Why Bain Killed Good Companies and Good Jobs - I Break It Down

[jsmirman]

This isn't filled with stunning revelations, but I wanted to explain in simple terms that many companies killed by Bain were targeted because they were functional companies doing active business. The workers that Mitt Romney and Bain left behind had good jobs at functioning companies. The proof? A fundamental proposition of the Bain play demands that the company be "healthy enough to kill in the Bain way."

Here is the breakdown I put together tonight:

A simple truth about Bain's go to move - that everyone should understand and think on: much of the time Bain Capital had to target functioning companies to kill. Why? Because you can't load up a company with debt unless that company has the cash flows (also known as actively doing business) to support that debt.

And loading a company up with debt is the go to move for vulture capitalists looking to take an initial pie, increase the size of the thing, and then take some choice slices for themselves (this is also known as immediately paying off one's initial investment).

So there was nothing markedly wrong with many of the companies Bain preyed upon. I'm repeating myself here, but note that a sick company, a failing company, cannot support Bain's debt games (a pie with fundamentally bad ingredients simply cannot be expanded).

The final step was, of course, bankruptcy and auctioning off the assets - sales that yielded further returns on Bain's investment. What does this all mean? Well, many things - I mean, it's a disgusting way of doing business that even many of the sharpest businessmen in the country eschew. But it also means that one of Bain's core strategies involved taking functioning companies that supported good steady jobs, making those companies sick with debt, and leaving behind shuttered gates and vanished jobs. Good jobs.

Those companies' only crime - they were successful enough to be prime targets for the vultures at Bain. That's Mitt Romney.

[B Calm]

1. Great post!

I'll never understand why anybody who works for a paycheck could ever vote for this monster. But they will, are they uninformed, love the magic R, or just like inflicting pain to their self?

[jsmirman]

4. I'll tell you the truth

the reason I immediately understood what Bain does is because I had an old acquaintance proudly explain the basics of the strategy to me when he told me about his new job at a Bain-doppleganger.

The punch line was that although things ended in bankruptcy, they made out like gangbusters on their investment. Their target was publishing companies because guess what those businesses had? Steady revenues. Revenues they could use to support loading them up with debt.

He couldn't understand why I wasn't thrilled with the brilliance of their business model. "I don't think you're getting it," he said. "No," I replied, "I understand what you've described perfectly well. I just think it's a shitty way of doing business."

Incidentally, our grandfathers had done decades of business with each other. My grandfather was an old school pillar of the business community - he was proud to pay his taxes, he always believed in leaving the cream at the top, and the idea of business without ethics was repugnant to him. And this guy's grandfather was someone my grandfather looked up to! Believe me, they would have reacted with the same disgust I expressed over a plan that relied on leaving someone else holding the bag.

"That's not good business" is something that was ingrained in me from the time I spent with my grandfather over a number of years. I'm sure his grandfather, who was a very principled businessman, expressed similar sentiments. Looks like only one of us was listening.

[xchrom]

2. Coming from cali - I'm too familiar w/ these kinds of business plans.

I hate them.

Good OP.

[coldwaterintheface]

3. This is exactly what the GOP has been doing to America since the days of St Ronnie

but to be fair and honest some Dems did and are helping too still today.

It is a good pretty simple write up but it needs to be written, dumbed down, to a level that Snookie could understand so that the vast majority of America can also understand.

[jsmirman]

5. Yeah, on a first run

that was about as simple as I could make it.

I may do a rewrite that focuses exclusively on pie. Maybe that would do it.

[coldwaterintheface]

7. It is very difficult to write for/to the ignorant

The NFL Ref story could have been a great teaching moment for Obama and the Dems on why we need unions, sadly they blew it or it was intentional depending on how one looks at things.

[jsmirman]

9. I think that was a hard story to play with anything but kid gloves

it would have been easy to come across like Romney shooting off his mouth on Libya, as appalling a comparison as that is to make.

But, sadly, and I'm a huge sports fan, the potential for self-damage in the two situations is strikingly similar.

