I think Romney defenders are going to focus on this point here:
"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."
Isn't this Capitalism at is finest? I feel like I hear this argument a lot from my co-worker.
That argument is a distraction. For the sake of the argument, concede that yes, Bain inducing companies to go deep into debt to pay them, is indeed the apex of capitalism. Woohoo for Bain for making a lot of money.
But how does that experience apply to running the US government - who will we steal from and who will we drive into debt, exactly? What part of Romney's Bain experience shows that he knows how to get rid of debt, create jobs or create stability - or that he has any interest in doing any of that without aa huge payday for himself?
Here's what I wonder. How many of these companies and private equity places were or are currently being held together only by the fact that interest rates have remained low low low for the past decade or more? What is going to happen what all these leveraged buy outs have to start paying normal interest rates? What kind of economic collapse are we looking at?
TTT - I don't know if I trust my economic knowledge to actually write a factual script! I love the idea though. We need to come up with a commercial that doesn't use fancy numbers.
I am not s supporter but as Taibbi has bias and, based on the DB article some months ago, it probably doesn't help with taking him as a great straight-reporter, as opposed to one with an agenda/bias/what have you.
Honestly, I'm open to another perspective on Romney's experience at Bain Capital.
But since Romney has declared it off limits, and no other reporter has been up for the task of doing some investigative work on their own, WTF is the public supposed to do? Ignore the only substantive piece yet written on Romney's experience over the last two presidential campaigns because he might have a bias?
Esf, I didn't say I would ignore this piece (but, really, even with limited knowledge, Most have seen Gere's role in PW is pretty much what Bain is and does so it does not shock me in the least). Is he like Fox? No, but I am not seeing him as some saving journalistic presence. ::shrugs::
I am not s supporter but as Taibbi has bias and, based on the DB article some months ago, it probably doesn't help with taking him as a great straight-reporter, as opposed to one with an agenda/bias/what have you.
Ah, Taibbi has bias....as in, "Taibbi speaks with a strong voice, and it's not mine, therefore it must be bias"?
It seems to me that Taibbi's bias is that he resents it when a crook isn't called a crook just because he wears a suit and tie. But facts can always be refuted, regardless of one's bias in presenting them.
Um, okay. Of course most of you are loving him...he is your side so no need to see his flaws. He isn't really equal opportunity, IMO. I am fine with the wall street anger, even if his points are usually op/Ed.. Continue on with the love fest of him in here.
This will be a post and run b/c I really have to go to bed, but 3 things that stick out about the article - ignoring all the distracting verbiage about accents and whatnot.
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.
How? How does the Bain liability transfer to the new company? What kind of contracts/balance sheet transfers/agreements are involved to make that happen? Not once does he explain that part. If I'm going to judge this reassignment of debt I want to know how it got there.
So, my understanding is that Bain (or whatever the private equity firm) uses the company as collateral for the debt. I think what often happens is that companies called Special Purpose Entities (SPEs) are created. The bank loan is made to the SPE, which is owned by Bain. The SPE in turn gives a portion of the bank loan money to the company. The company then assigns a portion of its assets (which could include a revenue stream, from say, bonds or assets, or even a product line) to the SPE in exchange for the loan money that Bain secured for it. The SPE uses those assets to pay back the bank and pay Bain for its "services" -- basically for managing the debt and equity that it generated for the company. The SPEs are bankruptcy proof. The company has turned over the asset to a new company (the SPE) and its off the company's books. So if the company goes bankrupt (or gets sued or if the IRS comes after it or any other risk), the bank (and Bain) still get paid as the asset isn't something that has to go through the bk courts and be distributed under normal bk distribution rules (which I believe require that employees get paid first before any other debt).
So the company isn't repaying the bank directly. It's repaying the SPE who in turn is repaying the bank and Bain.
I think I have this mostly right. I have only recently started to learn about SPEs so my grasp is a little tenuous but I think they are fascinating, and also incredibly scary.
I don't know the answer to your other two questions.
