Mitt Romney illustration
Illustration by Robert Grossman
The
great criticism of Mitt Romney, from both sides of the aisle, has
always been that he doesn't stand for anything. He's a flip-flopper,
they say, a lightweight, a cardboard opportunist who'll say anything to
get elected.
The critics couldn't be more wrong. Mitt Romney is no tissue-paper
man. He's closer to being a revolutionary, a backward-world version of
Che or Trotsky, with tweezed nostrils instead of a beard, a half-Windsor
instead of a leather jerkin. His legendary flip-flops aren't the lies
of a bumbling opportunist – they're the confident prevarications of a
man untroubled by misleading the nonbeliever in pursuit of a single,
all-consuming goal. Romney has a vision, and he's trying for something
big: We've just been too slow to sort out what it is, just as we've been
slow to grasp the roots of the radical economic changes that have swept
the country in the last generation.
The incredible untold story of the 2012 election so far is that
Romney's run has been a shimmering pearl of perfect political hypocrisy,
which he's somehow managed to keep hidden, even with thousands of
cameras following his every move. And the drama of this rhetorical
high-wire act was ratcheted up even further when Romney chose his
running mate, Rep. Paul Ryan of Wisconsin – like himself, a
self-righteously anal, thin-lipped, Whitest Kids U Know penny pincher
who'd be honored to tell Oliver Twist there's no more soup left. By
selecting Ryan, Romney, the hard-charging, chameleonic champion of a
disgraced-yet-defiant Wall Street, officially succeeded in moving the
battle lines in the 2012 presidential race.
Like John McCain four years before, Romney desperately needed a
vice-presidential pick that would change the game. But where McCain bet
on a combustive mix of clueless novelty and suburban sexual tension
named Sarah Palin, Romney bet on an idea. He said as much when he
unveiled his choice of Ryan, the author of a hair-raising budget-cutting
plan best known for its willingness to slash the sacred cows of
Medicare and Medicaid. "Paul Ryan has become an intellectual leader of
the Republican Party," Romney told frenzied Republican supporters in
Norfolk, Virginia, standing before the reliably jingoistic backdrop of a
floating warship. "He understands the fiscal challenges facing America:
our exploding deficits and crushing debt."
Debt, debt, debt. If the Republican Party had a James Carville, this
is what he would have said to win Mitt over, in whatever late-night war
room session led to the Ryan pick: "It's the debt, stupid." This is the
way to defeat Barack Obama: to recast the race as a jeremiad against
debt, something just about everybody who's ever gotten a bill in the
mail hates on a primal level.
Last May, in a much-touted speech in Iowa, Romney used language that
was literally inflammatory to describe America's federal borrowing. "A
prairie fire of debt is sweeping across Iowa and our nation," he
declared. "Every day we fail to act, that fire gets closer to the homes
and children we love." Our collective debt is no ordinary problem:
According to Mitt, it's going to
burn our children alive.
And this is where we get to the hypocrisy at the heart of Mitt
Romney. Everyone knows that he is fantastically rich, having scored
great success, the legend goes, as a "turnaround specialist," a shrewd
financial operator who revived moribund companies as a high-priced
consultant for a storied Wall Street private equity firm. But what most
voters don't know is the way Mitt Romney
actually made his
fortune: by borrowing vast sums of money that other people were forced
to pay back. This is the plain, stark reality that has somehow eluded
America's top political journalists for two consecutive presidential
campaigns: Mitt Romney is one of the greatest and most irresponsible
debt creators of all time. In the past few decades, in fact, Romney has
piled more debt onto more unsuspecting companies, written more gigantic
checks that other people have to cover, than perhaps all but a handful
of people on planet Earth.
By making debt the centerpiece of his campaign, Romney was making a
calculated bluff of historic dimensions – placing a massive all-in bet
on the rank incompetence of the American press corps. The result has
been a brilliant comedy: A man makes a $250 million fortune loading up
companies with debt and then extracting million-dollar fees from those
same companies, in exchange for the generous service of telling them who
needs to be fired in order to finance the debt payments he saddled them
with in the first place. That same man then runs for president riding
an image of children roasting on flames of debt, choosing as his running
mate perhaps the only politician in America more pompous and
self-righteous on the subject of the evils of borrowed money than the
candidate himself. If Romney pulls off this whopper, you'll have to tip
your hat to him: No one in history has ever successfully run for
president riding this big of a lie. It's almost enough to make you think
he really is qualified for the White House.
The unlikeliness of Romney's gambit isn't simply a reflection of his
own artlessly unapologetic mindset – it stands as an emblem for the
resiliency of the entire sociopathic Wall Street set he represents. Four
years ago, the Mitt Romneys of the world nearly destroyed the global
economy with their greed, shortsightedness and – most notably – wildly
irresponsible use of debt in pursuit of personal profit. The sight was
so disgusting that people everywhere were ready to drop an H-bomb on
Lower Manhattan and bayonet the survivors. But today that same insane
greed ethos, that same belief in the lunatic pursuit of instant borrowed
millions – it's dusted itself off, it's had a shave and a shoeshine,
and it's back out there running for president.