[coldwaterintheface]

11. So being a sports fan are you saying most sports fans are idiots

who could not comprehend what the whole lockout was really about?

[jsmirman]

12. I'm saying the NFL is really important to a lot of people

to the point of making them irrational about things related to their Sunday football, and that NFL Sundays (and now Saturdays, and Thursdays, in addition to Mondays) are their own third rail in American life.

Wisconsin is a swing-state and every candidate has had to carefully pander/say what they actually think regarding that atrocious last call in the Packers game.

I'm saying it's a touchy subject, and you can extrapolate from that as you see fit.

[coldwaterintheface]

14. Now how many of them acatually vote?

[jsmirman]

15. Folks who like the Packers, for example?

I'm guessing most of them.

[coldwaterintheface]

22. More of a percentage of voters who watch the NFL

if say only 10 out of 1000 even bother to vote then using the strike as a teaching moment would not lose any votes and very welll might turn some inot voters. THose that would get pissed off about the teaching moment most likely don't vote or vote Pub any how so who cares.

I did see a poll recently that showed that college football is watch by about 65% pubs so anyone looking to attract that demographic would be wise to buy time during the games.

[fasttense]

6. Bain also bribed the current CEOs and executives of those businesses

If the current CEOs and executives weren't so willing to take bribes and do the bidding of Bain, the harvesting of the once functional businesses would have been much more difficult to do. They stayed with the companies after Bain took them over and did the bidding of Bain in exchange for huge, unwarranted bonuses.

If the tax laws had not been rewritten, Mitt's plans to harvest the companies would have been almost profitless. So, changing the tax laws was a fundamental requirement to pull off this harvesting. See what wonders giving tax cuts to the filthy rich creates.

[jsmirman]

8. Excellent point

But I think for this I'm trying to make it less complicated!

But that is surely an essential point that you make!

[HiPointDem]

10. K&R

[Prometheus Bound]

13. Thnaks for the summary.

I don't have time to get into it to respond to Republicans who brag that Romney is an EXCELLENT businessman, but this helps me understand his MO.

[jsmirman]

16. Great - that's what I was shooting for

this really does cover the central point of why those workers at the plants closed by Romney hate him so much.

To a real extent, it's not that he's an "EXCELLENT businessman" as much as it's the reality that there's quite a bit of money to be made if you have no ethical compass and thus no problem with a business plan that rests on repeatedly leaving others holding the bag.

[tclambert]

17. It's what the mob calls a "bust out."

A "bust out" is a common tactic in the organized crime world, wherein a business' assets and lines of credit are exploited and exhausted to the point of bankruptcy.

--http://en.wikipedia.org/wiki/Bust_Out Wikipedia entry describing an episode of the Sopranos, in which Tony and his crew "bust out" Davey Scatino's sporting goods store.

Yeah, Romney is basically one of the Sopranos. The puzzle to me is: Why do banks and other lenders not recognize these tactics and blacklist a company like Bain? The first time they drive a company into bankruptcy, I can understand. But by the fourth time, the banks should know not to lend to any company owned by Bain.

[jsmirman]

25. The difference is that a bust out is illegal, while this is "excellent business"

amazing, no?

As to your question on the banks, it's funny, I asked the same question years ago.

The response I got was - "there will always be banks competing for our business."

Why could that be? As someone who worked for one of those banks a long time ago, I would say the obsession with sheer size, with "doing deals," with showing product for the league tables, the issue of having a nearly indistinguishable product from the competition - that sort of thing makes one so dependent on relationships with the client, that they are willing to eat a few bad deals...

[theKed]

38. Every time

a bank loans money, it is, really, creating money. If you want to borrow $10 000, they're not going into the vault, counting out ten grand in $100 bills and checking that out of their vault. You sign the piece of paper, give them a down payment, and presto! $10 000 of debt that didn't exist before now exists. They have to have a small amount of actual currency in the vault, legally, to cover default losses, but that number has gradually diminished to a laughably low percentage over the years (I can't recall the actual amount off the top of my head, something less than 5%).

