Sunday, July 29, 2012

Vampire Capitalism

Americans have long revered the great capitalist throughout our history.  Men who built huge personal fortunes while also building huge businesses that employed hundreds of thousands people.  Men like Andrew Carnegie, Henry Ford, William Durant, the Rockefellers,  the Vanderbilts.  George Romney -- Mitt's father -- pictured here on the 1959 cover of Time Magazine -- deserves a mention amoung these men.  The elder Romney made his fortune turning around American Motors and saving hundreds of thousands of jobs in the process.

Don't get me wrong, these men had plenty of critics including contemporaries who called them robber barons and questioned their labor and environmental practices.  They fought against fair labor practices, and had many, many flaws.  But they also built the industrial base that created the largest middle class in the world, sent millions of Americans to college, won two world wars and created the largest economy in the world -- a title we continue to enjoy to this day.

Mitt Romney has certainly made a real fortune that will support his family for generations to come.  And there is no suggestion that he made even 1 penny illegally.

The difference between Mitt Romney and father, is that Mitt's fortune was made not by building companies but from just the opposite.  Tex Gov Rick Perry called it vulture capitalism, but I prefer vampire capitalism.  Romney made his fortune sucking the life blood out of companies to pay himself and his investors huge rewards while leaving the company for dead.

Anthony Gardner at Bloomberg took a look at Romney, Bain and the companies they loaded with debt, drained of equity and profits, some of which ended up in bankruptcy even as he and his investors made off with hundreds of millions in profits.

Gardner called Romney and Bain's practices "casino capitalism".  They bought companies with very little of their own money and a lot of borrowed money -- called leverage -- that became the responsibility of the acquired company to pay back.  Leveraged buyouts are not an uncommon business practice.  We in St Louis watched InBev buy Anheuser-Busch with $52B in debt that was immediately saddled on A-B to pay back and it was we in St Louis who felt the cuts at A-B necessary to make those debt payments.
Thanks to leverage, 10 of roughly 67 major deals by Bain Capital during Romney’s watch produced about 70 percent of the firm’s profits. Four of those 10 deals, as well as others, later wound up in bankruptcy. It’s worth examining some of them to understand Romney’s investment style at Bain Capital.

In 1986, in one of its earliest deals, Bain Capital acquired Accuride Corp., a manufacturer of aluminum truck wheels. The purchase was 97.5 percent financed by debt, a high level of leverage under any circumstances. It was especially burdensome for a company that was exposed to aluminum-price volatility and cyclical automotive production

Forty-to-one leverage is casino capitalism that hugely magnifies gains and losses. Bain Capital wisely chose to flip the company fast: After 18 months, it sold Accuride, converting its $2.6 million sliver of equity into a $61 million capital gain. That deal, which yielded a 1,123 percent annualized return, was critical to Bain Capital’s early success and led the firm to keep maximizing the use of leverage.
Gardner looks at other Bain acquisitions, none of which did the acquired company or it's employees and their families any good.

As Gardner points out, it's very clear that Mitt Romney made lots of money for him and his investors,
What’s less clear is how his skills are relevant to the job of overseeing the U.S. economy, strengthening competitiveness and looking out for the welfare of the general public, especially the middle class.
It's perfectly clear that Romney had no intention or interest in building a competitive global economy or protecting the interest of middle class America. Romney's goal is to make permanent the laws and institutional advantages that have allowed him to suck the life blood out of American businesses for personal fortune.

The Capitalist of the past -- for all their flaws -- were able to do both.

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