to understand is that it is never in a private equity firm's interest to actually cripple a company with debt. It is never in a lenders best interest to lend enough debt to cripple a company. Sometimes both are wrong, more often than that for Bain, they were correct. The US Government is not a private enterprise, they don't have anything aside from the people running it to stop the debt faucet. At what point do we want to make an effort to fix the federal government's debt situation? When no one will lend to us anymore? When lenders start demanding that we repay what we owe? The government as we know it is not sustainable, and personally I would like to solve the problem as soon as possible because every day and month and presidential term that we push it off only makes it worse.

 

[avalon]

which debt is evil and which is not?

The predatory lending where the interest rates skyrocketed after a certain amount of time was pretty evil.

Overall, though, debt is not evil. Debt beyond one's means is a problem, obviously, but debt in an of itself is not a bad thing. I think that “debt” is a bad word to a lot of people and some politicians, on both sides, prey on that. (Republicans by scaring people with the debt of our government and Democrats by telling these horror stories of investors piling debt on poor companies.)

As buckets noted, debt is generally cheaper than other forms of financing. Which means that a company can increase the returns of its shareholders by financing through debt as well as equity. But that means the investors take on more risk, because if the company goes under, the equity stakeholders are the last to get paid. So Bain has a vested interest in ensuring that the company does not have more debt than it can handle, and that it can make its debt payments, otherwise the investment is lost.

And, to answer later questions you posted, I’m not sure if Romney’s ability to successfully turn around companies demonstrates that he can do the same with the government. The government is a different entity than a for profit venture. I’d imagine he can point to success in cutting costs and getting rid of inefficiencies, but I don’t really see how anything involving debt is comparable.

Edit: man, it took me so long to write that post that both WakeandBake and buckets have already added new posts and now I'm behind.

 

[RJKarl]

Avalon if the shareholders of Bain are paid upfront, from the debt incurred, they are protected from what happens later.

 

[WakeandBake]

This is correct. I think most people unfamiliar with private equity get caught up in the debt portion of it because of all the sob stories that make the press.

I'm not sure why you keep saying things like:


This just doesn't make sense. It isn't like workers are personally responsible for paying off the debt. Most of the time, they'll never know the difference. And debt doesn't make the profit, IMPROVING the company makes a profit. How do you improve a company? You make it more efficient, you make it better, you find the things that are wasteful and eliminate them, you find things that work well but are underutilized and ramp them up. Does that mean sometimes you have to fire people? Yes, absolutely. As we can see from the weekday participation on the boards, lots of people don't do dick at their jobs. Does it also mean that sometimes you have to hire people? Yes, absolutely. Private Equity firms usually love hiring people because it is a sign of growth.

The big thing to understand is that it is never in a private equity firm's interest to actually cripple a company with debt. It is never in a lenders best interest to lend enough debt to cripple a company. Sometimes both are wrong, more often than that for Bain, they were correct. The US Government is not a private enterprise, they don't have anything aside from the people running it to stop the debt faucet. At what point do we want to make an effort to fix the federal government's debt situation? When no one will lend to us anymore? When lenders start demanding that we repay what we owe? The government as we know it is not sustainable, and personally I would like to solve the problem as soon as possible because every day and month and presidential term that we push it off only makes it worse.

Does the company that was "saved" by Bain not now have a debt to pay and interest to pay on that debt? What am I not understanding? Bain doesn't put up its own money, or very little, to acquire the company. They borrow it from a bank. They come in and improve the company, fine, but that is not free. The company now has a debt to pay, do they not? I am genuinely asking. Where does the money come from, and who ends up paying it?

Why is the national debt so frightening to you? You acknowledged that debt was cheap, and you are right. All of a sudden the national debt is the bogeyman that has some of you running scared. You asked at what point do we want to make an effort to fix the federal debt. I say, not in the middle of a weak recovery. You say right now, don't wait another day, and you want to hire Mitt Romney and Paul Ryan to do it on day one by slashing spending and, curiously, slashing revenues and then hoping that supply-side economics magically starts working and demand skyrockets. Somehow Mitt Romney's brilliant expertise at borrowing money in tiny niche sector of finance makes him the man to pull of this magic trick. I say it ain;t gonna happen.

 

[avalon]

Avalon if the shareholders of Bain are paid upfront, from the debt incurred, they are protected from what happens later.

When did that happen? Are you arguing that Bain levered companies up and immediately paid shareholders their entire investment plus returns?

 

[Tin Cup]

Banks put a bajillion covenants in place on the loans they make. Its possible they allow for distributions to shareholders with portions of the loans they make, but not if the underlying credit can't support that. They aren't going to lend $100mm towards a buyout and allow for that debt to be a distribution to the shareholders. Cash-out debt events dont happen very often.

To WakeandBake, Bain puts plenty of their own money into the deals they do. I dont know what the debt/equity ratio is, but rest assured no lender is going to 100% finance an LBO.