So you borrow your ten grand, suddenly the bank has a lot more worth. Even if you default on the loan, they still get whatever you paid off before then. If you paid off $5000 of your loan before you, say, lost your job and defaulted on that loan, the bank is still $5000 up from where they started.

In normal circumstances, this is an okay arrangement for the banks. They keep track of credit ratings to make sure they aren't letting too many people that are all but guaranteed to default through the credit gate, keeping that bar low enough to let in as many people as they can without the bank losing money. When you start getting thousands of people defaulting on mortgages, of course, the banks are suddenly in a tight spot because there's hundreds of millions outstanding and, because the required reserve ratio is so low, they don't have the capital to lend more money. Things like the housing bubble collapse happen, sparking waves of banks with no money to lend. But that's a side-topic to where I was going.

Someone like Bain goes in, racks up a few million in debts, plays ball for a while, they bails leaving the battered husk of a company holding the bag. The banks create a few million dollars out of thin air, give it to the company, collect whatever percent the company pays off while still in business. The company collapses after Bain guts it and the banks get first crack at recouping their losses. They take pension funds, they sell off land and chattels, sell everything that isn't nailed down, and call it a day - still up from their starting point financially. And probably with a few million in liquid currency to serve as the seed money for more loans. At a 5% RRR $1 million in currency lets them create $20 million in debt, debt they can pass on to home buyers with decent credit, people buying cars, people that want credit cards - people that, by and large, have little risk of default and with plenty of collateral should they default as well. Companies like Bain rack up billions in debt, and create hundreds of billions the banks can push onto the populace. And they are all too happy to help you get that new 60" flat screen TV on your Visa, that new car you need because you just had another kid, that new house because you just got married and don't want to live in a shitty 1 bedroom apartment anymore. Corporations and banks have breed an incessant need for credit into contemporary consumer society.

[jmowreader]

39. LBO financing isn't done by conventional banks

How everyone except Ted Forstmann finances an LBO is through the sale of high-risk securities. In the old, old days, when Michael Milken and the Masters of the Universe were raping companies, they wrote high-yield bonds (named 'junk' bonds by financier Meshulam Riklis) against the company's assets. A company named Drexel Burnham Lambert would write...oh, say $10 billion...worth of these things and sell them to the financial division of the More Balls than Brains Club. In those days, you could write a junk bond that didn't pay its quarterly interest installment in cash but rather in more junk bonds. (This was a "pay in kind" security.)

Romney came into the business after they threw Milken in prison, Drexel was liquidated and the market for junk bonds no longer existed. To replace them, they used a derivative called the Collateralized Debt Obligation. How it works:

Mortgages, as you know, are salable. Once XYZ Mortgage loans John and Sally Jones $250,000 to buy a house, it sells the contract to a servicer for its face value. The servicer then collects the payments and keeps the interest.

That's all well and good but the servicer will need more money to buy more mortgages so it takes all the mortgages it bought over the last month or so, evaluates each one for creditworthiness, and puts them in two piles: "safe" and "risky." It then sells bonds called "mortgage backed securities" against each pile. The "safe" MBS gets sold to insurance companies and pension plans as an investment-grade bond. The "risky" MBS gets held onto until there are quite a few. When there are enough, they put them in a pile and write more bonds against it; these bonds are called Collateralized Debt Obligations. Because the underlying securities are high-risk MBS, they are sold as high-yield investments--the junk bond of the new millennium. This can be done by a brokerage, and usually is--no commercial banks need be involved. (On edit: they USED to put the loans into piles according to creditworthiness. These piles are called "tranches." Now they just throw all the mortgages in a gunny sack, declare that half of it's safe and the other is high-risk, and sell the different riskinesses of MBS anyway. This means that you as the derivatives buyer for Stay-At-Homers Insurance (what you buy when you don't want Travelers Insurance, right?) could very well buy $25 million in investment-grade MBS and have two-thirds of its value evaporate because the underlying mortgages defaulted...which ain't supposed to happen, kids.)

These high-yield CDOs are what Mitt Romney used to finance his takeovers, and he was aided by George W. Bush, who signed a law (the American Dream Downpayment Initiative) enabling low-income persons to buy homes using subsidized down payments.

