One of the oldest tactics in a political campaign is to try and turn an opponent’s biggest asset into a big liability. One of Mitt Romney’s supposed big pluses is that he’s a “conservative businessman” who knows how to fix the U.S. economy. But now Newt Gingrich (or at least his SuperPac) is launching an expensive attack to rebrand Romney as a Gordon Gekko whose “business success comes from raiding and destroying businesses.”
Well, the Wall Street Journal has just published its investigation into Romney’s record at Bain Capital. The paper “examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain’s involvement and shortly afterward.” And here is what it found:
– 22 percent either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses.
– An additional 8 percent ran into so much trouble that all of the money Bain invested was lost.
– Ten deals produced more than 70 percent of the dollar gains.
– Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested.
– Overall, Bain recorded roughly 50 percent to 80 percent annual gains in this period, which experts said was among the best track records for buyout firms in that era.
– Academic research has shown that buyout firms during this era exited their deals on average after 5½ years, but in a large percentage of cases were still involved beyond seven years. … If the Journal analysis were limited to bankruptcies and closures occurring by the end of the fifth year after Bain first invested, the rate would move down to 12 percent. That measure would exclude several cases that have brought Mr. Romney political criticism, where businesses filed for bankruptcy seven or eight years after Bain’s investment.
So what does it all mean? Well, Romney was really good at what he did. And what he did, initially, was venture capital, providing dough to promising young firms. Then he shifted to private equity, which is a) using investor money and debt to take over a business, b) attempting to improve its profitability (which may mean cutting the workforce), and c) selling the business and, as the WSJ, puts it, “extracting fees and sometimes dividends.”
That a small percentage of the Bain deals supplied most of the firm’s gains should not be surprising. Whether you are a private equity investor or a do-it-yourself stock picker, the key is letting your winners run and limiting the damage from your losers. Recall how famed Fidelity manager Peter Lynch always said he was on the hunt for “ten-baggers”—stocks where he could make ten times his original investment. A good investor is like a good baseball hitter. A .300 average gets you on the all-star team.
See, there is something called the Pareto Principle, which states that “for many events, roughly 80 percent of the effects come from 20 percent of the causes.” So 20 percent of customers, taxpayers, and investments often produce 80 percent of sales, revenue, and profits. Bain certainly seems to be another example of the Pareto Principle at play. A few big winners such as Staples, The Sports Authority, and Domino’s may well have provided a good chunk of the firm’s profits and the “over 100,000″ jobs created (which Team Romney needs to do better at substantiating).
Of course, Romney and Bain weren’t in the game to create jobs. They were in it to make money for their investors and themselves. Then again, the same would go for Bill Gates, Steve Jobs, Michael Dell, Warren Buffett, and just about every other successful entrepreneur and investor you could name. But that is the miracle of free-market capitalism. The pursuit of profits by creating value benefits the rest of society through higher incomes, more jobs, and better products and services. This isn’t “destructive creation”—like, say, crippling U.S. fossil fuel production before “clean energy” sources are viable—but “creative destruction” where innovation and efficiency sweep away the old and replace it with a more productive and wealthier society. This is one my favorite examples:
Through this constant roiling of the status quo, creative destruction provides a powerful force for making societies wealthier. It does so by making scarce resources more productive. The telephone industry employed 421,000 switchboard operators in 1970, when Americans made 9.8 billion long-distance calls. With advances in switching technology over the next three decades, the telecommunications sector could reduce the number of operators to 156,000 but still ring up 106 billion calls. An average operator handled only 64 calls a day in 1970. By 2000, that figure had increased to 1,861, a staggering gain in productivity. If they had to handle today’s volume of calls with 1970s technology, the telephone companies would need more than 4.5 million operators, or 3 percent of the labor force. Without the productivity gains, a long-distance call would cost six times as much.
Romney’s career as a free-market capitalist? No apologies necessary.
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This is what I don’t understand and what scares me about Romney. Why doesn’t he say that his job required him to downsize a company in order to allow it to grow and in the same sentence why doesn’t he ask how many jobs zerO has created in his lifetime? This chickenshlt approach is going to put zerO in the WH for 4 more years and this country of beyond stupid people will be done.