So, my understanding is that Bain (or whatever the private equity firm) uses the company as collateral for the debt. I think what often happens is that companies called Special Purpose Entities (SPEs) are created. The bank loan is made to the SPE, which is owned by Bain. The SPE in turn gives a portion of the bank loan money to the company. The company then assigns a portion of its assets (which could include a revenue stream, from say, bonds or assets, or even a product line) to the SPE in exchange for the loan money that Bain secured for it. The SPE uses those assets to pay back the bank and pay Bain for its "services" -- basically for managing the debt and equity that it generated for the company. The SPEs are bankruptcy proof. The company has turned over the asset to a new company (the SPE) and its off the company's books. So if the company goes bankrupt (or gets sued or if the IRS comes after it or any other risk), the bank (and Bain) still get paid as the asset isn't something that has to go through the bk courts and be distributed under normal bk distribution rules (which I believe require that employees get paid first before any other debt).
So the company isn't repaying the bank directly. It's repaying the SPE who in turn is repaying the bank and Bain.
I think I have this mostly right. I have only recently started to learn about SPEs so my grasp is a little tenuous but I think they are fascinating, and also incredibly scary.
I don't know the answer to your other two questions.
I appreciate the reply, but it doesn't make sense. The SPE doesn't give the company the bank loan money for an asset. It's the purchase price to acquire the controlling interest. Yes? No?
Yes. But the asset (the company or its revenues) is the collateral for the loan. The loan that Bain is taking out has to be backed by something. So they back it up with the company's asset.
The SPE then repays that loan with its assets - the little bit of equity put in by Bain (described in the article as 5% I think) and what Bain earns off its ownership of the company (in the form of stock dividends). It's assumed that that won't be enough to repay the bank, which is why the company winds up giving up its revenues to repay the debt (it is supposed to be a good deal for the company since, in theory, interest on debt is lower than the ROI on the equity received from the initial loan)
Let's assume the company does assign an asset to the SPE for the bank money, as you say, instead of it being an exchange for the controlling interest. That still leaves the debt in the SPE, which you've said is owned by Bain. So that still doesn't explain how the debt is left with the company and Bain can walk away.
After Bain "fixes" the company, it sells its shares back to the company or other investors at a higher price than it paid. The SPE is dissolved, leaving the company on the hook for the debt.
Thanks for the other links, I will take a look. I'm suddenly fascinated by this topic.
I only just got around to reading this article and am midway through it - when I was giving my Goodfellas comparison, I had no idea Taibbi used it in the article!
Sbp, I didn't dismiss the article, just that I was trying to see past my bias. Neeps has explained how there are issues with his "data" far better than I can and am just now sitting back down and will read over her backups and such.
I am serious about this video. If someone can get the facts and sources together for me and help me come up with a script (I see images have already been taken care of), I will totally make this video.
I have a professional recording studio at my disposal. I can do a voiceover, and add legal allowed music and sound effects etc. Im up for it, if you need!
This will be a post and run b/c I really have to go to bed, but 3 things that stick out about the article - ignoring all the distracting verbiage about accents and whatnot.
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.
How? How does the Bain liability transfer to the new company? What kind of contracts/balance sheet transfers/agreements are involved to make that happen? Not once does he explain that part. If I'm going to judge this reassignment of debt I want to know how it got there.
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.
So 93% of these buyouts do not go bankrupt? 93 out of 100 times a successful company will take the place of a troubled, maybe failing company?
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.
The market returned 30% a year? The article needs footnotes. I want to see the math that shows a 30% yearly average growth.
Just wanted to say I'm glad you responded. I don't really understand corp takeovers.
And with doing more digging on gst...I found this ..
This week the Obama campaign debuted its attack on Bain Capital, the private-equity firm Mitt Romney founded. Its two-minute ad purports to tell the story of GS Technologies, a Kansas City-based Bain investment that went bankrupt in 2001.
