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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.
Tags: 2012 campaign, mitt romney
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.
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.
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.
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
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.
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.
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