It gets more fun: Because this paper is very high risk, most investors do not want to buy it if they think there's a good chance they'll lose their investments. One might say CDO investors are seated in the crazy-not-stupid section. They therefore purchase a kind of insurance policy called the credit default swap, which is a derivative in its own right. It is not really insurance; the seller doesn't need to have the money to pay you back, and the buyer doesn't have to own the covered MBS or CDO. Because of this, you can create a whole NEW kind of derivative called the synthetic CDO by purchasing a lot of naked CDS and tranching them into bonds. And of course, you can sell this derivative for money to buy and rape companies with.

This is why I have said, and I will continue to say, that Mitt Romney caused the mortgage crisis.

[canoeist52]

18. In the simplist terms of all- a parasite needs a live host.

[jsmirman]

26. Pretty good description

and certainly shorter than mine!

[Zalatix]

36. +1,000! Well said!

[malaise]

19. Excellent post

Rec

[Scuba]

20. Same plan the R's have for America, including auctioning off the assets at fire-sale prices.

[jsmirman]

28. That's just what I've come to think Romney's true plan is

Since he hasn't told us what it really is, and because I can't figure out any other reason he actually wants to be president.

Load us up with more debt so that his wealthy friends can essentially pillage the treasury on the back of that (whether through tax cuts or other means) and leave someone else holding the bag.

He'll leave with a reputation as the President who put the last nail in our coffin, but he'll be laughing it up on a private island.

[Scuba]

30. Romney's secret plan to end the war on wealthy people.

[Iggy]

21. Good Points, However...

anyone here remember NAFTA??

North American Free Trade Act? pushed for by numerous democrats in congress and President
Bill Clinton?

it's past time to look at just how devastating NAFTA was to U.S. workers/jobs and the fact it's a
gigantic failure in terms of what it was supposed to do in Mexico-- raise wages/income of the
workers there and improve working conditions there.

Most of the debate about NAFTA has focused on the movement of plants to Mexico and the direct loss of American jobs as Mexican laborers earning less than $2 an hour are used to replace American workers making six or eight times as much, plus health and pension benefits. Though there are trade disputes with Canada regarding specific industries, America's partnership to the north does not spark the same kind of fundamental concern. Income, living conditions and the rule of law are similar in Canada to U.S. standards, which puts trade on a more level playing field.

The news media has tried to downplay the celebration of NAFTA's first decade, arguing that while the grandiose benefits from "free trade" have not materialized, the American job loses to Mexico have not been as bad as critics predicted. But saying that NAFTA's failure could have been worse is not exactly the kind of verdict that warrants a grand gala.

One of the most infamous predictions of NAFTA benefits was made by Gary Hufbauer of the Institute for International Economics, a well-financed "free trade" think tank. In a 1992 study, Hufbauer claimed, "NAFTA will generate a $7 to $9 billion surplus that would ensure the net creation of 170,000 jobs in the U.S. economy the first year." This did not happen, of course, and as the Wall Street Journal reported in its October 26, 1995 edition, "Gary Hufbauer...whose predictions of NAFTA job gains were embraced by the Clinton and Bush White Houses now figures the surging trade deficit with Mexico has cost the U.S. 225,000 jobs."

Here's an example of what NAFTA did to manufacturing jobs in the U.S.-- prior to NAFTA some clothes were actually made in the
United States.. one company was Fruit of the Loom (yeah, the company that makes your tightie whities). after NAFTA was enacted
more or less all clothing companies in the U.S. moved out- to the macquiladoras in Mexico and central America-- all but Fruit of the Loom. they insisted they would stay in the U.S. and actually spoke out against NAFTA.

of course the greedhead clothing companies that moved out of the U.S. began selling cheaper clothes in the U.S., which
Fruit of the Loom could not compete against-- since they were paying a living wage to their U.S. workers.

Yep, you guessed it-- Fruit of the Loom ended up moving their manufacturing facilities out of the U.S.- so they could compete. if you can't
beat 'em, join 'em!