To hear the Obama campaign, this is a tale of greed: GST was a healthy, happy, quality steelmaker until Bain plundered its worth and stripped its 750 workers of their due. "It was like a vampire," laments one former employee in the ad. "They came in and sucked the life out of us."
Related Video
Columnist Kim Strassel on President Obama hitting up Blackstone private equity investors for money at the same time he trashes Mitt Romney's Bain Capital record and Blackstone donors. Photo: Getty Images
GST is a tragic tale, though in a different way. The real story of GST is that of a private-equity firm trying to spark some life into a uncompetitive, over-unionized industry. Bain's crime here—if that's what you call it—was giving a dying steel plant an unexpected eight-year lease on life.
When Bain bought the Kansas City mill in 1993, steel was a scene of carnage. Global players were pouring out cheap products, and America's high-cost steel plants couldn't compete. The industry had lost 200,000 jobs in preceding years. In 1992 alone, the six largest U.S. steel mills had lost a combined $3 billion. Armco, the company Bain would buy the plant from, would lose $641 million in 1993.
The Kansas City plant was itself dying. At its 1970 height it employed 4,500; by the late 1980s it was down to 1,000. A year before acquisition, Armco had laid off another 75. Its equipment was old; it faced fierce competition at home and abroad.
B.C. Huselton, a vice president of the business at the time, tells me that in 1990 the Armco CEO held a meeting. "He told us, 'Look, we either try to sell it, or we've got to shut it down.'" Armco had shut down another Kansas City facility, Union Wire Rope, only a few years before.
The Kansas City plant had two product lines—high-carbon rods and grinding media (used in mining)—that it felt could give it a competitive edge. But it needed investment, and Armco was tapped out. Bain nonetheless saw some potential and in 1993 joined other investors to acquire it for $80 million. Management renamed it GS Technologies (which would become part of a larger GS Industries) and poured an additional $100 million into modernization.
The strategy worked for a time. The market firmed up and GSI became a U.S. leader in steel rods. In 1994 it felt confident enough to distribute a dividend to investors. In both 1996 and 1997, GSI would realize $1 billion in revenue.
Enlarge Image
Getty Images Mitt Romney as chief executive of Bain Capital in 1993
And then came the tsunami. The late 1990s saw a new outpouring of cheap steel from elsewhere around the globe. The Asian financial crisis walloped the mining industry, cutting demand for GST products. The price of GST's electricity and natural gas skyrocketed. The union dug in, refusing to make concessions. By April 1997, it was on strike, shooting bottle rockets at guards. Labor costs spiked, and by 1999 GSI was reporting $53 million in net losses.
In 2001 it would become one of 31 steel companies that went bankrupt from 1993 to 2003. (Mr. Romney left Bain in 1999.) The steel crash was the economic drama du jour, with Congress railing about "dumping."
At the time, GST's union blamed the company's bankruptcy on the political class, for failing to hamstring imports. "We can't compete against the steel imports that are being sold under cost," said the president of GST's union in 2001. "Our pleas fell on deaf ears in the political arena." The Bush administration would ultimately slap on giant tariffs.
The bankruptcies were led by unionized companies that, like airlines and textiles and Detroit, had negotiated pay and benefits that helped drive their employers under. GST's pension benefits would get passed on to the federal Pension Benefit Guaranty Corp., which in 2002 received $7.5 billion in claims from the steel industry alone. The PBGC covered GST's basic pension payouts.
The Obama ad doesn't note that the broader company, GS Industries, employed 3,500 and that the Kansas City plant (with 750 workers) was the only one shuttered. Other plants were bought and operate today. Nor does it mention Bain's other steel investment in the early 1990s, in an Indiana start-up called Steel Dynamics. The firm touts innovative technology and a nonunion workforce. It today reports $6.3 billion in revenue—25 times what it claimed in its 1996 IPO—and employs 6,000.