Mitt Romney, it turns out, is the perfect frontman for Wall Street's
greed revolution. He's not a two-bit, shifty-eyed huckster like Lloyd
Blankfein. He's not a sighing, eye-rolling, arrogant jerkwad like Jamie
Dimon. But Mitt believes the same things those guys believe: He's been
right with them on the front lines of the financialization revolution, a
decades-long campaign in which the old, simple,
let's-make-stuff-and-sell-it manufacturing economy was replaced with a
new, highly complex, let's-take-stuff-and-trash-it financial economy.
Instead of cars and airplanes, we built swaps, CDOs and other toxic
financial products. Instead of building new companies from the ground
up, we took out massive bank loans and used them to acquire existing
firms, liquidating every asset in sight and leaving the target companies
holding the note. The new borrow-and-conquer economy was morally
sanctified by an almost religious faith in the grossly euphemistic
concept of "creative destruction," and amounted to a total abdication of
collective responsibility by America's rich, whose new thing was making
assloads of money in ever-shorter campaigns of economic conquest,
sending the proceeds offshore, and shrugging as the great towns and
factories their parents and grandparents built were shuttered and
boarded up, crushed by a true prairie fire of debt.
Mitt Romney – a man whose own father built cars and nurtured
communities, and was one of the old-school industrial anachronisms
pushed aside by the new generation's wealth grab – has emerged now to
sell this make-nothing, take-everything, screw-everyone ethos to the
world. He's Gordon Gekko, but a new and improved version, with better PR
– and a bigger goal. A takeover artist all his life, Romney is now
trying to take over America itself. And if his own history is any guide,
we'll all end up paying for the acquisition.
Willard
"Mitt" Romney's background in many ways suggests a man who was born to
be president – disgustingly rich from birth, raised in prep schools, no
early exposure to minorities outside of maids, a powerful daddy to clean
up his missteps, and timely exemptions from military service. In
Romney's bio there are some eerie early-life similarities to other
recent presidential figures. (Is America really ready for another
Republican president who was a prep-school cheerleader?) And like other
great presidential double-talkers such as Bill Clinton and George W.
Bush, Romney has shown particular aptitude in the area of telling
multiple factual versions of his own life story.
"I longed in many respects to actually be in Vietnam and be
representing our country there," he claimed years after the war. To a
different audience, he said, "I was not planning on signing up for the
military. It was not my desire to go off and serve in Vietnam."
Like John F. Kennedy and George W. Bush, men whose way into power was
smoothed by celebrity fathers but who rebelled against their parental
legacy as mature politicians, Mitt Romney's career has been both a
tribute to and a repudiation of his famous father. George Romney in the
1950s became CEO of American Motors Corp., made a modest fortune betting
on energy efficiency in an age of gas guzzlers and ended up serving as
governor of the state of Michigan only two generations removed from the
Romney clan's tradition of polygamy. For Mitt, who grew up worshipping
his tall, craggily handsome, politically moderate father, life was less
rocky: Cranbrook prep school in suburban Detroit, followed by Stanford
in the Sixties, a missionary term in which he spent two and a half years
trying (as he said) to persuade the French to "give up your wine," and
Harvard Business School in the Seventies. Then, faced with making a
career choice, Mitt chose an odd one: Already married and a father of
two, he left Harvard and eschewed both politics and the law to enter the
at-the-time unsexy world of financial consulting.
"When you get out of a place like Harvard, you can do anything – at
least in the old days you could," says a prominent corporate lawyer on
Wall Street who is familiar with Romney's career. "But he comes out, he
not only has a Harvard Business School degree, he's got a national
pedigree with his name. He could have done anything – but what does he
do? He says, 'I'm going to spend my life loading up distressed companies
with debt.' "
Romney started off at the Boston Consulting Group, where he showed an
aptitude for crunching numbers and glad-handing clients. Then, in 1977,
he joined a young entrepreneur named Bill Bain at a firm called Bain
& Company, where he worked for six years before being handed the
reins of a new firm-within-a-firm called Bain Capital.
In Romney's version of the tale, Bain Capital – which evolved into
what is today known as a private equity firm – specialized in turning
around moribund companies (Romney even wrote a book called
Turnaround that complements his other nauseatingly self-complimentary book,
No Apology)
and helped create the Staples office-supply chain. On the campaign
trail, Romney relentlessly trades on his own self-perpetuated reputation
as a kind of altruistic rescuer of failing enterprises, never missing
an opportunity to use the word "help" or "helped" in his description of
what he and Bain did for companies. He might, for instance, describe
himself as having been "deeply involved in helping other businesses" or
say he "helped create tens of thousands of jobs."
The reality is that toward the middle of his career at Bain, Romney
made a fateful strategic decision: He moved away from creating companies
like Staples through venture capital schemes, and toward a business
model that involved borrowing huge sums of money to take over existing
firms, then extracting value from them by force. He decided, as he later
put it, that "there's a lot greater risk in a startup than there is in
acquiring an existing company." In the Eighties, when Romney made this
move, this form of financial piracy became known as a leveraged buyout,
and it achieved iconic status thanks to Gordon Gekko in
Wall Street.
