OK, I continue being a complete doofus in what concerns the economy. I see numbers and I fall asleep but I try to fight against this unhelpful tendency. So let’s try to figure this out together.
A reader sent me an article where Matt Taibbi describes the way Mitt Romney made his fortune as “indefensible.” Here is how Taibbi describes Bain’s activities:
Well, look, again, this is what-how companies like Bain made their money. And a great example was a company that I went and visited-well, the place where it used to exist-KB Toys, which used to be headquartered out in Pittsfield, Massachusetts. They took over the company with like $18 million down. They financed the other $302 million. So that’s borrowed money that subsequently became the debt of KB Toys. This is an important distinction for people to understand. When they borrowed that money to take over that company, they didn’t have to pay it back, KB had to pay it back. Once they took over the company, they induced it to do a $120 million, quote-unquote, “dividend recapitalization,” which essentially means that the company had to cash in a bunch of shares and pay Bain and its investors a huge sum of money. And in order to finance that, they had to take out over $60 million in bank loans. So, essentially, you take over the company, you force them to make enormous withdrawals against their credit card, essentially, and pay the new owners of the company. And that’s essentially what they did. They took over a floundering company that was sort of in between and faced with threatening changes in the industry, and they forced them to cash out entirely and pay all their money to the new owners.
I’m sorry for a longish quote but I think this needs to be read in full if we have a chance at understanding what happened. Note the repeated use of the word “force” that is not followed by any explanation about the nature of the forcing.
Here is the most confusing passage (which, at least, is blissfully short) that, again, introduces the idea of force into the description of the situation:
They are-they’re essentially vultures who hang out waiting for companies to get sick, then they forcibly take them over, and they extract fees, commissions and dividends, by force, essentially.
Again, a very short sentence that repeats “forcible” and “by force” like a mantra. I don’t get what this is supposed to mean. I always feel suspicious of such rhetorical devices because they make me think that the author believes that repeating something many times will make it true. What is a “forcible” takeover in this context? I don’t think Bain Capital stormed into a company’s headquarters with guns blazing and made the owners sign paperwork against their will. Surely, there would have been legal recourse available to the victims if that had happened? Did the owners get fake paperwork to sign without understanding what was being proposed to them?
I put the rest under the fold because not everybody wants to read such a long post on the economy.
According to Taibbi:
Romney has piled more debt onto more unsuspecting companies, written more gigantic checks that other people have to cover.
I don’t understand how come the companies who accepted Bain’s money were “unsuspecting.” Was there no paperwork signed when these deals were made? Was there no contract in place? This is a crucial bit of information that Taibbi avoids mentioning. If two companies entered into a binding agreement of their own free will, then I don’t see how we can talk of forcing unsuspecting folks to do anything. The owners of an ailing company could have chosen not to involve Bain at all? Or am I wrong? If I am, do tell me.
Taibbi proceeds to say the following:
You know, America used to be-especially the American economy was built upon this brick-and-mortar industrial economy, where we had factories, we built stuff, and we sold it here in America, and we exported it all over the world. That manufacturing economy was the foundation for our wealth and power for a couple of centuries. And then, in the ’80s, we started to transform ourselves from a manufacturing economy to a financial economy.
Again, I think this is ridiculous. In a capitalist system that has any hope of functioning, you cannot possibly prescribe to people that they need to build instead of finance. You want to build? Go build. But if you don’t, then feel free not to.
One of the things that bothers me a lot (and we all know why) is this old and tired idea of the grass that used to be greener in the good ole times:
And so, it’s not at all uncharacteristic to have these situations where people are pleading for their jobs or they’re saying, you know, “We’ll tighten our belts, if you just make this concession and keep us.” That’s irrelevant to the Mitt Romney-slash-Bain Capital-slash-Carlyle Groups of the world. They’re entirely about making profits. And if that means shipping jobs to China or eliminating jobs, that’s what they’re going to do. And that’s the new generation of corporate owners in this country.
Yes, the capitalists of the former generations were SO not about making profits. They were good, nice capitalists who built stuff and cared about workers. I mean, seriously? Are we back to Michael Moore’s belief in the ideal 1950s where every worker had a car and a happy housewife to boot?
