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Peter Smirniotopoulos

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Finally, Newt Gingrich Gets Two Things Right

Posted: 01/12/2012 1:51 pm

One of my goals in writing this blog is to take the seemingly incomprehensible and make it at least a little more understandable for the average reader. This is a particularly worthwhile goal in my opinion -- I removed the "H" in IMHO some time ago -- because while we continue to live in an increasingly complex world, the amount of time the average person is willing to devote to real substance seems to be shrinking.

In the ongoing GOP presidential nominee contest, which has increasingly become the contest to see how long before The Anointed One sheds his Cloak of Inevitability and actually becomes the Republican Party's choice to run in the 2012 Presidential Election, complex issues favor whoever seeks to obfuscate them. I continue to lament the withdrawal from the GOP race of former pizza executive Herman Cain in this regard, as there was no air of obfuscation about him whatsoever. In fact, if you were to have asked him his position on obfuscation, the Herminator would likely have looked skyward, as if to ask the Lord Himself for the divine wisdom to recall where on the globe Obfuscation is located, so he might then recall what his advisers had told him was his foreign policy position regarding the Obfuscates.

Mitt Romney, on the other hand, revels in obfuscation because he has no other choice than to do so. He must obfuscate his clear record of being a political moderate and consistent flip-flopper, because if anyone were to scrutinize his policy record carefully they would conclude he does, in fact, have the political convictions of a "well-oiled weather vane" (as succinctly described by his opponent, John Huntsman). He must obfuscate his record as Governor of Massachusetts because, among other things, he passed a health care law with a mandate, after which the much-derided Obamacare was modeled. And, most importantly of all, at a time when the economic fate of 99% of all Americans is decided by the remaining 1% (or, at the very least, in light of the growing perception that that is indeed the case), he must obfuscate his track record as the Job Cremator-in-Chief of Bain Capital, the private equity firm he founded and ran for some twenty-five years.

As the attacks on Romney's record at Bain Capital have become increasingly frequent and strident from within his own party -- particularly from GOP opponents Newt Gingrich and Texas Governor Rick Perry, respectively -- GOP elites, and Conservative pundits like Rush Limbaugh and Joe Scarborough (of Morning Joe fame), have come not only to Romney's defense but also to the defense of Capitalism itself. This development reminds me of an axiom that a former law partner of mine -- now a judge in the Commonwealth of Virginia -- was fond of repeating: Bad facts make bad law. I am compelled to repeat that axiom here, as a defense of the type of capitalism practiced by Romney and his partners at Bain Capital takes the worst aspects of a capitalism run amuck, and wrongly holds them up as a shining example of how the American system of free enterprise works for all.

Romney's initial defense of his track record with Bain Capital was to talk about the "net jobs created" through Bain's investments in fledgling or struggling companies. That number was initially touted by Romney as "tens of thousands." It has more recently been upgraded to approximately 100,000 net jobs. In other words, Romney contends that even if you account for all of the jobs lost when Bain invested in a company and subsequently engaged in massive layoffs to facilitate hiring back fewer workers (at lower wages and without benefits), or off-shored operations completely, thereby eliminating U.S.-based jobs, the number of jobs created in those companies strengthened by Bain's venture capital investments resulted in approximately "net" 100,000 jobs. This defense of Bain fits nicely within the GOP narrative about strengthening the U.S. economy by lowering taxes on enterprises that create jobs, like Bain Capital (which already benefits enormously from the favorable tax treatment accorded to "carried interests"; the topic of a future blog post), and eliminating the regulations under which they must operate to free them up to create even more jobs.

This is such an appealing argument on its face, particularly if you are a Republican or thinking about voting for the Republican candidate for president in 2012, that primary voters seem by-and-large satisfied with this simple explanation. It is through its oversimplification that Romney's explanation about his track record at Bain Capital effectively obfuscates the truth. And it is the effectiveness of this obfuscation that lends so much credence to the fact that Newt Gingrich is correct: The 2012 election (but perhaps not the GOP nomination contest, as it appears to be playing out) will be about "Populism" versus "Vulture Capitalism"; and Mitt Romney is the poster child of Vulture Capitalism.