And perhaps a corporate downsizing expert is exactly what we need now, since our federal government could definitely need some downsizing.
Expert?
Gingrich balanced the budget and cut welfare while Romney dismantled dead companies on commission (or got them gov’t bailouts) and his signature achievement was Romneycare.
Which part of that is confusing?
The model for Romney and Bain is not Gordon Ghecko, it should be Danny Devitos character, Larry the Liquidator, from Other Peoples Money. He has a great speech that explains how liquidating failing companies not only makes money for the stockholders, but helps the overall economy. And interestingly enough, the movie portrays Larry the Liquidator with more heart and honor than many of the people in the firm he is taking over.
Hopefully this class warfare waged by Newt Gingrich (who is imitating Mr. Obama, but calls himself “the true conservative”), will inoculate Romney from a wave of similar class warfare that Obama’s cronies are preparing. Everyone now can see why Obama is inciting and supporting the “Occupy” movement , (trying to foment resentment against capitalism and the eventual nominee, Romney).
Speaker Gingrich took a tack in his “Morning Joe” appearance this morning that he represented as “just the facts”, but was in fact either deliberately dishonest or shows a stark lack of knowledge about how private equity works.
“If you have a company that cost $30 million, they took out $180 million, and then it went bankrupt,” said the former Speaker, “they have some obligation to explain why they took that much money out if it was bankrupting the company.”
In fact, private equity is about adding enough value to the company through modernization, streamlining operations, smart management, and innovation so that something that was bought for $30 million could be SOLD for $180 million. The money doesn’t come out of the company…it is paid by a buyer in an arms-length deal. If ANYONE gets a bad deal, it’s the buyer, who more often than not is another private equity firm.
It’s as if you bought a fixer-upper antique car for $5,000…put a couple of years of work into it so it runs “like-new”…sold it for $30,000, and then the new owner runs it into the ground and crashes it into a wall. You didn’t take money out of the car…you increased its value six-fold through your skill and sweat. And you are not responsible for what the new owner does in running it into the ground.
It is a sad day when the former Speaker, who represents himself as a Republican defender of free enterprise, adopts the themes of the Far Left in the name of the ego trip that his shell-of-a-campaign has become.
Speaker Gingrich can hide behind his PAC (the same man who said Romney can tell his PAC to stop now says he has no control over what his PAC does), but every word he speaks and every ad he runs is a disservice to the cause of Republican economic values.
Michael, unbelievable post. Well done.
MIchael…great post…I just hope the voters have enough intelligence to realize this is what took place. I guess Gingrich, Perry and Obama would prefer government to come in and adopt more regulations to prevent corporations from laying off workers and also put a limit as to how much profit a company can make from business deals.
Gingrich is betting that the electorate is emotional and stupid.
Perry, Newt, and Santorum are grabbing at the air…this will type of rhetoric will not help them. This has seemed like a good punch line but will hurt them very shortly. Republicans will not put up with this type of socialist talk.
Thank you, Newt, for doing something no one else, including Mitt Romney, has been able to do. And that is, unite conservatives behind Romney on something. Even Rush Limbaugh found himself in the uncomfortable position today of backing Romney against Newt and Perry’s imbecilic attacks. Newt has done exactly the opposite of the “positive” campaign he was running, the one that led him to the top of the polls just as he declared himself the nominee and called for no more negativity. lol Sorry, Newt. You made your own bed, and perhaps some of your girlfriends helped along the way. Now you sleep in it. How does that Nancy Pelosi/ Global Warming nightcap feel? Those Freddie Mac slippers? How ’bout that “Right-wing social engineering” T-shirt with Paul Ryan’s face on it? ugh. What an idiot. I’ve lost a little more respect for this blowhard.
Romney/Ryan in ’12.
The substance of the attacks probably do not matter. This is politics. He should not apologize, but explain it better. His campaign may rest on it and this is why Commentary and other conservative outlets are fervently defending/explaining Romney’s Bain days. He should be the one doing it, however.