So thanks Bill Clinton and "democrats" in congress-- thanks for aiding and abetting the destruction of manufacturing
jobs in the U.S.

http://americaneconomicalert.org/view_art.asp?Prod_ID=715

[Egalitarian Thug]

23. In the old days, at least the guy did get the protection.

This is how "successful" American business like Bain have worked since he 80's.

[meow2u3]

35. So would that make Bain "The Mormon Mafia"?

Sure as hell sounds like it.

If a working-class Italian organization pulled the same shit Rmoney and Bain did, they'd be brought up on RICO charges.

[Egalitarian Thug]

37. There has been a Mormon Mafia for generations. It, along with the corporate Mafia, runs Las Vegas.

Unlike the Italian Mafia however, they have no interest in keeping their victims happy and out of their business. Ask any native here and they will tell you that when the mob ran this town itself, it was way better for everybody. The Italians had a great formula; spread the wealth around. Keep the workers and the tourists happy and out of their business.

One of the oh-so-many secrets of the Mormons is that is is just fine to lie, cheat, steal from, or even kill a non-Mormon.

This town could, and probably should, keep the entire DoJ busy for decades rooting out the corruption here. That story of Adelson backing Rmoney to head off investigations of his dealings absolutely rings true. The only place I know of in America that is comparably as corrupt as Las Vegas is Chicago.

[ThomThom]

24. we need to examine why we have corporations

and bring them back to providing good to society
Just making a few people wealthy is not good enough any more, corporations need to change their tune. We need to change the tax laws and end the greed. Worker owned businesses should get a break.

[yardwork]

27. Good description. Thanks.

[jsmirman]

29. Thanks

I confess that I was inspired to spell it out in simple terms after watching "When Mitt Romney Came To Town."

Not a fan of the source of that video, but I can't say that I find any problems with what the video has to say.

Watching the interviews with those workers whose lives were destroyed, I wanted to explain why they were singled out - and just how unfair and loathsome it all was.

[Turbineguy]

31. Bain is a financial predator

and so is Romney. He's the financial equivalent of a serial killer. But serial killers would probably be much happier if murder was made legal.

[gulliver]

32. If we want to talk cheating

This stuff should all be illegal. Romney's way of doing business and his hidden tax returns (we have to assume they are chock-a-block with shenanigans) should give America a learning moment. Lobbyists paying Republican politicians to create loopholes, bankrupting companies while making profits, keeping money in hidden accounts to evade taxes?

Maybe Romney can finally get America talking about cheating. He's a perfect example.

[Wellstone ruled]

33. Willard and Bain plus BiBi

of the Boston Consulting Group,Harvested millions out of businesses during the 80's and 90's. Got to remember,company owners and directors have huge egos. Willard and crew would stroke these egos and promise huge returns if they ran with their plans. With the failure of Raygun not in enforcing Sherman Anti-Trust laws,the door was wide open,and the thieves took over.

Take a look at how this group cleaned out new tech start-ups during the Dot Bomb mess. The vultures would come in with promises of cash infusions to expand or go public. Bullshit,Bain put one of their insiders on the BOD's just to control the Harvesting Operation. Issue tons of new stock,then dump it on the OTC and short the shit out of it,even so far as Naked Shorting. Once they totally Harvested every penny,they would transfer all the technology to one of their shell companies and bankrupt whats left. Watch this happen on two occasions. Perfectly legal,nobody was minding the store,by the time the SEC got tired of people screaming,the Repuks and the Rockfeller wing of the Democratic party had changed the rules so there isn't any recourse. The 1%ers won again.


Harvesting was the new Paradigm of early eighties,had three Employers during this time period that succumbed to this type of actions. The Raygun administration would went so far as to put wages and earn vacations on the bottom of the Bankruptcy list when it came time for claims. Most claims were paid at less than ten cents on the dollar and it took ten years for your settlement to happen. Yet you got dinged by IRS for the full amount in the year of the Bankruptcy. Thank you GOP and Vulture Funds.

[jsmirman]

34. Do you have a list

of tech start-ups they did this with?