So here are the facts: The GOP holds up the concept of Capitalism as the bulwark of our economic freedoms, providing opportunity for all in a free-market system where anyone can aspire to and achieve greatness and financial success; where merit is the sole arbiter of the economic fruits of one's labor. Of course, if the complete meltdown of our financial markets, leading to the largest economic collapse since the Great Depression, has taught us anything it should be that this Pollyanna view of Capitalism is antithetical to the way things actually work in America today.

There is no "level playing field" because the largest corporations -- not the small businesses that account for the majority of jobs created in this country -- have an unfair competitive advantage over everyone else; only they can afford to pay hundreds of millions of dollars annually to lobbyists who write laws worth billions of dollars to them in revenue, and then get them passed through a corrupt legislative system where money talks. The "Capitalism" that's practiced in this country is more like crony capitalism on the way up (where those with money, power or some combination of both reap the largest rewards through their undue influence over legislation and regulation), and Socialism on the way down (where the rich and powerful get the elected leaders in their back pockets to foist losses off onto the American people through bail-outs, new tax loopholes, and less regulation).

Bain Capital's primary mission was to make the maximum profit possible for its owners and directors (Romney was both) with the least amount of their own money at risk. Their modus operandi was to identify the limping Thompson's gazelle in a particular industry or region, and buy it as cheaply as possible using the equity they raised primarily from investors (the critical OPM -- or "Other People's Money" -- that reduced the risks assumed by Bain's principals in each acquisition). Their reasons for making such acquisitions varied widely: For example, sometimes a target's financial circumstances were the result of poor management practices which could be corrected, even if draconian labor practices were required to do so; sometimes a target's "break-up value" would exceed the purchase price, allowing for a relatively quick return on investment by selling-off the components of the target company without regard to the consequent dissolution of the underlying business.

Bain's goal in each transaction was always to show as much value as quickly as possible, oftentimes to allow new debt to be placed on the acquired company and/or invite in an infusion of additional capital from new equity investors (i.e. raising even more OPM), so that Bain could then extract as much cash from the company as possible, to the benefit and delight of Bain's principals and investors. What became of the target company after Bain realized its very high rate of return (relative to traditional equity investments), as well as the return of its entire investment, mattered not to Bain once it got out of the deal. Many of the companies that Bain "saved" failed completely or filed for bankruptcy after Bain extracted its extraordinary profit from the transaction. In fact, if you accept the methodology by which Romney claims Bain's investments resulted in 100,000 net jobs (which includes jobs created long after Bain recouped its investment and sold the company, as is the case with the much-touted Staples), then Bain's track record of whether it ultimately helped the target companies it acquired becomes quite abysmal, because you have to subtract all of the jobs lost when target companies went out of business after Bain got out of each deal. The most-recent statistic I read was that between four and ten of the 77 companies in which Bain invested are in business today. Romney mentions only three whenever speaking on the success of Bain's business model.

The things about Capitalism that Americans hold dear, and that the GOP puts up on a pedestal whenever waxing ecstatic about how a Republican-run government would hasten the economic recovery of the U.S., bear no resemblance whatsoever to why Bain Capital was formed, how it operated, or the callous manner in which it generated whorish returns. Granted, Bain Capital made Mitt Romney a much wealthier man than he already was as the heir to Daddy's fortune. But was it good for America? Hardly. Is this the American Dream? Perhaps only for the already wealthy Romney.

Newt Gingrich has become the pariah of the GOP by raising questions about the type of Capitalism the GOP will be encouraging if Mitt Romney gets the Party's nomination and is subsequently elected President in the 2012 election. Pundits like Limbaugh and Scarborough are working hard to silence Gingrich, Perry, and others who want GOP primary voters to know the truth about Bain Capital's track record, and how disconnected it is from the kind of real job creation and economic recovery in the U.S. that would benefit everyone. This is a discussion the Republican Party needs to have in selecting its nominee, and one in which all Americans need to engage as part of their collective calculus of who should be President in 2013. If Romney truly has "broad shoulders" and a "granite jaw," neither he nor his surrogates should seek to suppress this dialogue, as they are clearly doing now.

 

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