Capitalism is, indeed, about making profits. And nothing but making profits. The root of the word is “capital” and nothing but capital. It is a grievously problematic and cruel system that has still not been challenged by any better system ever put into existence anywhere on Earth. (And if anybody starts telling me once again that France and Swede are not capitalist countries, I will die of boredom). Everything else the world has experienced has turned out much worse. We can sit here and sigh over some completely imaginary capitalists of the olden times who were so much better than the ones we have today but I don’t see this as a productive position.
I also want to share with you the following quote from Taibbi that made me lose all respect for him:
Again, in the old days, the real power in the American economy was-belonged to the industrialists, the guys who-men and women who actually made things, because they had-they were the primary sources of cash and revenue.
Oh, all those female captains of the industry of the pre-1980 era! Where did they all go all of a sudden? Maybe Romney “forcibly” overtook them and drove them into debt.
Taibbi concludes by saying:
Mitt Romney has-again, he’s banked his entire campaign rhetoric on the sort of prairie fire of debt theme. And yet, this is a guy who spent-who made his fortune creating debt. Somehow, this question has not been asked to him. How is that not hypocritical?
I find this position to be very disingenuous. According to this logic, everybody who is worried by the government budget deficit yet has a mortgage, a credit car, or a car loan is a hypocrite. If there is reason to believe that if Romney gets elected, he will engage in greater government spending than what he promises, then by all means let’s discuss that.
I’m not trying to defend Romney or suggest he will make a good president. I just want to see texts that address his activities in a way that will make sense. This article makes some pretty huge claims but, to me, all that it managed to prove is that Romney can function well within the capitalist system. Well, it isn’t like he ever claimed otherwise. I see that Taibbi wants his readers to feel outraged but I can’t fathom what the outrage is supposed to be about.
P.S. I don’t want a discussion that runs along the lines of “I hate Romney, ergo anything he did in life is indefensible by definition.” I don’t think this is a valuable position. I want to enlighten myself about this, so only specific responses that address this issue are welcome. I can’t see how a conversation about whether Romney is evil by nature or whether Romney walks on water is likely to enrich my understanding of anything.
Clarissa's Blog 
get over the “force”, that’s not the issue and is only confusing the subject.
Fact is they go in and take over a company somewhat distressed
they finance the deal, now they are the new owners, they can do what ever they want, no force needed! Now the company pays the new owners a large sum (bonus or whatever you want to call it). Company now fails bankrupt, loan in the dump but a huge sum of money made by the takeovers. Move on to the next company!
Its that simple!
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Wow, you are a fast reader! Good for you!
I was not the one who introduced the word force into the discussion, but let’s put it aside for a moment.
If what you describe is done with full consent of the company’s owners, then wherein lies the problem? If I buy your car with money I borrowed and choose to destroy my purchase, how is that wrong or indefensible? Should there be a law regulating what we do with all our purchases? Or what is the suggestion here?
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I am not an expert in this area… but I fail to see why people recently think that business is altruistic. Businesses are there to make money. I don’t see that as good or evil — just fact. I side with you on this one, Clarissa. People seem to have assigned a moral judgment to different ways of doing legitimate business. (I know I haven’t defined the word “legitimate”, but for now let’s assume it has a somewhat real definition).
I don’t think people are “evil” just because they made money. I don’t think other people are “good” just because they didn’t. I am not sure it is the responsibility/right/obligation of someone who makes money to give it to other people…most people who are outraged don’t seem inclined to give 50% of their money to other people (no, they ‘earned’ that money…).
If this is starting a new topic, that’s ok, but this post reminded me of my “outrage” over the recent court case forcing Samsung to pay Apple over $1 billion in damages for breach of contract. Am I being hypocritical to say people like Romney are just doing good business (since companies do enter agreements with him of their own free will) but that Apple was somehow doing “bad business” but using legal muscle and money to force competition out of business?
What is “good capitalism” anyway? I admit, I am confused.
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“I am not an expert in this area… but I fail to see why people recently think that business is altruistic. Businesses are there to make money. I don’t see that as good or evil — just fact. ”
– That’s exactly what I’m saying. This is what capitalism is like. If there are people who want to propose entirely new systems of existence, I will be ugely interested in hearing about them.
“If this is starting a new topic, that’s ok, but this post reminded me of my “outrage” over the recent court case forcing Samsung to pay Apple over $1 billion in damages for breach of contract. Am I being hypocritical to say people like Romney are just doing good business (since companies do enter agreements with him of their own free will) but that Apple was somehow doing “bad business” but using legal muscle and money to force competition out of business?”
