May 22, 2012 · 2 Comments
By Marie Burns:
As you probably know, on Sunday’s “Meet the Press” Newark Mayor Cory Booker, ostensibly an Obama surrogate, created a political firestorm when he criticized the Obama campaign for attacking Mitt Romney’s business experience as head of Bain Capital. Booker waxed eloquently about the virtues of private equity in general and spoke well of Bain in particular. He likened the Obama campaign’s Bain ads to a right-wing billionaire’s contemplated – but never produced – campaign to exploit Obama’s relationship with the Rev. Jeremiah Wright. Booker’s remarks, which – after a “good conversation” with the Obama campaign – he is trying to walk back (see videos here and here) – naturally delighted the GOP: the Republican National Committee quickly produced an ironical “I Stand with Cory” petition.
The New York Times‘ David Brooks was the first to sign the petition. Brooks devotes his column today to touting the virtues of private equity companies, which he claims saved American business. In his lede, Brooks writes,
Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations. The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.
Now, isn’t that a rosy picture? It does kind of make the reader see Romney in a new light – an All-American Ayn Randy Capitalist Hero. Get another lamp.
We all favor efficiency. That’s why we buy washing machines and lawnmowers. They are conveniences that beat washboards and sheep. They make our lives easier. But that is not what private equity investments is about. The primary goal of Bain Capital and other private equity firms is to make money for themselves and for their investors. As the Wikipedia entry on Bain Capital notes, “At first, Bain Capital focused on venture capital opportunities. One of Bain’s earliest and most notable venture investments was in Staples, Inc., the office supply retailer.” The funding enabled Staples to expand from one store in 1986 to over 2000 stores in 2011.”
But soon Bain moved from venture capitalism into “vampire capitalism,” a/k/a the leveraged buyout, where the specialty is “creative destruction.” In the best of circumstances, leveraged buyouts make the companies in which they purchase an interest “leaner, quicker and more efficient,” as Brooks claims. But these positive results are at best byproducts of the business model; they are not its raison d’être. Many companies (Brooks’ “bare-knuckled corporate executives”) hire their own efficiency consultants who recommended improvements to client companies. And here, in the best of circumstances, not just management, not just the paid consultants, but also workers and the community would benefit from the improvements. Workers become more productive, so management – here’s a thought – raises their pay and benefits. They have more to spend at local businesses. They put their savings in the local bank. Sales tax revenues increase; the values of homes increases, so school and local tax revenues increase, too. Hooray: a new park, a new state-of-the-art school science lab. And/or the company cuts worker hours without cutting pay: a 35-hour work week instead of a 40-hour week. Three-week vacations instead of two.
None of these positive outcomes is likely to happen when a private equity firm takes an interest in an established company: Bain Capital, with headquarters in Boston, has no interest in improving the lot of some town in rural Indiana. Every penny it puts into workers is a penny that doesn’t go into Bain’s profits.
Brooks ignores this. Instead he cites a recent column by Kimberly Strassel of the Wall Street Journal. Strassel claims that Bain tried to save GST Steel, the subject of Obama negative campaign ads against Romney. Brooks, following Strassel, writes that the Obama ads are “wildly misleading.” Not according to PolitiFact, which is usually pretty hard on campaign ads. According to PolitiFact, in a statement accompanying the ad, the Obama campaign wrote, “After purchasing the company, Mitt Romney and his partners loaded it with debt, closed the Kansas City plant and walked away with a healthy profit, leaving hundreds of employees out of work with their pensions in jeopardy.” Then, in a statement responding to the Obama ads, Bain Capital said that it “undertook an ambitious plan in 1993 to turnaround GSI, a struggling manufacturer of specialty steel products that was slated for closure if no investor could be found. We invested more than $100 million and many thousands of hours into this turnaround, upgrading its facilities in an attempt to make the company competitive.” PolitiFact, after some investigation, took the Obama campaign’s side. PolitiFact said the ad was accurate but required clarification on a few claims. Absent the clarifying data, PolitiFact rated the ad “mostly true,” noting that they found evidence that Bain did load GST with debt, closed the Kansas City plant, walked away with a healthy profit, and left hundreds of employees out of work with their pensions in jeopardy. I’m not in love with PolitiFact, but they are surely more accurate and unbiased than a Wall Street Journal op-ed writer. Brooks should have cited PolitiFact’s findings, too.
Brooks does cite a valid academic study that doesn’t come from one of his right-wing think tank friends: “A giant study by economists from the University of Chicago, Harvard, the University of Maryland and the Census Bureau found that when private equity firms acquire a company, jobs are lost in old operations. Jobs are created in new, promising operations. The overall effect on employment is modest.” Brooks’ characterization of the study is accurate.
