Matt Taibbi has a timely explanation of how Mitt Romney made his fortune. It’s kind of long and the first fifth of it is pretty much contentless diatribe, but it does finally get to the point. If you come to really understand how a leveraged buyout works and why they can be so ridiculously lucrative, you probably will be more interested in forcibly separating Romney from his money than you will be in voting for him.
The leveraged buyout is really not an essential component of free-market capitalism. And a few tweaks in our tax laws would make them both less common and less destructive. It’s hard to define what Romney did as anything other than looting.
You accidentally relinked to the GOP caucus write-up from your last post, not Rolling Stone. Just FYI.
Now it goes to CBS. I was wondering how Taibbi got on CBS.
Having substantial link fail today.
In case anyone is not intimately tied into the facebook / twitter machine, President Obama is currently answering some questions on reddit.
It’s hard to define what Romney did as anything other than looting.
On the contrary, it’s very easy. One could also call it outright theft, highway robbery, a giant bustout scheme, a heartless money grab, or just plain old stealing.
Not hard at all.
Looting? Why isn’t the mainstream media getting into this story?
“One hundred and seventy workers at a Sensata Technologies plant in Freeport, Illinois — of which Bain is the majority owner — are calling on Romney to help save their jobs from being shipped to China.”
“After repeatedly touting his business experience as an asset towards reviving the U.S. economy, Mitt Romney has been put on the defensive by Bain Capital workers who are fighting back against the outsourcing of their jobs. One hundred and seventy workers at a Sensata Technologies plant in Freeport, Illinois — of which Bain is the majority owner — are calling on Romney to help save their jobs from being shipped to China. The factory manufactures sensors and controls that are used in aircraft and automobiles, but has been dismantling and shipping the plant to China piece-by-piece — even as it requires the workers to train personally their Chinese replacements, who have been flown in by management. We’re joined by two workers from the Sensata plant in Freeport, Illinois: Tom Gaulrapp and Cheryl Randecker. Both worked at Sensata for 33 years and were told their jobs would be terminated by the year’s end.”
http://www.nationofchange.org/workers-bain-owned-illinois-factory-bring-fight-save-outsourced-jobs-r
omney-and-rnc-1346248685
working link to taibbi @ rolling stone: Greed and Debt: The True Story of Mitt Romney and Bain Capital.
an interesting and enlightening read, to say the least.
1 — There’s no such thing as free-market capitalism.
2– Leveraged buyouts are just one instance of how ridiculously lucrative money is made from the Plutocrat playground laughingly called the American economic system. In short, you use other people’s money to gamble and charge ridiculous rent for, and then skim your take off the top and dump the losses on the government, workers, institutional investors, and customers. That’s pretty much all Wall Street does. Just ask Jamie Dimon or Lloyd Blankfein or the good folks at Enron. Or at Moody’s and Standard & Poor’s, whose job is to inflate worthless investments to bring in the money flow for all to skim.
It will take a lot more than a few tweaks in our tax laws “a few tweaks in our tax laws” to patch this broken, looted machine.
Taibi has developed into an irreplaceable journalistic gem.
It must be an 0 sum game, given how far others in the news business have strayed from real journalism.
Distills thirty years of US economic financialization down to a few pages and puts Bain in its correct position, a third rate, copy-cat predator. A brilliant piece of work for those that don’t want to read all the books that have been covering this over the decades.
The reason Romney and his ilk are rich and many like me aren’t is simple — I was raised to believe that lying, cheating, and stealing are wrong.
“Looters” yes Romney has given an interesting dimension to Ayn Rand’s least favorite group of people.
It never ceases to amaze me that supporters of capitalism are shocked — SHOCKED — that a system that proudly calls itself capitalism operates in the service of capital.
So what are the essential components of free-market capitalism? What is “free market” capitalism?
It’s their term for Laissez-Faire capitalism. Except when it drops in the pot. Then they call for government bailouts to “save the system”. Also known as Bushonomics.
This was explained to me in the ’80s as “private individual buys a corporation using money that the corporation borrowed.” As a lawyer, Booman, can you explain how this is legal? It sounds like “I buy my neighbor’s house using his money. Then I sell it to someone else, pocketing all the money, leaving the bank to swallow the mortgage because the house owes it, not me.”
