There's Debt and Then There's Debt

by Mary

Wow, oh wow. Digby finds Romney bewailing the unfairness of institutional debt in Florida.

"Yeah. It's just tragic, isn't it? Just tragic, just tragic," Romney said. "We're just so overleveraged, so much debt in our society, and some of the institutions that hold it aren't willing to write it off and say they made a mistake, they loaned too much, we're overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it's worth."

Considering how he parlayed his millions into hundreds of millions by exploiting debt, it is truly a remarkable thing for him to talk about. Here's James Surowiecki explaining exactly how Bain Capitol and other Private Equity companies operated from 2003 on.

The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets, deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits. Financial engineering has always been central to leveraged buyouts. In a typical deal, a private-equity firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it or taking it public. The key to this strategy is debt: the model encourages firms to borrow as much as possible, since, just as with a mortgage, the less money you put down, the bigger your potential return on investment. The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust.

This approach has one obvious virtue: if a private-equity firm wants to make money, it has to improve the value of the companies it buys. Sometimes the improvement may be more cosmetic than real, but historically private-equity firms have in principle had a powerful incentive to make companies perform better. In the past decade, though, that calculus changed. Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” This allowed them to recoup their initial investment while keeping the same ownership stake. Before 2000, big special dividends were not that common. But between 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

Romney's investments enriched himself and his investors, but not the country. His money and wealth would have been scorned by his dad according to Rick Perlstein's piece in Rolling Stone.

That's another rebellion against his late dad. Not only was George Romney, that loser, ironclad in his ideological commitments; his vision of how capitalism should work was in every particular the exact opposite of the one pushed by the vulture capitalist he sired. (If George Romney's AMC was around now, Mitt Romney's Bain Capital would probably be busy turning it into a carcass.) A critic once said he was "so dedicated to good works his entrance into politics is like sending a Salvation Army lass into the chorus at a burlesque house." As a CEO he would give back part of his salary and bonus to the company when he thought they were too high. He offered a pioneering profit-sharing plan to his employees. Most strikingly, asked about the idea that "rugged individualism" was the key to America's success, he snapped back, "It's nothing but a political banner to cover up greed." He was the poster child for the antiquated notion that corporations have multiple stakeholders: the workers that breathe them life, the communities in which they are situated, and the nation to whom they owe a patriotic obligation – most definitely and emphatically not just stockholders, as Mitt and his defenders say.

George Romney earned his money by creating value. Mitt "earned" his money by creating debt. That's the difference between market capitalism and vulture capitalism.