Gekko's business strategy was essentially identical to the Romney–Bain
model, only Gekko called himself a "liberator" of companies instead of a
"helper."
Here's how Romney would go about "liberating" a company: A private
equity firm like Bain typically seeks out floundering businesses with
good cash flows. It then puts down a relatively small amount of its own
money and runs to a big bank like Goldman Sachs or Citigroup for the
rest of the financing. (Most leveraged buyouts are financed with 60 to
90 percent borrowed cash.) The takeover firm then uses that borrowed
money to buy a controlling stake in the target company, either with or
without its consent. When an LBO is done without the consent of the
target, it's called a hostile takeover; such thrilling acts of corporate
piracy were made legend in the Eighties, most notably the 1988 attack
by notorious corporate raiders Kohlberg Kravis Roberts against RJR
Nabisco, a deal memorialized in the book
Barbarians at the Gate.
Romney and Bain avoided the hostile approach, preferring to secure
the cooperation of their takeover targets by buying off a company's
management with lucrative bonuses. Once management is on board, the rest
is just math. So if the target company is worth $500 million, Bain
might put down $20 million of its own cash, then borrow $350 million
from an investment bank to take over a controlling stake.
But here's the catch. When Bain borrows all of that money from the
bank, it's the target company that ends up on the hook for all of the
debt.
Now your troubled firm – let's say you make tricycles in Alabama –
has been taken over by a bunch of slick Wall Street dudes who kicked in
as little as five percent as a down payment. So in addition to whatever
problems you had before, Tricycle Inc. now owes Goldman or Citigroup
$350 million. With all that new debt service to pay, the company's
bottom line is suddenly untenable: You almost have to start firing
people immediately just to get your costs down to a manageable level.
"That interest," says Lynn Turner, former chief accountant of the
Securities and Exchange Commission, "just sucks the profit out of the
company."
Fortunately, the geniuses at Bain who now run the place are there to
help tell you whom to fire. And for the service it performs cutting your
company's costs to help you pay off the massive debt that it, Bain,
saddled your company with in the first place, Bain naturally charges a
management fee, typically millions of dollars a year. So Tricycle Inc.
now has two gigantic new burdens it never had before Bain Capital
stepped into the picture: tens of millions in annual debt service, and
millions more in "management fees." Since the initial acquisition of
Tricycle Inc. was probably greased by promising the company's upper
management lucrative bonuses, all that pain inevitably comes out of just
one place: the benefits and payroll of the hourly workforce.
Once all that debt is added, one of two things can happen. The
company can fire workers and slash benefits to pay off all its new
obligations to Goldman Sachs and Bain, leaving it ripe to be resold by
Bain at a huge profit. Or it can go bankrupt – this happens after about
seven percent of all private equity buyouts – leaving behind one or more
shuttered factory towns. Either way, Bain wins. By power-sucking cash
value from even the most rapidly dying firms, private equity raiders
like Bain almost always get their cash out before a target goes belly
up.
This business model wasn't really "helping," of course – and it
wasn't new. Fans of mob movies will recognize what's known as the
"bust-out," in which a gangster takes over a restaurant or sporting
goods store and then monetizes his investment by running up giant debts
on the company's credit line. (Think Paulie buying all those cases of
Cutty Sark in
Goodfellas.) When the note comes due, the mobster
simply torches the restaurant and collects the insurance money. Reduced
to their most basic level, the leveraged buyouts engineered by Romney
followed exactly the same business model. "It's the bust-out," one Wall
Street trader says with a laugh. "That's all it is."
Private
equity firms aren't necessarily evil by definition. There are many
stories of successful turnarounds fueled by private equity, often
involving multiple floundering businesses that are rolled into a single
entity, eliminating duplicative overhead. Experian, the giant
credit-rating tyrant, was acquired by Bain in the Nineties and went on
to become an industry leader.
But there's a key difference between private equity firms and the
businesses that were America's original industrial cornerstones, like
the elder Romney's AMC. Everyone had a stake in the success of those old
businesses, which spread prosperity by putting people to work. But even
private equity's most enthusiastic adherents have difficulty explaining
its benefit to society. Marc Wolpow, a former Bain colleague of
Romney's, told reporters during Mitt's first Senate run that Romney
erred in trying to sell his business as good for everyone. "I believed
he was making a mistake by framing himself as a job creator," said
Wolpow. "That was not his or Bain's or the industry's primary objective.
The objective of the LBO business is maximizing returns for investors."
When it comes to private equity, American workers – not to mention
their families and communities – simply don't enter into the equation.