In a consumated leveraged buy-out, the buyer uses the hidden “value” in the purchased firm to negotiate a loan from other sources to repay the original loan (“investment”) and to pocket additional vigorish (consulting fees, prepaid interest, special dividends, etc.). This results in the original firm essentially paying for its own buy-out, because it’s the debt loaded on the firms books which enable the buyer’s loan (original investment) to be repaid early. The whole process can work if economic activity continues to hum along without any stumbles or the purchased firm doesn’t find its market position suddenly under attack. However, since the leveraged buyout results in the purchased firm operating with insane debt levels (30-to-1 or more against capital invested, like those investment banks which went under in 2008-2009)), any stumble results in the firm heading for bankruptcy. Financial service firms might be able to operate with those types of leverage, but anybody producing a real service or product will find themselves in difficulty in short order. All that matters is that the buyer can find some fool willing to buy the spiel the buyer spins about the prospects for the firm, can structure bonds which protect the buyer when it issues debt and invest an over-large amount of money to the firm. The yields are delicious, but the lender will likely never get to taste them.
OK, I get a loan from KKR or whoever. I buy the company. The company issues bonds. I take the money from the bonds as a “dividend”, paying back KKR and I own the company free and clear. Nothing illegal because the whole deal including the massive dividend that dwarfs profit is approved by 100% of the stockholders, mainly me. Got it. Thanks.
What gets minimized is that the LBO guys have relationships with money guys that the management of the target company doesn’t have. Plus, if it’s a public company that the predators are after and which they’ll take private, the ownership and management will be the same and that paves the way for a future IPO when the banksters and predators cash out.
Carlyle quickly made out well on United Defense using that method — then GWB WOT turned that hefty return into a goldmine.
Am waiting for someone to investigate and write-up the full details on Bain’s Mattel deal. That may have been Bain’s biggest payoff.
So the full story goes like this:
ABC Corp is a mid-sized manufacturer with book value of $10M and a market cap of $25M. I borrow $30M from KKR for the buyout. Shareholders go for the deal because they are making a quick 20%. Once I own the company, I go to the Vampire Squid to float a $32M bond issue in the company’s name. GS browbeats S&P to put a AA rating on the bonds and I use the money for a special dividend with which I pay off KKR (nut and $2M vig). Meanwhile GS has sold derivatives betting against the bonds they just underwrote. Now I’m whole and I own a company with $10M in hard assets but is in the hole for $22M. I cancel the pension plan and pull back $5M which I pay myself a bonus with. I gradually sell off hard assets, machinery and such, (to China) and replace them with rentals, dropping the company’s taxes. I pocket the proceeds as more dividends and bonuses. When everything is sucked out, the company declares bankruptcy (just before payday) and the workers are now out of work and just general creditors for their last paychecks in bankruptcy court where they stand behind the bondholder who have no chance in Hell of collecting. ABC Corp’s customers have no warranties on products they bought and are also standing behind the bondholders for money they prepaid for orders that were never delivered. Meanwhile, the Vampire Squid collects on their derivative bets and I write off my $30M stock loss reducing my income tax to a pittance. Some bankruptcy lawyers pick the bones.
I believe that’s how Willard operated. All legal, but he would fry in Hell for it if Hell existed. IIRC from the Chrysler/Benz merger, it would not be legal in Germany because of deceptive statements at the bond issue.
Might have a few extra steps in there. You ARE KKR or Bain or Carlyle. You identify the target and collect a bit of money from your equity investment buddies — sort of like a down payment or earnest money. The balance of funds required to complete the takeover can come from any number of sources — banks, investment banks, pension fund managers. The bond issuance comes later — after the takeover — and probably isn’t a preferred method unless or until the company is publicly traded.
It was a thumbnail sketch. Could have had an IPO that ripped of Goldman-Sachs clients too. They are noted for cheating their clients. GS makes even more betting against their clients by selling puts on the stock they advise them to buy. IPO comes after selling the seed corn to temporarily boost earnings. In this scenario, workers, customers, AND investors are all repped off. Only winners are the sharks and the original stockholders who got their 20%.
THIS is the business that Romney understands, not three guys in a garage building a personal computer from game components (Apple II).
It’s the business Mitt approved of, was engaged in and made a lot of money from. However, suspect that his skills, talents, and knowledge were similar to what he exhibits in the political sphere. IOW, he was the seed money fundraiser and beyond that his partners did their best to keep him out of operational functions because everybody including Bain lost money when he directed the deals. Did any of his “partners” weep when Mitt ran for the senate, take a leave to run the Olympics, or run for Governor? How better to get someone out of the way than feeding his ego and hunger for political office?