A private-equity firm looking to quickly strip value from a company—to "suck" the life out of it—does not do so by investing $100 million in modernization and holding on for eight years, through bankruptcy. Bain has surely made its share of mistakes, and one may well have been trying to resuscitate a traditional steel firm in the grip of industry upheaval. The irony, says Mr. Huselton, is that this plant "wouldn't even be in today's news, if it hadn't been the opportunity that came with Bain. Those jobs would have been gone in 1993."
That's a more revealing story—of the pressures of a global market, the dangers of an inflexible workforce, and the opportunities that come with private equity and risk-taking. It's just not one Team Obama wants to tell.
In regards to the article, a few more inconsistencies stuck out and while I was looking into this:
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.
Because it seems to me that if a company isn't taken over in a hostile manner, that means it's for sale right? Turns out it does. Consolidated Toys announced KB Toys was for sale 6 months before Bain bought it. articles.latimes.com/2000/dec/09/business/fi-63167
If a company is for sale, how are the takeover target company's management being bought off with bonuses?
You can still have hostile takeovers even if a company is for sale. It's not like a selling shit at walmart. It's more like finding someone to adopt a dog. You shop around and look for an ideal fit. There are lots of situations where something like this might happen. A company's management might not want to be owned by a foreign parent, or they may not want to be swallowed up by a competitor, or they might want to find a buyer that reflects their general philosophy for charitable giving or responsible business practices.
The article is misleading at best. Like this: 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.
True, that was their return on their initial investment, but does he mention that Bain owned nearly 40% at the time of bankruptcy? So they certainly didn't just walk away.
Ampad did go bankrupt; however, they filed for Chapter 11 re-org and emerged 3 years later.
The article says Bain owned 34.9% of the stock at bankruptcy. They bought that stock with their $5 million dollar investment. That they had already made $100 million on. Even the article says that is correct:
The Obama and Priorities USA Action videos are correct in saying that Bain earned about $100 million on its initial investment in Ampad. The Wall Street Journal reported that Bain invested $5 million in Ampad and earned $102 million — from management and acquisition fees, as well as tens of millions from the initial public offering in 1996, as the Globe reported.
Why do you think they didn't just walk away? What loss do you think they felt? That they lost their $5 million initial investment in the stock purchase? Even though they made 20 times that because of that investment?
Can you explain why you think Taibbi's piece is misleading when the source you cite to claim it is misleading admits it is the truth?
The Kb toys...wasn't that after Romney left? The stores didn't close until 04, long after takeover (00) and after Olympics/governorship ?
According to Wiki, Romney either took a paid leave of absence or (in Romney's own words) continued to work part time from 1999-2002. But if you had read Taibbi's article, you'd see that he mentions several times that the KB purchase happened when Romney was leaving the company, that he was just a beneficiary of the purchase, but not responsible for the execution or later years.
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.
So 93% of these buyouts do not go bankrupt? 93 out of 100 times a successful company will take the place of a troubled, maybe failing company?
I still don't know enough about this, but I think the takeaway here is that workers and benefits are cut to pay Bain et al millions. So, sure, companies are saved but at what cost? Is there a more efficient way of saving the company that does not cost jobs? I don't really know. I'm not really sure how to respond to this, or what kind of information you are looking for in response? It seems he's leaving the data up for people to decide for themselves.
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.
The market returned 30% a year? The article needs footnotes. I want to see the math that shows a 30% yearly average growth.
Well, it's not footnotes, but he does say where he got the information. So I googled that person's name.
Here's what I'm assuming is the passage from Brett Arends that Taibbi relies on:
As Brett Arends, author of the biography, The Romney Files, explains: “From 1984 through the end of 1998, the stock market overall produced gains of nearly 20% a year. If you had leveraged each dollar with $2 in debt at corporate interest rates, your returns would have ballooned to nearly 30% a year. If you’d been able to borrow $3 at corporate interest rates, you’d be up towards 35% a year. 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.”
I don't know if that's true or not, but if it's false, it's not so much Taibbi's fault as it is the biographer (who covers the stock market for the WSJ, so probably fairly reliable)
I've really enjoyed discussing this article and hope people continue to participate. I've learned something while doing this.
