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Decoding Romney

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Despite all his flip-flops, Mitt Romney is predictable. Let's start with that.

In the good ol' days we had "smoke and mirrors" as a source of illusion. Today we have Mitt Romney's "smoke and more smoke" as a source of delusion. Mr. Romney has repeatedly asserted that he will create 12 million new jobs by 2016. As usual, his claim is bogus. Drawing on his experience at Bain Capital, he is manipulating and fabricating numbers which he then runs through his PR processor. He's treating U.S. as another leveraged buyout (LBO) because that's what he knows how to do and he's made tons of bucks doing it. It's a really bad idea.

More broadly, Mr. Romney claims that his business experience has endowed him with the skills to fix all that ails America, particularly its economic challenges. More smoke. Let's start with jobs.

Romney repeatedly asserts that "Government does not create jobs." Try telling that to the defense industry or the sugar industry or the prison industry or the financial industry or the lobbying industry or the television industry. Without the government, Paul Ryan would have missed his professional career. The three richest counties in the United States are in Virginia, slam up against the District of Columbia. No jobs in DC, right? Well, maybe a few, but those aren't connected to government, right?

In a genuinely perverse way, even Mitt Romney's very profitable career at Bain Capital is a direct consequence of government policy, action and forbearance. Ronald Reagan's budget director, David Stockman, puts it very simply:

Bain Capital is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain's billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise

That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn't be much scope for it because it creates little of economic value. But we have a rigged system -- a regime of crony capitalism -- where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

In this Newsweek article, Stockman provides compelling evidence that getting rich at Bain is not meaningfully connected to guiding a complex, multi-trillion dollar economy ($15T+ if GDP is your metric). Sadly for Mr. Romney, even if he were qualified, presidents do not control economies; even one-party China is encountering serious and mounting difficulties (there too the .01% are enriching themselves at the expense of the general population).

Romney's objection to the government's creation of jobs is effectively directed towards jobs for the middle class and for the poor. Government supported jobs in finance and defense are fine, thank you. This is an unimaginative rehash of crony capitalism straight out of the Gilded Age. James Surowiecki skewers this benighted perspective in The New Yorker under the heading "Corporate Welfare Queens." It's a familiar story, but one which the .1% are disinclined to hear and would rather you not either, hence the deafening silence on the subject in most of the media.

Beyond jobs, there is the more general concern about our economic future. Does Romney's experience support his claims to being our fiscal savior? The principal activity and experience of Romney and Bain is the leveraged buyout, with heavy emphasis on the "leveraged" part. Leverage is one of the main magical ingredients in the LBO potion.

According to Stockman, much of Bain's and Romney's financial success is also traceable to their ability (and willingness) to hype the target company's stock, allowing them to unload it at a very handsome profit. This added magic in the LBO process is provided by stirring in liberal doses of what are called "'pro forma' financials" which are characterized as

... Prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt or issuance of equity. The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes. Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements.

However, AICPA (American Institute of Certified Public Accountants) explicitly states that "By definition, presentations of pro forma financial information are not financial statements." More explicitly: you cannot rely on them. They are speculative statements about current conditions and about what may happen in the future, what the AICPA characterizes as "assumed or anticipated facts," a.k.a. speculation.

Because these pro formas are assumptions and statements about what will happen in the future, trusting them is a matter of taste or judgement, not of demonstrable fact. They do not meet minimal audit standards. Usually they come with a disclaimer designed to protect the issuer of the pro forma financial information from the consequences of failures in their assumptions and/or prophecies, intentional or otherwise. For Bain and Romney, the future often did not match their prophecies and their assumptions often proved inaccurate. The fact that such deals are (mostly) legal merely supports Mr. Stockman's other point: the game is rigged.

Romney has been richly rewarded for his imaginings. Quite naturally, this positive reinforcement has powerfully influenced who he is today. It is clear that Mr. Romney's campaign and, indeed, his character are rooted in his Bain experience. What is also now crystal clear is that he has been presenting and constantly revising pro forma political information. What he is trying to sell to the American people is highly speculative, tendentious and intended to maximize the payout to Mr. Romney and his associates. Where are the disclaimers?

Meanwhile, back to the other ingredient in Romney's magic elixir: the L of it. LBO wizards are able to make extravagant sums of money because of: a.) the use of leverage, known also as OPM (other people's money), mostly debt (remember junk bonds and the felonious Michael Milken) and b.) the asymmetrical nature of the bet: heads, I win; tails, I'll keep most of your money anyway.

Even if his assumptions and prophecies proved to be accurate, which they have not, applying Romney's experience to the U.S. debt challenge is relevant only if he's considering an LBO of the US of A. Unfortunately, the U.S. is already leveraged to the hilt and beyond. Even with the most dazzling set of pro formas -- smoke upon smoke upon smoke -- solving the debt problem by piling on debt is hardly a solution. Nor do imaginary savings from unspecified changes in tax deductions along with a doctrinaire refusal to consider raising taxes offer much hope for job growth, economic growth or debt reduction. There is a reason alchemist went out of fashion: no gold, no jobs, no money. They could not deliver what they promised.

More generally, financial engineering of the type Mr. Romney represents is not going to fix our problems. Financial engineering is what got us into this godawful mess. Because his experience and his character are so deeply enmeshed in the artificial LBO world -- leveraging OPM and pro forma-ing nonsense -- Mitt Romney will make things much worse if given the opportunity.

I had thought that what we were facing in the Republican Party, followed by Mitt Romney, was a manifestation of the Humpty Dumpty syndrome. I underestimated the con. This is not a word game; this is a shell game. It is correct that Mr. Romney will say almost anything, because what he says doesn't matter. The words are pro forma political information. They are not connected to reality as you and I know it. They are connected to what he wants, the big payoff: your Country. Very predictable.