Monday, January 7, 2019

No, Mitt Romney's Bain Capital Was Not a Scam

Tucker Carlson takes out after Mitt Romney and Mitt's foolish op-ed in the Washington Post. And there  is plenty to criticize, as I did in my latest American Thinker piece.

But then he starts in on Romney's Bain Capital.
Bain Capital all but invented what is now a familiar business strategy: Take over an existing company for a short period of time, cut costs by firing employees, run up the debt, extract the wealth, and move on, sometimes leaving retirees without their earned pensions. Romney became fantastically rich doing this.

Meanwhile, a remarkable number of the companies are now bankrupt or extinct. This is the private equity model. Our ruling class sees nothing wrong with it. It’s how they run the country.
I'd say that was the Democratic version of Bain Capital. Here's my version.

There are, in the economy, many corporations that are past their sell-by date. They hobble along, racking up debt to keep going, but get deeper and deeper in debt. Maybe they expanded too much in the good times; maybe they cranked up employee benefits too much. Maybe the management sucks. Maybe the employee union has plundered the company to deliver unaffordable benefits. Think of Sears, once the best of the best, showing the world how to do retail and also catalog. But the world has passed Sears by, and now it is going into bankruptcy or a sale to its CEO.

There is nothing remarkable about this. People do it too. They get into debt, and then don't get the pay-raise they were banking on. So they take on more debt in the hope that things will turn around. Only, usually, they don't. And most people lack the intestinal fortitude to make tough decisions to stop the rot: sell the dream home; dump the luxury car.

Same with CEOs. The CEO that inherits a company from the guy that built it into a colossus is probably a man without the vision and the guts to make tough decisions. So he lets the corporation borrow to keep things going, in the hope that things will not come to a crisis on his watch. But if you let a company like Sears keep going down it will eventually cease to exist, all its assets mortgaged, and its employees turned out on the street.

The business model of an outfit like Bain Capital is to buy a troubled corporation for a song and take it private, paying off the public stockholders. Then the Bain guys develop a turn-around plan and present it to the bondholders and creditors: try this or lose everything. The plan will probably involve shedding a ton of employees, employee benefits, money-losing divisions, and haircuts for the creditors. And probably it involves additional debt and new equity investors to finance the turnaround.

The Bain turn-around plan may work, or it may not. If it fails, then the employees and creditors are probably no worse off than if the corporation just subsided into bankruptcy under the old, tired management.  If it succeeds, then most of the employees keep their jobs, but probably not the above-market benefits they used to enjoy. And Bain and its investors make a ton of money.

That is how capitalism works. If you accept a risk proposition, then you lose everything if the proposition fails, and make a ton of money if it succeeds.

In capitalist societies there is a class of people that says: trust us, and we will protect you no matter what. These people are called politicians and activists, and they are liars. Nobody can protect you, no matter what. Not a nation state. Not a corporation.

But capitalism offers options on the risk proposition. You can be a business owner, and accept a heavy risk proposition: maybe enormous profits, or, more likely, losses that put you out of business. Or you can go to work as an employee for a fixed wage. When you do that you are saying to your employer: profits and losses, that's your affair; I just want my paycheck. But it never ends there. If the employer makes a ton of money, the employees will start grumbling: hey, how come I don't get some of da loot? If the employer suffers losses, the employees will resist cuts to benefits: hey, you promised me health care benefits, and now you want to renege just when my wife needs life-saving drugs?

In the old days, people were serfs and peasants; they relied on their lords to protect them from the Mongols and the army of the lord next  door. The lord offered this protection -- until he didn't.

In these days, the people have options. You can go work for government, with life tenure and pensions, but a soul-destroying work environment. You can go work for a  corporation, and hope that it keeps on the up and up.  But hey, even Apple experiences reverses, as its stock has plunged 40 percent in a few months. Or you can work on the assumption that your value fluctuates in the market like everything else. So you keep your eyes open, and adjust your skills to match the economy. And hope that when you plan to retire the stock market is on the up and up and not in the middle of a generational crash like 1929 or 2008.

But the truth  is that the basic feature of humans is that we want our cake and to eat it too. So we are always ready to blame "them" when things go wrong.

So people run around blaming "finance capital" and "robber barons" for the inevitable reverses in life and work. Of course, it is true that the bushes are full of knaves and scoundrels. And some of those scoundrels run private equity outfits.

Meanwhile,  in the last 200 years, the per-capita income of the American people has gone up by 3,000 percent in real terms. There has never been anything like it, ever.

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