– I haven’t heard about this case but I will research it now.
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Hm, it seems to me KB chose to sell to Bain, who offered 300 million but only ended up paying them 18 million by “leveraging the rest as debt on the company” (I’m not sure exactly what that means, some clarity from anyone would be helpful) “, so then when the company went belly up (thanks to Bain’s new poor management) the old owners never got their money. It seems like the transfer of ownership is just not as black and white as say a car as you used in an analogy above.
To me, it seems like this would be a good analogy:
You buy my car and pay me some money upfront, and then promise to pay me the rest as long as the car doesn’t break down, but then you crash the car and all of a sudden don’t owe me money anymore.
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The former owners of KB Toys got paid the full $320 million … with $18 million coming from Bain and other investor’s “equity”.. and the other $302 million came from bank loans and potentially bonds issued to other investors (banks, mutual/bond funds, pension funds).
It is the the lender of this 302 million which lost money…. i have no particular problem with that because they could of (and should have!) put covenants (which are basically rules or restrictions) that said the company couldn’t pay out dividends for a certain amount of time.
Hope that is helpful in understanding how the financing worked
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“The former owners of KB Toys got paid the full $320 million … with $18 million coming from Bain and other investor’s “equity”.. and the other $302 million came from bank loans and potentially bonds issued to other investors (banks, mutual/bond funds, pension funds).”
– Then I don’t see why anybody is supposed to be outraged about this whole thing. And I still don’t see where forcible actions and unsuspecting owners come from.
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What they are mainly outraged about (I THINK) is that if KB toys had not taken out so much debt then the company might still exist, and the jobs for that company would exist as well. That is debatable, but the concept is when you add $300 million in debt the company has a harder time paying that debt and stayingi n business. So the outrage is how jobs may be lost. Additionally, the outrage may be that Mitt shouldn’t get credit for “creating jobs” and being a great businessman who understands the economy, when in reality the laws are constructed in a way to favor investors over the workers.
I think that is the crux of Taibbi’s argument and i partially agree. He also brough up the point of how allowing the debt to be tax-deductible is another HUGE subsidy to the company/investors.
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I agree that KB are idiots. I’m just not sure why I should feel upset that Bain outplayed KB at the capitalist game.
I now wonder who you will vote for, Matt. 🙂 Seems like you don’t have a candidate who’d embody your ideas.
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Well sadly romney is a better of the two choices. Just to be clear because I may have confused this… KB former OWNERS (the ones who sold to Bain… did great! they got paid more than they should have). Bain did great. The lenders (banks, pension funds who bought bonds of the NEW private KB toys owned by Bain and other equity investors) lost out.. and that is fine.. that is the capitalist game!
The employees of KB (not the owners, but mid-managers down to the hourly workers) you could argue really got shafted… and that is where righteous indignation from Taibbi is fair. I don’t have a perfect solution, but we need to make some of the changes I indicated in my other comment that lets truly skilled capitalists make money.. but taht doesn’t reward capital (the wealthy) unfairly just by taking over the laws and system. This will never happen until we have campaign finance reform… another issue I differ with many conservatives on. Basically… I think I am pro-capitalist and entreprneeurship… but sadly neither party embraces taht… oh well… will you be my VP if I run someday Clarissa :)?
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“The employees of KB (not the owners, but mid-managers down to the hourly workers) you could argue really got shafted… and that is where righteous indignation from Taibbi is fair.”
– I absolutely agree that the employees were shafted. But it’s a big question whether they would have been all that much better off if the company had simply declared bankruptcy. I don’t really see a third option here. Bankruptcy, Bain or. . . what?
“This will never happen until we have campaign finance reform… another issue I differ with many conservatives on. Basically… I think I am pro-capitalist and entreprneeurship… but sadly neither party embraces taht”
– EXACTLY!! I agree with this profoundly.
“oh well… will you be my VP if I run someday Clarissa”
– Absolutely. 🙂
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This is a MASSIVELY complex issue Clarissa and one of the reasons I love your blog (and you 🙂 ) so much is that you take on complex issues like this with an open mind!
The former owners of KB toys did fine, and in actuality probably got paid more than there company was worth at the time (private equity firms usually pay a premium above current trading value). The lenders lost money, and frankly I don’t have a problem because they were dumb to allow Bain to take their money out.