Take a typical Bain transaction involving an Indiana-based company
called American Pad and Paper. Bain bought Ampad in 1992 for just $5
million, financing the rest of the deal with borrowed cash. Within three
years, Ampad was paying $60 million in annual debt payments, plus an
additional $7 million in management fees. A year later, Bain led Ampad
to go public, cashed out about $50 million in stock for itself and its
investors, charged the firm $2 million for arranging the IPO and
pocketed another $5 million in "management" fees. Ampad wound up going
bankrupt, and hundreds of workers lost their jobs, but Bain and Romney
weren't crying: They'd made more than $100 million on a $5 million
investment.
To recap: Romney, who has compared the devilish federal debt to a
"nightmare" home mortgage that is "adjustable, no-money down and
assigned to our children," took over Ampad with essentially no money
down, saddled the firm with a nightmare debt and assigned the crushing
interest payments not to Bain but to the children of Ampad's workers,
who would be left holding the note long after Romney fled the scene. The
mortgage analogy is so obvious, in fact, that even Romney himself has
made it. He once described Bain's debt-fueled strategy as "using the
equivalent of a mortgage to leverage up our investment."
Romney has always kept his distance from the real-life consequences
of his profiteering. At one point during Bain's looting of Ampad, a
worker named Randy Johnson sent a handwritten letter to Romney, asking
him to intervene to save an Ampad factory in Marion, Indiana. In a
sterling demonstration of manliness and willingness to face a difficult
conversation, Romney, who had just lost his race for the Senate in
Massachusetts, wrote Johnson that he was "sorry," but his lawyers had
advised him not to get involved. (So much for the candidate who insists
that his way is always to "fight to save every job.")
This is typical Romney, who consistently adopts a public posture of
having been above the fray, with no blood on his hands from any of the
deals he personally engineered. "I never actually ran one of our
investments," he says in
Turnaround. "That was left to management."
In reality, though, Romney was unquestionably the decider at Bain. "I
insisted on having almost dictatorial powers," he bragged years after
the Ampad deal. Over the years, colleagues would anonymously whisper
stories about Mitt the Boss to the press, describing him as cunning,
manipulative and a little bit nuts, with "an ability to identify
people's insecurities and exploit them for his own benefit." One former
Bain employee said that Romney would screw around with bonuses in small
amounts, just to mess with people: He would give $3 million to one, $3.1
million to another and $2.9 million to a third, just to keep those
below him on edge.
The private equity business in the early Nineties was dominated by a
handful of takeover firms, from the spooky and politically connected
Carlyle Group (a favorite subject of conspiracy-theory lit, with its
connections to right-wingers like Donald Rumsfeld and George H.W. Bush)
to the equally spooky Democrat-leaning assholes at the Blackstone Group.
But even among such a colorful cast of characters, Bain had a
reputation on Wall Street for secrecy and extreme weirdness – "the KGB
of consulting." Its employees, known for their Mormonish uniform of
white shirts and red power ties, were dubbed "Bainies" by other Wall
Streeters, a rip on the fanatical "Moonies." The firm earned the name
thanks to its idiotically adolescent
Spy Kids culture, in which
these glorified slumlords used code names, didn't carry business cards
and even sang "company songs" to boost morale.
The seemingly religious flavor of Bain's culture smacks of the
generally cultish ethos on Wall Street, in which all sorts of ethically
questionable behaviors are justified as being necessary in service of
the church of making money. Romney belongs to a true-believer subset
within that cult, with a revolutionary's faith in the wisdom of the pure
free market, in which destroying companies and sucking the value out of
them for personal gain is part of the greater good, and governments
should "stand aside and allow the creative destruction inherent in the
free economy."
That cultlike zeal helps explains why Romney takes such a curiously
unapologetic approach to his own flip-flopping. His infamous changes of
stance are not little wispy ideological alterations of a few degrees
here or there – they are perfect and absolute mathematical reversals, as
in "I believe that abortion should be safe and legal in this country"
and "I am firmly pro-life." Yet unlike other politicians, who at least
recognize that saying completely contradictory things presents a
political problem, Romney seems genuinely puzzled by the public's
insistence that he be consistent. "I'm not going to apologize for having
changed my mind," he likes to say. It's an attitude that recalls the
standard defense offered by Wall Street in the wake of some of its most
recent and notorious crimes: Goldman Sachs excused its lying to clients,
for example, by insisting that its customers are "sophisticated
investors" who should expect to be lied to. "Last time I checked,"
former Morgan Stanley CEO John Mack sneered after the same scandal, "we
were in business to be profitable."
Within the cult of Wall Street that forged Mitt Romney, making money
justifies any behavior, no matter how venal. The look on Romney's face
when he refuses to apologize says it all:
Hey, I'm trying to win an election. We're all grown-ups here.
After the Ampad deal, Romney expressed contempt for critics who lived
in "fantasy land." "This is the real world," he said, "and in the real
world there is nothing wrong with companies trying to compete, trying to
stay alive, trying to make money."
In the old days, making money required sharing the wealth: with
assembly-line workers, with middle management, with schools and
communities, with investors. Even the Gilded Age robber barons, despite
their unapologetic efforts to keep workers from getting any rights at
all, built America in spite of themselves, erecting railroads and oil
wells and telegraph wires. And from the time the monopolists were reined
in with antitrust laws through the days when men like Mitt Romney's dad
exited center stage in our economy, the American social contract was
pretty consistent: The rich got to stay rich, often filthy rich, but
they paid taxes and a living wage and everyone else rose at least a
little bit along with them.