So the question is, will this line of attack stick in the general election? If Republicans think it is, then pick another candidate. He is not a company man anymore, instead he could potentially be the POTUS of every single American, including the people he fired. All of this dovetails to his stupid comment about “liking to have the ability to fire people.” (Democrats will put this out of out of context just like Romney–or a Romney favored PAC–did to Obama several weeks ago on Americans being lazy). Continued messups like this will make me think twice of him as the best candifate against Obama.
You are correct–he needs to directly face into the issue and explain what happened.
Having been the CEO once of a “turn around”, I can personally attest that it is the job from hell. Virtually all of the time, the problem is too many employees. You have to get rid of the (right) ones; easier said than done and hell on earth no matter what.
Key things to get across are: 1)The ONLY way a Bain gets in the door is that the alternative is worse–usually BK with EVERYONE losing their jobs. Unfortunately, this is a “jobs saved or created” argument–hard to make 2) Bain doesn’t land the Marines at the front door. The previous owners sold their interests to Bain because they thought they were getting a better deal than the alternative 3) Bain had to put up real money–which sometimes they lost altogether. It is VERY hard (read federal BK law) for an investor to “make money” by liquidating a company. Sometimes a Chapter 11 is the right way to go, but only if the company comes out of it operating.
This is going to be tough–the MSM simply doesn’t understand and are motivated to get Obama reelected, fair or foul. It is a tough thing to explain, the average Joe has been educated to believe that up is down when it comes to economics and finance.
I am NOT an Romney fan, but I actually think that his Bain experience may be his strongest suite. He has a background of fixing up failing institutions–can you spell USA?
I disagree. I wouldn’t call it a “blunder” or anything of the sort. I’d call it Romney being who he is…a free-market capitalist. This was actually “red meat” for conservatives. Rush, for example, loves that kind of straight forward honesty in defense of capitalism. Anyone who saw the clip knows that Romney was making the point that free markets give people options and the freedom to find the “right” people for whatever work or services they need done, which entails at times firing people. He was praising the beauty of the free-market system….the freedom that people enjoy in this country. It was remarkable that he had to give a press conference to clarify his remark for all the drones and their masters in the lamestream media who jumped all over it because they’re a little slow on the take. Yes, freedom is a good thing. Imagine that! “You mean he fired people? Gasp!!!!!! How HORRIBLE!!!”
What a party of deadbeats and fools, the Disreputable, Dependent Democrats have become.
You forgot to mention powerful friends and rich daddies
Winners and losers referred to businesses, not people. Businesses don’t win or lose based on “rich daddies.” And the fact of that matter is: some businesses lose. The “everyone should win” mentality is called socialism.
LIBs don’t believe in an opportunity society. They believe in an entitlement society. Romney is the man to carry the torch for the free-market opportunity society against the onslaught of anti-American leftism…the entitlement society that Obama and the Democrats are pushing.
I was born poor to working class parents. SO WHAT? I am sorry but if you are born rich with connections who in their right mind would not use the capital (money or resources) given to them. This old stupid argument that you were born rich so you should hide somewhere is just silly.
Romney should run ads with people who now work for companies he started: I owe my job, my career, my family to Romney and Bain Capital.
Wow. Someone with the experience and ability to cut people who do a poor job or inefficiently provide a product or service. I don’t know about you, this is exactly what we need, someone who can make our government more efficient and severely cut the bloat that has become the federal government.
Why is anyone upset about that? Except maybe those in government whose salaries and pensions far outweigh the private sector.
Newt is upset about it. Why? Because he has the mentality of a 4th grader. No, make that a 1st grader. Newt is a big baby who will do or say anything. He’s the quintessential Washington politician that we need to REJECT. Can Newt recover from this and still play a role as a policy advisor or perhaps head up the Education Dept. But he’s embarassing himself by spewing Obama’s talking points on Mitt Romney.