The one point that Taibbi is partially right on is the “financialization” of our economy. And it is a major problem. I am massively pro-business/capitalist.. but not so much pro-financier… this is a subtle difference but hugely important.
The problem are not so much Mitt Romney or Lloyd Blankfein (although we do agree he’s a douche 🙂 )… the issue is that our laws don’t reward “constructive capitalism” and tangible asset building. There is nothing nefarious in what Mitt did, but if our laws were constructed differently, then the buyout of KB toys would have taken out much differently.
Here are a few rules we could change that would make “casino capitalism” less profitable: Allow for capital gains for only initial equity into a company (if you are a buying a company then if you sell those shares in the future then the tax rate should be normal tax rates)
Limit the tax deductibility of debt.. By allowing the interest on all $300 million in debt the govt. essentially was giving a tax subsidy to KB toys.
Most importantly, implement something closer to Glass-Steagal (not a 2,000 page lobbyist bill like Dodd-Frank.. but a short, clearly defined bill) which does not allow for the banks and financial institutions to be backed by the govt. this has massively reduced the cost of capital (basically lowering interest rates) and has allowed for speculation that goes on.
I am frustrated that I can’t more concisely describe my ideas because this is an area I know a ton on and wish I could add more value to you and your readers, but essentially what I am saying is being pro-business is different than being pro-finance, and if the laws were tweaked we could reward great businessmen while also making it more attractive to increase employment in this country and have some of the benefits “shared” broadly.
Last change is the way we allow for the tax deduction of equipment and property… teh govt. again subsidizes automation by making owning equipment cheaper then employing people.
In short.. just remember how while I am raging capitalist… I want an equitable system so when I run for office you can support a conservative like me 🙂
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“The lenders lost money, and frankly I don’t have a problem because they were dumb to allow Bain to take their money out.”
– That’s how I feel, too. Finally, we agree on something. Hmmm. . . 🙂 Oh, I forgot, we also agree that I’m amazing! 🙂 (Joke.)
“The problem are not so much Mitt Romney or Lloyd Blankfein (although we do agree he’s a douche )… the issue is that our laws don’t reward “constructive capitalism” and tangible asset building. There is nothing nefarious in what Mitt did, but if our laws were constructed differently, then the buyout of KB toys would have taken out much differently.
Here are a few rules we could change that would make “casino capitalism” less profitable: Allow for capital gains for only initial equity into a company (if you are a buying a company then if you sell those shares in the future then the tax rate should be normal tax rates)
Limit the tax deductibility of debt.. By allowing the interest on all $300 million in debt the govt. essentially was giving a tax subsidy to KB toys.
Most importantly, implement something closer to Glass-Steagal (not a 2,000 page lobbyist bill like Dodd-Frank.. but a short, clearly defined bill) which does not allow for the banks and financial institutions to be backed by the govt. this has massively reduced the cost of capital (basically lowering interest rates) and has allowed for speculation that goes on.”
– I agree with all of this. This position sounds eminently reasonable to me and I could fully support it. I also don’t celebrate people who make money by lending, borrowing and trading in junk bonds and subprime mortgages. I think the policies you suggest would be hugely beneficial to all of us and to society at large. Now, if Taibbi had written all this, I would have no problem with his article. Yet he just throws out scary words without backing them up with anything.
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” (And if anybody starts telling me once again that France and Swede are not capitalist countries, I will die of boredom).”
Sorry, no thoughtful points on your interesting post. Just noting that, once again, you make me laugh (“I will die of boredom,” in this case.) Thank you. 🙂
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It’s one of my favorite expressions, actually. 🙂
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Maybe I’m missing something here, but Obama has given us a multi trillion dollar deficit, and a lowered credit rating, and Taibbi thinks he’s helping the Dems by attacking Romney for making money? It seems to me that every time you mention money and Romney in the same sentence, it helps Romney.
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“It seems to me that every time you mention money and Romney in the same sentence, it helps Romney.”
– I have to agree.
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Obama gave us a deficit? really? seriously?
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Bush created the deficit and Obama added to it.
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Seems to me that legitimate financial activity is not the problem. I believe the problem is twofold: 1) The financial sector of the major Western countries has taken over too large a portion of the economy, while other sectors, such as manufacturing or construction, have declined precipitously. 2) Because the financial sector has grown so large and complex, it provides grand opportunities for unscrupulous sharpies who would exploit and steal.
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