Explaining Southern California's economy

Mitt Romney and Bain Capital: He did what he had to do

Republican presidential hopeful Mitt Rom

JEWEL SAMAD/AFP/Getty Images

Mitt Romney has been taking it on the chin from the unlikeliest of places: his fellow Republican candidates, especially Newt Gingrich, have claimed that Romney's time at private-equity firm Bain Capital was all about killing jobs, not creating them. Mitt says he "created" 100,000 jobs. Not so fast, say his detractors.

At the Huffington Post, Robert Lipton explains why this he-said/he-said doesn't entirely make sense:

The reality is both more simple and more complex than all those allegations would have one believe. It is simple because the function of Bain and other private equity funds has no planned relation to job creation or job losses. It is more complex, because the activities of Bain do tell us something about Mitt Romney -- having nothing to do with jobs. Let's look at how Bain and other private equity companies actually operate.

The business goal of private equity companies is to make profits for investors in the equity funds they manage. The greater the profits for the investors, the larger the take of the fund managers, who typically receive a base management fee of about 2 percent plus a portion of the fund profits, generally around 20 percent. If the fund manager is very successful then the manager's participation in profits may run as high as 30 percent, which investors may be prepared to accept just to be able to invest with that manager. We're told that Bain was very successful in creating very high returns on investment for its investors, said to be an astounding 88 percent per year, to the point where it could get 30 percent participation in profits. One tax advantage of the fund mangers is that although their business is to get paid by creating values, unlike other payment for services, which is taxed as ordinary income, their return for their services is treated as capital gain and taxed at the lower capital gains rate.

So in the end, Romney did what he had to do to achieve significant returns. If that meant massive layoffs, so be it. If that meant that the company Bain Capital was turning around thrived and hired thousands, great.

But is this any way to run a county? At the New York Times, Paul Krugman pointedly doesn't think so:

Like many observers, I was somewhat startled by his latest defense of his record at Bain — namely, that he did the same thing the Obama administration did when it bailed out the auto industry, laying off workers in the process. One might think that Mr. Romney would rather not talk about a highly successful policy that just about everyone in the Republican Party, including him, denounced at the time.

But what really struck me was how Mr. Romney characterized President Obama’s actions: “He did it to try to save the business.” No, he didn’t; he did it to save the industry, and thereby to save jobs that would otherwise have been lost, deepening America’s slump. Does Mr. Romney understand the distinction?

At Reuters, Felix Salmon also asks some questions, rightfully bringing up a key aspect of Bain's business that Romney might not want to talk much about — debt:

Romney’s company, Bain Capital, was a “private equity” firm — the friendly, focus-grouped phrase which replaced “leveraged buy-outs” after Mike Milken blew up. But at heart it’s the same thing: you buy companies with an enormous amount of borrowed money, and then dividend as much money out of them as you can. If they still manage to grow, you can make a fortune; if they don’t grow, they’ll likely fail, but even then you might well have made a profit anyway.

The LBO business in the 1980s and the private-equity business later runs on debt. Debt is for all practical purposes the capital in this type of high-risk capitalism. Borrowed money, in this context, is regular money on steroids.

Some might find it ironic that other Republicans think Romney's record at Bain wasn't one of job creation. After all, isn't private equity just another form of the free-market capitalism that the GOP beloves? If they don't like capitalism anymore and detest socialism, what's left? What economic system can they embrace? Bartering? Feudalism?

The answer is that even free-market Republicans have their limits. Private equity can be seen as just another version of the debt-fueled hyper-capitalism that brought us the financial crisis. It's buchaneer Wall Street capitalism for risk junkies. When it works, it prints piles of money. When it doesn't...well, as Felix notes, the company just goes bankrupt. It might have gone bankrupt anyway. The whole reason the private-equity guys got interested in the first place was because the assets were distressed.

When Republican talk about free-market capitalism, what they really mean is "less government regulation" and "lower taxes." At base, they're basically all about a kind of Golden Age Chamber of Commerce capitalism that divided into owners and workers. They hadn't counted on hypercapitalism and its brutally intelligent, borderline ruthless financiers, and so now they're backed into a corner.

The debate over Romney's record at Bain shows how difficult it's become for the GOP to square this circle. He did what he had to do at Bain. And now they remaining Republican candidates who want to stay in the race have to do what they have to do.

Follow Matthew DeBord and the DeBord Report on Twitter.

blog comments powered by Disqus