However, other academics have questioned the study’s methodology for counting jobs lost and created. Eileen Appelbaum of the Center for Economic Policy Research said she looked at the study very carefully. Her problem with the conclusion
is that [the study] is looking, not just at jobs created at the companies that are taken over or other jobs destroyed at the companies taken over relative to others, at branches or stores or factories that were closed and at … plants that were opened. If you look only at those, you find a much larger loss of job…. The way [the study's writer] gets that headline figure is he also includes acquisitions. So when private equity takes over some of these smaller companies, it grows them by acquiring other companies. Now, when they acquire those other companies, they acquire their employees. There’s no net job creation.
That is, the acquired companies did not create those jobs, which are counted in the study. They were already there. You don’t create any jobs if you buy a company with 400 employees and you keep them. Yet according to Appelbaum, the study Brooks cites counts those 400 employees as jobs the underlying deal created, thus making the jobs lost/jobs gained ratio look much less draconian than it is in reality.
How successful was Romney’s company at turning around “bloated, sluggish” companies? Bain is listed among the top dozen U.S. venture capitalist companies. That doesn’t mean Bain was a marvel. Marilyn Geewax of National Public Radio summarized a Wall Street Journal analysis of the 77 businesses Bain invested in during Romney’s tenure.
It found 22 percent either filed for bankruptcy or shut down within eight years of Bain’s investment. Even several companies that initially provided Bain with huge profits later ran into trouble. Of the 10 deals that produced more than 70 percent of Bain’s gains, four eventually filed for bankruptcy. But the companies that succeeded were hugely profitable. The Journal concluded that Bain turned $1.1 billion in investments into $2.5 billion in gains in the 77 deals.
The full Wall Street Journal report, which I have cited before, is worth reading. (The Journal’s news and editorial pages, at least until Rupert Murdoch took over the paper, have been separately run, and the reporting was considered solid; the editorial board has long been hard right-wing and not devoted to fact-based commentary.)
Brooks claims that Obama is “offering no comparably sized agenda to reform the public sector.” It is true that, unlike Romney and his fellow Republicans, President Obama does not plan to gut the federal government. In June 2010, he did order federal agencies to trim at least 5 percent from their budgets. And in November 2010 – in a move I thought was stupid in a recession – he announced a two-year pay and benefits freeze for most civilian federal workers. More recently, as Mark Landler and Annie Lowrey of the New York Times reported in January 2012,
President Obama on Friday announced an aggressive campaign to shrink the size of the federal government, a proposal less notable for its goal – the fight against bloat has been embraced by every modern-day president – than for the political challenge it poses to a hostile Congress. Mr. Obama called on lawmakers to grant him broad new powers to propose mergers of agencies, which Congress would then have to approve or reject in an up-or-down vote…. Experts on government efficiency applauded the initiative….
Let’s end with Brooks’ most stupid remark: “… banks would not be lending money to private equity-owned companies, decade after decade, if those companies weren’t generally prosperous and creditworthy.” Banks – and other investors like Newark’s pension funds — lend money to private equity firms because those firms make money for themselves and their investors. Yes, those companies are “generally prosperous and creditworthy.” It is the companies they eat up that go bankrupt. I don’t know if Brooks truly doesn’t understand that or if he is just trying one more trick to pull the wool over readers’ eyes.
The real rap on Bain Capital is this, as President Obama remarked yesterday in response to a question at a press conference following the NATO meetings:
When you’re president as opposed to the head of a private equity firm, your job is not simply to maximize profits. Your job is to figure out how everybody in the country has a fair shot…. But understand that their priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers.
As Glenn Greenwald wrote yesterday, “Romney’s record at Bain, like everything else about a presidential candidate, deserves real scrutiny, and the private equity and hedge fund conduct that made him rich has indeed played a substantial role in exploding levels of income inequality and the relentless assault on basic middle class security.” “What check is there to keep these numbers from just spiraling upward forever?” Michael Tomasky of the Daily Beast asked. “Probably nothing,” he concluded. Then he added,
But there used to be something that did. It was called civic responsibility, or civic virtue. Or plain decency. We once had a collective sense in this country that TV news anchors simply didn’t need to make $15 million a year. Interestingly enough, a former famous and very successful American CEO, back in 1960, refused a bonus of $100,000, saying that no executive needed to make more than $225,000 ($1.4 million today), his salary at the time. That was George Romney.
Unfortunately, George Romney is not running for present. His son is. David Brooks, who loves writing about morality, should have looked at the morality of Romney’s leveraged buyout model instead of standing with Cory Booker.
Marie Burns blogs at RealityChex.com