The sad thing here is that Romney’s opponents are getting desperate and grasping for anything that will keep them alive. By attacking Romney they are abandoning the very principles that make the Republican party great, and playing into the hands of the left and fostering more class warfare. The success of our country in business has always come from the free enterprise system. There are winners and losers (unfortunately). Some will succeed because they have have great products, better business plans, more capital, harder workers, more innovation, etc. Some will go down trying. You can’t blame people for trying…in many cases they risked everything they owned, and often stay around longer than they should because they don’t want to let their good people go. Bain’s business was to take troubled companies, risk a lot of money, and try to make them successful. Clearly they were more successful than not at this. Good for them.
What is really important here is that Romney’s Bain experience will make him the ideal President to attack the severe problems our country is faced with. Our country is in trouble, and the only way we are going to fix it is to make it leaner and meaner. It will be painful, but the stakes of not fixing the problems will be catastrophic for the this great country. It is going to take a courageous leader to make the tough decisions. Romney is the right man, at the right time in America’s history to get this job done. It will be a terrible shame if this issue derails Romney’s road to the White House. Shame on Gingrich, Perry, and Huntsman for going down this dangerous path.
great post. There should be no apologies for operating within a free market system. Newt should be ashamed of himself. Now, if Bain acted illegally, as so many of the firms led by Democrats do today, then that’s a different story. Mitt should make this about the difference between actual free market capitalism and the corrupt type being offered up by the likes of Jon Corzine, Larry Summers, Bernie Madoff, Lloyd Blankfein, et al.
I don’t have a problem with what Romney did to the firms that were in trouble but let’s not turn it into a heroic act. If you had been working at one of the doomed firms and lost your job AND pension you might not see him as a white knight either. Do any of you remember Frank Lorenzo? He was the same “Business man” in the 80′s that Romney was in the 90′s. He bought controlling interest in companies, the largest being Eastern Airlines, sold their assets and then liquidated them along with the employees and their pensions. He made a lot of money and many on Wall Street thought thought he was brilliant. No, he wasn’t brilliant but he was cold blooded and ruthless. Not a quality one wants in his/her president. One of my boyhood friends became a bankruptcy lawyer. His job was to go into a business that was about to be liquidated and determine where their remaining money went and to whom. One thing that was certain was that he was always paid first and up front. It was not a glamorous job but it had to be done. However it was not a job to run for office on.
Apples and oranges my friend. You need to do a little more research on what Romney did at Bain.
So this is the WORST that thing they can dig up against Romney? That he was a superb businessman and cut fat out of bloated orgainzations and made them profitable? And that is supposed to be a BAD thing?
Like millions of Americans I have been downsized or rightsized or made redundent. And more than once too, because that is what happens to people who work in I.T. What happens is that you deal with it. You ‘consult’. Meaning you work temporary jobs, a month here, two quarters there, until your find another permanent job with benefits.
It really hurts the first time. You take it personally. You get upset. You fume. You want to kick the dog. (I ALWAYS want to strangle the cat so that doesn’t count :-}) You get angry. You get mad at the world. You get really mad at the … uh … clowns … who decided you weren’t worth the money they were paying you.
Then you find another job.
And, sometimes, a year or two later you read that the compnay which let you go finally went out of business and the … uh … clowns :.. who fired you are out of a job themselves. That makes you smile, even if it shouldn’t.
Then when it happens to your poker buddies or guys you know from church or other parents at your childrens schools or friends of yours from college …. well … you help them network and try to help them find jobs of their own. If that happens you ALWAYS get treated to a great dinner!
Come on, grow up America. Stuff happens. Don’t whine. Just get back to work.
Anon, what a tremendous post you have put up. You are spot on with every single point. Additionally, as someone else said, many of the companies Bain invested in were facing bankruptcy or other trouble which could have resulted in 100% of the workforce losing their jobs. If Bain came in to a workforce of 15,000 which was facing going out of business, injected capital and reduced the workforce by 7,500 while making changes that led to greater efficiency, they will have SAVED 7,500 jobs and put the company back on a course for growth which could result in adding jobs later.
I just re-read the constitution. It does not mention anything about a right to a job. I can’t believe America has got to the point that we criticize people for achieving and living the American Dream, while advocating a system where no one loses and everyone has mediocre jobs forever. I think Communism gave that a go. I honestly thought Americans would choose Capitalism over Communism every time, but now, I’m not so sure.
