By Farron Cousins
November 1st, 2012 12:00pm
Recently, Rolling Stone reporter Matt Taibbi wrote about Mitt Romney’s disastrous record at Bain Capital – how he would buy up smaller companies with borrowed money, sell the company, and leave the debt for someone else to pay off. Below is an interview that Ring of Fire co-host Robert F. Kennedy, Jr. conducted with Taibbi about his recent article:
Robert: Welcome back to Ring of Fire. I’m Robert F. Kennedy, Jr. For the past year, Republicans have been upset over the fact that progressives have criticized Mitt Romney’s private sector records, specifically his actions at Bain Capital. Romney’s time at Bain gives us the clearest picture of how he would govern America: Slash and burn, outsource, and take the lion’s share of the profit for himself and his shareholder. You can imagine the consequences of these actions on the regulatory agencies like FDA and OSHA. That’s why it’s important to understand Mitt Romney’s record at Bain Capital. I have Rolling Stone contributor Matt Taibbi with me now to talk about Bain Capital’s actions under Mitt Romney’s leadership.
Matt, you’ve written a terrific article for Rolling Stone, a cover piece called “Greed and Debt: The True Story of Romney and Bain Capital.” It’s really more than just a recital of his record of Bain. It’s really a portrait of his personality and how he views the world. The way that we’ve been looking at him is as a will of the wisp who goes wherever the winds carry him, but he actually has a pretty consistent vision over his time and over his career. That’s a vision that should be very scary to the American people.
Matt: Yes, absolutely. I think what we were trying to get at in this article was this whole issue of what exactly Bain Capital does, or did it do? What was the strategy that Mitt Romney employed when he worked at that company? He pretty consistently represented this movement that people on Wall Street talk about toward something called financialization, which is the strategy of no longer putting all your eggs in the basked of “let’s build companies and create an industrial economy” but instead “let’s use financial innovations to simply engineer profits and money out of thin air.”
Instead of building businesses, which is what Mitt Romney’s father of course did, as the CEO of AMC, the car company, Romney, who actually began his career at Bain doing something like that. He was in the venture capital business. He most famously started a company called Staples. He eventually moved more towards this financialization module which really just involved using financial innovations and techniques to extract profits from existing companies and keep them for himself and his investors. That’s really what we were writing about, this whole evolution of the Wall Street mindset from building things to simply taking money. That’s perfectly represented by the career of Mitt Romney.
Robert: The interesting thing is that loading companies with that kind of debt does not help those companies; it actually cripples them and destroys them. You outlined the M.O. that Romney would take which is to pay off the board of directors. Instead of doing a hostile takeover like we saw in the ‘80s, he would give large bonuses to the board of directors to persuade them to go along with this takeover. He and his partners would put up 5% of the capital and they’d borrow $350 million dollars from Goldman-Sachs.
The company would end up owing that debt. Whatever other problems that company had, it now had $350,000 in debt to deal with, plus all of the management fees that Romney and his partners at Bain were charging them every year. That dynamic was designed to run these companies into the ground.
Matt: This is the key point. Romney wrote a book called Turn Around, and I think this is a key deception of this campaign, that he’s presented himself as this expert in turning organizations around. What he did at Bain was irrelevant to the Bain business model, whether the company actually turned around or not. Just as you described, the way they typically took over a company was they would borrow and they would put a small amount of money down, just like those mortgages conservatives were always criticizing where you put 5% or 10% down and you get a huge house you can’t afford. That’s what they would do.
For instance in the example of KB Toys which was taken over by Bain Capital, they put down $18 million but then they financed. They went out to banks and they borrowed $302 million. When they did that, they used that money to take over a controlling stake in the company. What people don’t understand is when they borrow all that money, that debt becomes assumed by the company that gets taken over. Now KB Toys owes that $302 million, or whatever it was that Bain borrowed.
Because they owe all that money, they have this increased debt service every month. They inevitably have to cut costs, so what they have to do is fire people. Bain tells them who to fire or advises them on how to cut costs. For the privilege of telling them who to fire, you have to pay the company a management fee of millions or even tens of millions of dollars a year. Those are two huge new costs that the target company has to assume after it gets taken over. You get the debt service and the management fees.
The third thing, which you mentioned at the beginning, is typically you have these massive bonuses to upper management which they can’t afford, usually. Bain pays them anyway because they need their assent to do the takeover in the first place.
Robert: One of the neat little bits of hypocrisy that you talk about in this article so artfully is Romney’s focus, and Paul Ryan’s focus of course, on the national debt as the real threat to American democracy. Ironically, he built a career rooted in running up huge debt.
Matt: Right. It’s incredible. I got the idea to watch this article when I was watching a debate performance earlier this year. It was covering the campaign and Romney was using this imagery of this prairie fire of debt that was sweeping across the country that was literally going to burn your children alive. I remember looking back and forth and saying, “Doesn’t anybody remember what this guy did for a living for 20 years?”
