Romney's Success at Bain Capital: The Business as Scam Model

Romney's Success at Bain Capital: The Business as Scam Model

Private equity companies like Bain Capital are not primarily about producing wealth. They profit largely by siphoning off wealth created elsewhere in the economy. There are many different ways in which this diversion of wealth is accomplished.

The simplest and most common trick is gaming the tax code. It is absolutely standard practice for private equity companies to immediately load up the companies they acquire with debt. This has two benefits for the PE company. First, it allows them to get most of their money back right away. They end up with a heavily leveraged company, where the PE company is still in control, but has little of its own money at risk.

The other benefit is that the interest on the debt, unlike dividends paid out to shareholders, is tax deductible. This means that even if the PE company does nothing to improve the operations of a company it acquires, it will increase its profitability by reducing its taxes.

Of course PE companies like Bain are likely to have more sophisticated tax avoidance strategies as well. As Governor Romney said in a recent campaign speech, big companies know the tax tricks, small companies often are stuck paying the taxes they owe. This means that there can be big profits by acquiring smaller companies and teaching them how to game the tax code.

It's not just the tax code that PE companies game. By loading the companies they acquire up with debt, PE firms like Bain make them much more vulnerable to bankruptcy. While the creditors who lent the acquired company money presumably understood the risk, there are often many inadvertent creditors such as suppliers, landlords, and even workers through their pension. (The debt is always held by the acquired company not by Bain, which carries no risk beyond its limited investment.) If a Bain-owned company goes under, these inadvertent creditors can take big losses. In the case of pensions, part of the loss will come back to the taxpayer through the Pension Benefit Guarantee Corporation.

There is often a sense of reciprocity between workers and employers where workers understand that if they work hard in their younger years and acquire firm-specific skills, their employer will keep them on the payroll in their older years when they may not be as productive. This can be a profitable long-term strategy. However, a PE company like Bain, that doesn't care about the long-term, can break the second half of this deal for sizable short-term profits.

In short, Bain Capital is not about producing wealth but rather about siphoning off wealth that was produced elsewhere in the economy. There is no doubt that one individual or one company can get enormously wealthy if they are able to do this successfully. However you cannot have an entire economy that is premised on the idea that it will siphon off wealth produced elsewhere. It is not clear that Mitt Romney understands that fact, but certainly the general public should when it goes to vote this fall.

http://www.huffingtonpost.com/dean-bake ... f=business

I'm Mitt-the-Twit, and I'm here to rape you... (And this is supposed to make me qualified to be president...) rofllol

...(and where ARE those tax-returns?)