The entire country seems to be suffering from a wealth hangover. There is genuine resentment that some people have managed to become wealthy, and now those who did not manage to achieve that would rather everyone else forfeit their wealth and fall back than be ambitious and strive to achieve on their own.
There is no doubt in my mind. Of our current field, becoming more pathetic by the day as the heat is turned up, Romney is the only one with the right skill set, temperment, and discipline to right the economic ship. Please no more experiments or mercy votes this cycle. Please.
Amen on the experiments, mercy votes, and other cop outs. One should at least narrow the choices to candidates who have a realistic shot at winning the presidency.
Newt Gingrich is comical “I don’t think a Milton Friedman or a Hayek would say to you, rich guys have to go and rip off companies and leave a wreckage behind,”
Needless to say, Milton Friedman defended, even celebrated creative destruction, saying regarding job loss: “what we’re doing is not losing jobs, we’re making opportunities for our people, for people in the United States to use their skills in the most effective way, by enabling them to combine more effectively with other people.”
http://dallasfed.org/news/friedman.cfm
Researchers have looked at almost all firms receiving venture capital between 1987-2008 in a paper in American Economic Review (“close to the universe of companies receiving venture funding from 1987 to 2008″). They conclude that 75% of entrepreneurs receive nothing by exit. A very small fraction who do extremely well stand for all the returns. Similarly the Small Business Administration reports that 75% of American firms go out of business within 15 years. Of all newly started employer firms, half don’t survive five years. The Bain portfolio seems to have outperformed the average.
I guess the media, Democrats and Newt Gingrich conclude that venture capital backed entrepreneurship is a scam and should be outlawed. How dare capitalists take risks by investing in firms that are not guaranteed to succeed?
Anyone who criticizes Romney because some (a lower rate than average, it turns out) of the firms he invested in went out of business doesn’t understand fundamental economics.
http://www.sandhillecon.com/pdf/Hall-Woodward-Entrepreneurship.pdf
http://web.sba.gov/faqs/faqindex.cfm?areaID=24
Well said. One thing the chattering class and the ” cushy job for life” politicians/bureaucrats don’t begin to understand is how tough it really is to make a buck in the private sector.
Great post. That’s the whole point of capitalism. It’s not the guarantee of success, but the opportunity. For every one business that succeeds there are many more than fail. That is the way that it has always been. It can be harsh, but the alternative is called what we call socialism where everyone “wins” (or translated – fails). Is that a better alternative?
Researchers have looked at almost all firms receiving venture capital between 1987-2008 in a paper in American Economic Review (“close to the universe of companies receiving venture funding from 1987 to 2008″). They conclude that 75% of entrepreneurs receive nothing by exit. A very small fraction who do extremely well stand for all the returns. Similarly the Small Business Administration reports that 75% of American firms go out of business within 15 years. Of all newly started employer firms, half don’t survive five years. The Bain portfolio seems to have outperformed the average.
I guess the media, Democrats and Newt Gingrich conclude that venture capital backed entrepreneurship is a scam and should be outlawed. How dare capitalists take risks by investing in firms that are not guaranteed to succeed?
Anyone who criticizes Romney because some (a low rate than average, it turns out) of the firms he invested in went out of business doesn’t understand fundamental economics.
http://www.sandhillecon.com/pdf/Hall-Woodward-Entrepreneurship.pdf
http://web.sba.gov/faqs/faqindex.cfm?areaID=24
Anybody noticing how Newt is starting to sound like the administration? Is he really trying to play class envy within the Republican party?
There’s a lot of Americans who would look at that example of creative destruction and think “4.5-million secure jobs with decent pay that don’t require a college degree? Sounds good to me.”
I think a big thing missing is: typically when venture caps or private equity comes into play, these “businesses” are hurting. Either threw not enough sales, high costs, inefficiency, cash flow, etc. Rarely is a business approached by outsiders when they aren’t looking for outside help.
My point is, many of the individuals who were laid off or lost their job were really well on that path before Bain got involved. If anything, Bain provided a slight reprieve or an opportunity to “change things around.” Was Bain to invest money and basically say “Hey, run things like you always have.”