Really, as a leverage buyout specialist, a guy who worked in a private equity company that took over other companies, that’s all he did for his entire career, create mountains of debt that other people had to pay off. Again, we just went over it with KB Toys but that’s the model for taking over a giant company: you have to borrow these massive sums in order to buy enough to get a controlling stake, and then that debt becomes somebody else’s debt.
Even worse, very often companies like Bain, and Bain has done this on numerous occasions, they get the company to take out additional debt. They get them to go to banks and take out loans of $50 million or $100 million just to pay a dividend to Bain Capital when it needs more cash.
That’s what happened to KB. That’s what happened to Dunkin’ Donuts, which got taken over by a consortium including Bain a few years ago. They had to take out a billion dollar loan to pay a dividend to Bain and its partners. That’s all that Romney’s been doing for years, creating debt. It’s very ironic to hear him talk about how he’s going to reduce it now.
Robert: One of the really disconcerting parts of the piece for me, this wonderful piece you’ve done for Rolling Stone, was your description of how America used to make money. Even in the old days, making money required sharing wealth. If you wanted to make yourself rich, you also were making your neighbors rich. You were making other people rich. You were sharing the wealth with the assembly line workers. Even the robber barons were doing this with middle management, with schools and communities, and investors. You were building America.
That’s exactly what George Romney, Mitt Romney’s father, did. He built a company and he did it by going against the grain and building cars that were not gas guzzlers, that were fuel efficient. He put a lot of people to work and he gave them good pensions. He gave them good benefits and he gave them good paychecks.
His son is part of this trend on Wall Street. I have friends in the financial services space. They can’t tell you what they do for a living. With venture capitalists, they’re betting money on a startup company that’s going to go out and create jobs and create products. That’s what Mitt Romney did during the first half of his career. As you point out, during the second half of his career he got sucked into this vortex on Wall Street where they don’t make anything. They close factories. They do creative destruction. They offshore their accounts. They devise tricks for liquidating pensions for workers, for firing workers, for not paying their taxes, for escaping all of the responsibility for paying the expenses of America and for building our country up.
Matt: That’s exactly the problem that we have on Wall Street now. The cycle has gotten so small that the people who are at the very top of the biggest hedge funds, the biggest private equity companies, the biggest banks and investment banks, they all have to produce profits in such a shorter time-frame now that in their minds they don’t have time to go out and build businesses. They don’t have time to go out and build AMC Motors and wait for America to catch up to the idea of fuel-efficient cars. What do they do instead? They cook up things like CDOs and credit default swaps that are ways of packaging existing investments or existing loans, selling and reselling and creating bets on those investments, piling bets on top of bets.
Romney is part of that world. He’s part of this world that doesn’t create anything but instead targets existing things and uses financial engineering to extract profits out of them, move them from one place, move them from communities into the pockets of a few people in Manhattan and Boston. That’s been the trend in Wall Street for the last 15 to 20 years. They’ve gotten away from this whole idea of slow growth and they’ve moved to this incredibly short time-frame, short-term thinking. He perfectly represents that change in attitude.
Robert: You have these poignant portraits of men and women whose lives he has destroyed through his actions, this interesting portrait of Romney as a guy who has done everything in his power to try to keep those stories and those people at arms’ length. In the end, one of the most damning things you say is that if you look at Bain Capital under Romney’s leadership and the wake of destruction that they left in their path, even by destroying all these lives, these factories and these communities, he didn’t really achieve profits that were note-worthy. If he had just bet on the Dow Jones Industrial average he would have done just as well as he did during his tenure at Bain, and those companies would still be functioning.
Matt: Right. That’s what’s so frustrating about this story. If you’re an investor in a private equity company like Bain and you know that they’re going to use these extreme tactics of forcing a company to take out a $100 million bank loan to pay a dividend, which is exactly what you would never do if you were trying to build up that business, on a cynical level you would at least want to get better returns than you would if you were just betting on an index of the S&P or the New York Stock Exchange.
The truth is the only people who make extraordinary amounts of money doing the hostile takeover or the friendly takeover model type of business that Bain was involved in are these private equity companies themselves. Their investors actually don’t typically make a whole lot more money, or really any more money at all, then an ordinary investor would just betting on a mutual fund that tracks with the Stock Exchange. All this destruction is for the benefit of a couple of people but the pain is spread out to an enormously larger sect of society.
Robert: Matt, you’ve played a historical role over the past five years explaining in all of these articles in Rolling Stone to the American public exactly what’s happening on Wall Street. Nobody else is doing it like you are and it’s an extraordinary public service. I want to thank you for this article and urge you to keep on fighting. Matt Taibbi is the author of several books, the most recent being Griftopia. He’s also a regular contributor to Rolling Stone and Men’s Journal. Thanks for joining us, Matt.
Matt: Thank you very much. I appreciate it.
Farron Cousins is the executive editor of The Trial Lawyer Magazine, a contributing writer at DeSmogBlog.com, and producer of Ring of Fire Radio.