But under Romney's business model, leveraging other people's debt
means you can carve out big profits for yourself and leave everyone else
holding the bag. Despite what Romney claims, the rate of return he
provided for Bain's investors over the years wasn't all that great.
Romney biographer and
Wall Street Journal reporter Brett
Arends, who analyzed Bain's performance between 1984 and 1998, concludes
that the firm's returns were likely less than 30 percent per year,
which happened to track more or less with the stock market's average
during that time. "That's how much money you could have made by issuing
company bonds and then spending the money picking stocks out of the
paper at random," Arends observes. So for all the destruction Romney
wreaked on Middle America in the name of "trying to make money,"
investors could have just plunked their money into traditional stocks
and gotten pretty much the same returns.
The only ones who profited in a big way from all the job-killing debt
that Romney leveraged were Mitt and his buddies at Bain, along with
Wall Street firms like Goldman and Citigroup. Barry Ritholtz, author of
Bailout Nation,
says the criticisms of Bain about layoffs and meanness miss a more
important point, which is that the firm's profit-producing record is
absurdly mediocre, especially when set against all the trouble and pain
its business model causes. "Bain's fundamental flaw, at least according
to the math," Ritholtz writes, "is that they took lots of risk, use
immense leverage and charged enormous fees, for performance that was
more or less the same as [stock] indexing."
'I'm
not a Romney guy, because I'm not a Bain guy," says Lenny Patnode, in
an Irish pub in the factory town of Pittsfield, Massachusetts. "But I'm
not an Obama guy, either. Just so you know."
I feel bad even asking Patnode about Romney. Big and burly, with
white hair and the thick forearms of a man who's stocked a shelf or two
in his lifetime, he seems to belong to an era before things like
leveraged debt even existed. For 38 years, Patnode worked for a company
called KB Toys in Pittsfield. He was the longest-serving employee in the
company's history, opening some of the firm's first mall stores, making
some of its canniest product buys ("Tamagotchi pets," he says, beaming,
"and Tech-Decks, too"), traveling all over the world to help build an
empire that at its peak included 1,300 stores. "There were times when I
worked seven days a week, 16 hours a day," he says. "I opened three
stores in two months once."
Then in 2000, right before Romney gave up his ownership stake in Bain
Capital, the firm targeted KB Toys. The debacle that followed serves as
a prime example of the conflict between the old model of American
business, built from the ground up with sweat and industry know-how, and
the new globalist model, the Romney model, which uses leverage as a
weapon of high-speed conquest.
In a typical private-equity fragging, Bain put up a mere $18 million
to acquire KB Toys and got big banks to finance the remaining $302
million it needed. Less than a year and a half after the purchase, Bain
decided to give itself a gift known as a "dividend recapitalization."
The firm induced KB Toys to redeem $121 million in stock and take out
more than $66 million in bank loans – $83 million of which went directly
into the pockets of Bain's owners and investors, including Romney. "The
dividend recap is like borrowing someone else's credit card to take out
a cash advance, and then leaving them to pay it off," says Heather
Slavkin Corzo, who monitors private equity takeovers as the senior legal
policy adviser for the AFL-CIO.
Bain ended up earning a return of at least 370 percent on the deal,
while KB Toys fell into bankruptcy, saddled with millions in debt. KB's
former parent company, Big Lots, alleged in bankruptcy court that Bain's
"unjustified" return on the dividend recap was actually "900 percent in
a mere 16 months." Patnode, by contrast, was fired in December 2008,
after almost four decades on the job. Like other employees, he didn't
get a single day's severance.
I ask Slavkin Corzo what Bain's justification was for the giant
dividend recapitalization in the KB Toys acquisition. The question
throws her, as though she's surprised anyone would ask for a reason a
company like Bain would loot a firm like KB Toys. "It wasn't like, 'Yay,
we did a good job, we get a dividend,'" she says with a laugh. "It was
like, 'We can do this, so we will.' "
At the time of the KB Toys deal, Romney was a Bain investor and
owner, making him a mere beneficiary of the raping and pillaging, rather
than its direct organizer. Moreover, KB's demise was hastened by a host
of genuine market forces, including competition from video games and
cellphones. But there's absolutely no way to look at what Bain did at KB
and see anything but a cash grab – one that followed the business model
laid out by Romney. Rather than cutting costs and tightening belts,
Bain added $300 million in debt to the firm's bottom line while taking
out more than $120 million in cash – an outright looting that creditors
later described in a lawsuit as "breaking open the piggy bank." What's
more, Bain smoothed the deal in typical fashion by giving huge bonuses
to the company's top managers as the firm headed toward bankruptcy. CEO
Michael Glazer got an incredible $18.4 million, while CFO Robert Feldman
received $4.8 million and senior VP Thomas Alfonsi took home $3.3
million.