And with doing more digging on gst...I found this ..
@wsj.com
I have read this article three times, and I still can't figure out what this has to do with Taibbi's piece. Even if this is meant to be as some sort of example of something good that Bain did, does that mean Bain didn't ever do anything wrong? Does it mean that Romney's business experience is really something great for the country?
The Kb toys...wasn't that after Romney left? The stores didn't close until 04, long after takeover (00) and after Olympics/governorship ?
According to Wiki, Romney either took a paid leave of absence or (in Romney's own words) continued to work part time from 1999-2002. But if you had read Taibbi's article, you'd see that he mentions several times that the KB purchase happened when Romney was leaving the company, that he was just a beneficiary of the purchase, but not responsible for the execution or later years.
Except that he says he helped in making him a mere benefactor of the raping and pillaging, wtf? Yeah, no issue with his reporting (I had to look as I was thinking I had conflated this with his blog article on the Bain/speech from the 31st. I didn't). And, he then goes n to say "this is where romneys self-Touted reputation as a turnaround specialist is a myth" so I'm wondering where you think Taibbi is leaving Romney out of equation? He says Bain had no plan for the 21st century need, etc. so, again, ??
So 93% of these buyouts do not go bankrupt? 93 out of 100 times a successful company will take the place of a troubled, maybe failing company?
Yeah I did a double take at that number too. These (Bain, et al) takeovers are of troubled companies, right? The whole time I read Taibbi's article I was thinking of General Motors. Obviously they didn't go through the exact same process but I noticed a lot of parallels. The government saddled GM with loans it had to repay and GM proceeded to screw over its current employees + fire I don't even know how many people. Then GM goes bankrupt anyway, fires more people, shutters factories, fucks its bondholders, sells out retirees, and ship jobs overseas. If they had been bailed out by Bain I don't even know if they'd be considered part of the 7% or 93% since they still went bankrupt. Obviously there's a difference bwtwn the govt "rescuing" a firm & Bain-types, not the least of which is that the govt may never make a profit on this investment (although GM's execs sure did). But does anyone seriously think GM is worse off post-bailout, or had any choice but to fire thousands of people in order to save the rest? Is GM all that much different than Bain's bailed out companies? Troubled firms downsizing is not surprising to me. I don't know the other firms Taibbi mentioned as well as GM so I appreciate the other details you posted. It's still unclear to me how these companies were completely screwed over by their investors.
I don't know enough about venture capitalists, corporate buyouts, or takeovers to make heads or tails of this situation. Isn't this sort of behavior just de rigueur in today's modern business world? I'm not saying that makes it right but it does make me temper my outrage accordingly. But the author writes it as if THIS is the cross that the voter should nail Romney on.
To me, the most interesting part of the article, the part that I think deserves more fleshing out, is the fact that government assistance and policies have been pivotal to Romney's success (e.g. The Olympic bailout, the tax structure/laws, etc.). Which undercuts the "I built that" mantra.
But an interesting read nonetheless. Thanks for posting.
I think the "you didn't build that" meme is a bit boring for a piece such as this. It would not be getting the play this one is on many blogs, etc so I think that is why it didn't get fleshed out as much and the focus became in demonization Romney. Taibbi has written a few pieces about Romney, complete with calling him repugnant. He likes to compare him to a mob hit man. I don't think pulling in how he made use of government services would have sufficed in his critique. The arguments he presents with half-explanations, or leaving out some interesting facts (he brings them up in a f/u about how pension investments for such orgs as unions make money for their constituents with this "blood money"). The more I read in followups to this, the more I am actually annoyed, but impressed by the piece and it's (obvious to me, anyway) purpose.
neeps, thanks for all the new info. I'm not abandoning the debate but when I saw it this morning, I didn't have coffee in me so I didn't have the strength to respond. Now, I've had too much wine. I will try to come back tomorrow or wednesday.