Exactly right! 100% of the companies Bain invested in were in trouble, facing bankruptcy and closure. That means that potentially 100% of the employees faced losing their jobs! Bain comes in, provides capital and helps them to reorganize and reimagine their companies in the hopes of making them successful and avoid closure. Yes some people lost their jobs–but not all. If Bain hadn’t come in, chances are they would have lost their jobs anyway! It happens in every business, especially if you are in trouble financially. It’s called capitalism. And according to the Wall street Journal after 8 years only 12% of the businesses actually went belly up. Wow! Sounds like a pretty impressive turnaround and a very successful businessman. And the point of every business is to make a profit, which is exactly what Romney did. So what exactly is Newt’s problem? Has he actually done this more successfully–somewhere–anywhere? I liked Newt–I was even contemplating voting for him in the primary–but this really pisses me off.
A little recognized fact is that, today, everyone is in business for themselves. If you think that employment stability ought to be a given, you’re wrong. People coming in to the workforce today can look forward to a series of job-changing events across their work years. If you don’t care for that prospect, go in to business for yourself. Having been terminated and made unemployed by changing economic events,more than once, I know first hand that it doesn’t have to be all doom and gloom. Pandering to the unemployed, as political figures are wont to do, extends the period of time needed to “wise up” and recognize the new reality. The work of an organization like Bain could be looked at as creative destruction. Assets tied up in entities that were not profitable were released back into the economy to be reformed and put to better use. The employees were not victims. They were not succeeding where they were and, they too, got a new start somewhere else, to try to find their own success. Romney has no reason to be defensive about his role with Bain. He does need to be able to explain what happened to those who fail to understand on their own.
Why doesn’t Romney turn a ‘bad’ into a ‘good’ by saying he will look at the federal government the same way he evaluated those companies to see what works and what doesn’t and make the changes necessary to keep the fed gov “in business”; i.e., avoid ‘bankruptcy’?
He has. He has said he will look at every dollar spent and every program and evaluate it on a cost benefit level. That is why he said he would cut PBS funding among other things.
I’m sure the Romney team, if they haven’t already, will begin their own “documentary” about Bain investing in companies that had already failed or were failing. Romney is intelligent, and they have a strong team.
It is good that Gingrich did this so early. Even though I don’t like the negative campaigning, it will make Romney a stronger candidate. Keep the heat on. Go Team Romney!
Seeing the big picture in an informed manner is, unfortunately, a not-so-easy thing to do for a majority of the population without a good education system teaching facts and figures, unburdened by ideology and bias, which is not what is in place in most Western countries. For many, life experience will fill in the missing pieces but in the meantime, with the added influence of the left-leaning media, they can still vote and make the wrong choices for the economy and the nation.
Reverting to a proper, unbiased education system will take time. Meanwhile, maybe raising the voting age would provide a measure of sanity. One can always dream.
Those who lost their jobs will never see that way. Those who got new jobs due to innovation will.
Look at the big picture….what Romney did for the nation as a whole was great thing. What he did for individuals will remain a nightmare. Presidents of the United States will hope to help as many as he can, but not everyone will be so blessed. Hard to be President isn’t it!
I am having a little trouble reconciling how you think these people’s (the one’s who lost their jobs) fate would have been any different if someone else’s hand or money was involved. Most likely if their company failed and they were out of work, the end result would have been the same. People need to realize that no job is permanent and everyone is replaceable. Once they have that mind set they will always work harder and efficiently to make being replaced a bit harder and always having a bag packed so they can hit the ground running if they lose their job and find a new one quickly.
Wrong. When a company is in trouble, anyone stepping in to help is extremely welcome.
Wrong. You are assuming the businesses that Bain invested would have happily gone on their way, gainfully employing the same people on into the future. Equity firms only buy companies that are in trouble, usually due to inadequate funding or (most often) poor management. The equity firm swoops in because they think that underneath the rust and grime is a good company.
Without Bain, the companies that went under would still have gone under. My guess is that not a single person lost a job that was not already doomed to be lost, and a lot of people kept jobs that would have been gone otherwise.