And what did Bain bring to the table in return for its massive,
outsize payout? KB Toys had built a small empire by targeting
middle-class buyers with value-priced products. It succeeded mainly
because the firm's leaders had a great instinct for what they were
making and selling. These were people who had been in the specialty toy
business since 1922; collectively, they had millions of man-hours of
knowledge about how the industry works and how toy customers behave.
KB's president in the Eighties, the late Saul Rubenstein, used to carry
around a giant computer printout of the company's inventory, and would
fall asleep reading it on the weekends, the pages clasped to his chest.
"He knew the name and number of all those toys," his widow, Shirley,
says proudly. "He loved toys."
Bain's experience in the toy industry, by contrast, was precisely
bupkus. They didn't know a damn thing about the business they had taken
over – and they never cared to learn. The firm's entire contribution was
$18 million in cash and a huge mound of borrowed money that gave it the
power to pull the levers. "The people who came in after – they were
never toy people," says Shirley Rubenstein. To make matters worse,
former employees say, Bain deluged them with requests for paperwork and
reports, forcing them to worry more about the whims of their new bosses
than the demands of their customers. "We took our eye off the ball,"
Patnode says. "And if you take your eye off the ball, you strike out."
In the end, Bain never bothered to come up with a plan for how KB
Toys could meet the 21st-century challenges of video games and cellphone
gadgets that were the company's ostensible downfall. And that's where
Romney's self-touted reputation as a turnaround specialist is a myth. In
the Bain model, the actual turnaround isn't necessary. It's just a
cover story. It's nice for the private equity firm if it happens,
because it makes the acquired company more attractive for resale or an
IPO. But it's mostly irrelevant to the success of the takeover model,
where huge cash returns are extracted whether the captured firm thrives
or not.
"The thing about it is, nobody gets hurt," says Patnode. "Except the people who worked here."
Romney
was a prime mover in the radical social and political transformation
that was cooked up by Wall Street beginning in the 1980s. In fact, you
can trace the whole history of the modern age of financialization just
by following the highly specific corner of the economic universe
inhabited by the leveraged buyout business, where Mitt Romney thrived.
If you look at the number of leveraged buyouts dating back two or three
decades, you see a clear pattern: Takeovers rose sharply with each of
Wall Street's great easy-money schemes, then plummeted just as sharply
after each of those scams crashed and burned, leaving the rest of us
with the bill.
In the Eighties, when Romney and Bain were cutting their teeth in the
LBO business, the primary magic trick involved the junk bonds pioneered
by convicted felon Mike Milken, which allowed firms like Bain to find
easy financing for takeovers by using wildly overpriced distressed
corporate bonds as collateral. Junk bonds gave the Gordon Gekkos of the
world sudden primacy over old-school industrial titans like the Fords
and the Rockefellers: For the first time, the ability to make deals
became more valuable than the ability to make stuff, and the ability to
instantly engineer billions in illusory financing trumped the
comparatively slow process of making and selling products for gradual
returns.
Romney was right in the middle of this radical change. In fact, according to
The Boston Globe
– whose in-depth reporting on Romney and Bain has spanned three decades
– one of Romney's first LBO deals, and one of his most profitable,
involved Mike Milken himself. Bain put down $10 million in cash, got
$300 million in financing from Milken and bought a pair of
department-store chains, Bealls Brothers and Palais Royal. In what
should by now be a familiar outcome, the two chains – which Bain merged
into a single outfit called Stage Stores – filed for bankruptcy
protection in 2000 under the weight of more than $444 million in debt.
As always, Bain took no responsibility for the company's demise. (If you
search the public record, you will not find a single instance of Mitt
Romney taking responsibility for a company's failure.) Instead, Bain
blamed Stage's collapse on "operating problems" that took place three
years after Bain cashed out, finishing with a $175 million return on its
initial investment of $10 million.
But here's the interesting twist: Romney made the Bealls-Palais deal
just as the federal government was launching charges of massive
manipulation and insider trading against Milken and his firm, Drexel
Burnham Lambert. After what must have been a lengthy and agonizing
period of moral soul-searching, however, Romney decided not to kill the
deal, despite its shady financing. "We did not say, 'Oh, my goodness,
Drexel has been accused of something, not been found guilty,' " Romney
told reporters years after the deal. "Should we basically stop the
transaction and blow the whole thing up?"
In an even more incredible disregard for basic morality, Romney
forged ahead with the deal even though Milken's case was being heard by a
federal district judge named Milton Pollack, whose wife, Moselle,
happened to be the chairwoman of none other than Palais Royal. In short,
one of Romney's first takeover deals was financed by dirty money – and
one of the corporate chiefs about to receive a big payout from Bain was
married to the judge hearing the case. Although the SEC took no formal
action, it issued a sharp criticism, complaining that Romney was
allowing Milken's money to have a possible influence over "the
administration of justice."
After Milken and his junk bond scheme crashed in the late Eighties,
Romney and other takeover artists moved on to Wall Street's next
get-rich-quick scheme: the tech-Internet stock bubble. By 1997 and 1998,
there were nearly $400 billion in leveraged buyouts a year, as easy
money once again gave these financial piracy firms the ammunition they
needed to raid companies like KB Toys. Firms like Bain even have a
colorful pirate name for the pools of takeover money they raise in
advance from pension funds, university endowments and other
institutional investors. "They call it dry powder," says Slavkin Corzo,
the union adviser.
After the Internet bubble burst and private equity started cashing in
on Wall Street's mortgage scam, LBO deals ballooned to almost $900
billion in 2006. Once again, storied companies with long histories and
deep regional ties were descended upon by Bain and other pirates,
saddled with hundreds of millions in debt, forced to pay huge management
fees and "dividend recapitalizations," and ridden into bankruptcy amid
waves of layoffs. Established firms like Del Monte, Hertz and Dollar
General were all taken over in a "prairie fire of debt" – one even more
destructive than the government borrowing that Romney is flogging on the
campaign trial. When Hertz was conquered in 2005 by a trio of private
equity firms, including the Carlyle Group, the interest payments on its
debt soared by a monstrous 80 percent, forcing the company to eliminate a
third of its 32,000 jobs.
In 2010, a year after the last round of Hertz layoffs, Carlyle teamed
up with Bain to take $500 million out of another takeover target: the
parent company of Dunkin' Donuts and Baskin-Robbins. Dunkin' had to take
out a $1.25 billion loan to pay a dividend to its new private equity
owners. So think of this the next time you go to Dunkin' Donuts for a
cup of coffee: A small cup of joe costs about $1.69 in most outlets,
which means that for years to come, Dunkin' Donuts will have to sell
about 2,011,834 small coffees every month – about $3.4 million – just to
meet the interest payments on the loan it took out to pay Bain and
Carlyle their little one-time dividend. And that doesn't include the
principal on the loan, or the additional millions in debt that Dunkin'
has to pay every year to get out from under the $2.4 billion in debt
it's now saddled with after having the privilege of being taken over –
with borrowed money – by the firm that Romney built.
If
you haven't heard much about how takeover deals like Dunkin' and KB
Toys work, that's because Mitt Romney and his private equity brethren
don't want you to. The new owners of American industry are the polar
opposites of the Milton Hersheys and Andrew Carnegies who built this
country, commercial titans who longed to leave visible legacies of their
accomplishments, erecting hospitals and schools and libraries,
sometimes leaving behind thriving towns that bore their names.
The men of the private equity generation want no such thing. "We try
to hide religiously," explained Steven Feinberg, the CEO of a takeover
firm called Cerberus Capital Management that recently drove one of its
targets into bankruptcy after saddling it with $2.3 billion in debt. "If
anyone at Cerberus has his picture in the paper and a picture of his
apartment, we will do more than fire that person," Feinberg told
shareholders in 2007. "We will kill him. The jail sentence will be worth
it."
Which brings us to another aspect of Romney's business career that
has largely been hidden from voters: His personal fortune would not have
been possible without the direct assistance of the U.S. government. The
taxpayer-funded subsidies that Romney has received go well beyond the
humdrum, backdoor, welfare-sucking that all supposedly self-made free
marketeers inevitably indulge in. Not that Romney hasn't done just fine
at milking the government when it suits his purposes, the most obvious
instance being the incredible $1.5 billion in aid he siphoned out of the
U.S. Treasury as head of the 2002 Winter Olympics in Salt Lake – a sum
greater than all federal spending for the previous seven U.S. Olympic
games combined. Romney, the supposed fiscal conservative, blew through
an average of $625,000 in taxpayer money per athlete – an astounding
increase of 5,582 percent over the $11,000 average at the 1984 games in
Los Angeles. In 1993, right as he was preparing to run for the Senate,
Romney also engineered a government deal worth at least $10 million for
Bain's consulting firm, when it was teetering on the edge of bankruptcy.
(See
"The Federal Bailout That Saved Romney")
But the way Romney most directly owes his success to the government
is through the structure of the tax code. The entire business of
leveraged buyouts wouldn't be possible without a provision in the
federal code that allows companies like Bain to deduct the interest on
the debt they use to acquire and loot their targets. This is the same
universally beloved tax deduction you can use to write off your mortgage
interest payments, so tampering with it is considered political suicide
– it's been called the "third rail of tax reform." So the Romney who
routinely rails against the national debt as some kind of child-killing
"mortgage" is the same man who spent decades exploiting a tax deduction
specifically designed for mortgage holders in order to bilk every dollar
he could out of U.S. businesses before burning them to the ground.
Because minus that tax break, Romney's debt-based takeovers would
have been unsustainably expensive. Before Lynn Turner became chief
accountant of the SEC, where he reviewed filings on takeover deals, he
crunched the numbers on leveraged buyouts as an accountant at a Big Four
auditing firm. "In the majority of these deals," Turner says, "the tax
deduction has a big enough impact on the bottom line that the takeover
wouldn't work without it."
Thanks to the tax deduction, in other words, the government actually
incentivizes the kind of leverage-based takeovers that Romney built his
fortune on. Romney the businessman built his career on two things that
Romney the candidate decries: massive debt and dumb federal giveaways.
"I don't know what Romney would be doing but for debt and its
tax-advantaged position in the tax code," says a prominent Wall Street
lawyer, "but he wouldn't be fabulously wealthy."
Adding to the hypocrisy, the money that Romney personally pocketed on
Bain's takeover deals was usually taxed not as income, but either as
capital gains or as "carried interest," both of which are capped at a
maximum rate of 15 percent. In addition, reporters have uncovered plenty
of evidence that Romney takes full advantage of offshore tax havens: He
has an interest in at least 12 Bain funds, worth a total of $30
million, that are based in the Cayman Islands; he has reportedly used a
squirrelly tax shelter known as a "blocker corporation" that cheats
taxpayers out of some $100 million a year; and his wife, Ann, had a
Swiss bank account worth $3 million. As a private equity pirate, Romney
pays less than half the tax rate of most American executives – less,
even, than teachers, firefighters, cops and nurses. Asked about the fact
that he paid a tax rate of only 13.9 percent on income of $21.7 million
in 2010, Romney responded testily that the massive windfall he enjoys
from exploiting the tax code is "entirely legal and fair."
Essentially, Romney got rich in a business that couldn't exist
without a perverse tax break, and he got to keep double his earnings
because of another loophole – a pair of bureaucratic accidents that have
not only teamed up to threaten us with a Mitt Romney presidency but
that make future Romneys far more likely. "Those two tax rules distort
the economics of private equity investments, making them much more
lucrative than they should be," says Rebecca Wilkins, senior counsel at
the Center for Tax Justice. "So we get more of that activity than the
market would support on its own."
Listen
to Mitt Romney speak, and see if you can notice what's missing. This is
a man who grew up in Michigan, went to college in California, walked
door to door through the streets of southern France as a missionary and
was a governor of Massachusetts, the home of perhaps the most instantly
recognizable, heavily accented English this side of Edinburgh. Yet not a
trace of any of these places is detectable in Romney's diction. None of
the people in any of those places bled in and left a mark on the man.
Romney is a man from nowhere. In his post-regional attitude, he
shares something with his campaign opponent, Barack Obama, whose
background is a similarly jumbled pastiche of regionally nonspecific
non-identity. But in the way he bounced around the world as a
half-orphaned child, Obama was more like an involuntary passenger in the
demographic revolution reshaping the planet than one of its leaders.
Romney, on the other hand, is a perfect representative of one side of
the ominous cultural divide that will define the next generation, not
just here in America but all over the world. Forget about the Southern
strategy, blue versus red, swing states and swing voters – all of those
political clichés are quaint relics of a less threatening era that is
now part of our past, or soon will be. The next conflict defining us all
is much more unnerving.
That conflict will be between people who live somewhere, and people
who live nowhere. It will be between people who consider themselves
citizens of actual countries, to which they have patriotic allegiance,
and people to whom nations are meaningless, who live in a stateless
global archipelago of privilege – a collection of private schools, tax
havens and gated residential communities with little or no connection to
the outside world.
Mitt Romney isn't blue or red. He's an archipelago man. That's a big
reason that voters have been slow to warm up to him. From LBJ to Bill
Clinton to George W. Bush to Sarah Palin, Americans like their
politicians to sound like they're from somewhere, to be human symbols of
our love affair with small towns, the girl next door, the little pink
houses of Mellencamp myth. Most of those mythical American towns grew up
around factories – think chocolate bars from Hershey, baseball bats
from Louisville, cereals from Battle Creek. Deep down, what scares
voters in both parties the most is the thought that these unique and
vital places are vanishing or eroding – overrun by immigrants or the
forces of globalism or both, with giant Walmarts descending like
spaceships to replace the corner grocer, the family barber and the local
hardware store, and 1,000 cable channels replacing the school dance and
the gossip at the local diner.
Obama ran on "change" in 2008, but Mitt Romney represents a far more
real and seismic shift in the American landscape. Romney is the frontman
and apostle of an economic revolution, in which transactions are
manufactured instead of products, wealth is generated without
accompanying prosperity, and Cayman Islands partnerships are lovingly
erected and nurtured while American communities fall apart. The entire
purpose of the business model that Romney helped pioneer is to move
money into the archipelago from the places outside it, using massive
amounts of taxpayer-subsidized debt to enrich a handful of billionaires.
It's a vision of society that's crazy, vicious and almost unbelievably
selfish, yet it's running for president, and it has a chance of winning.
Perhaps that change is coming whether we like it or not. Perhaps Mitt
Romney is the best man to manage the transition. But it seems a little
early to vote for that kind of wholesale surrender.
This story is from the September 13, 2012 issue of Rolling Stone.
Related
•
Taibbi Responds: On Mitt Romeny, Bain Capital and Private Equity•
Mitt Romney's Federal Bailout: The Documents•
Right-Wing Billionaires Behind Mitt Romney•
How the GOP Became the Party of the Rich
