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July 17, 2012 11:23 AM Bloomberg on Romney’s Bust-Out Operation

By Mark Kleiman

Anthony Gardner, himself a private-equity operator, has crunched some numbers:

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.

Gardner then explains, using some of those big deals (including Ampad and GS Steel) as examples, how the asset-stripping operation worked: Bain would buy control of a company using a little money and a lot of debt, load up the target with still more debt, pay out big chunks of the loan proceeds to itself as fees and share buy-backs, and then let the now-worthless company die, sticking creditors, workers, and sometimes the government with the tab.

I’m sure there’s a legal difference between this sort of operation and the classical “bust-out scam” (aka “long firm fraud”) for which small-time grifters go to prison. (Bust-out scammers buy a retailer of, for example, cameras. They then place big orders with a bunch of suppliers, getting routine 30-day trade credit, sell the stuff quickly for whatever it will fetch, move the proceeds to other bank accounts, and go out of business, leaving the suppliers stuck.) But I’m damned if I can see any moral difference.

And the notion that Romney is somehow not responsible because the actual bankruptcies only took place after he stopped active management of Bain whenever that turns out to be) is just absurd. What ought to count is when the fatal blow was struck, not when the medical examiner signed the death certificate.

Update John Cole beat me to the “bust-out” comment; he has video.

[Cross-posted at The Reality-based Community]

Mark Kleiman is a professor of public policy at the University of California Los Angeles.

Comments

  • Emily on July 17, 2012 4:18 PM:

    Uh, well, the obvious difference is that one is fraud and the other isn't. Companies like Bain don't go in with the intent to commit fraud; in fact, your claim that they "then let the now-worthless company die, sticking creditors, workers, and sometimes the government with the tab" only holds true for companies that fail. Plenty of Bain's investments succeeded. I'm highly skeptical of the assertion that Bain went in with the deliberate intention of destroying companies. Its intention was to make money, and if that "killed" the company, then so be it. But that's very, very far from committing some sort of crime.

  • boatboy_srq on July 19, 2012 9:37 AM:

    @Emily: there's that legal versus moral quandary again. For example, what George Zimmerman did back in February may well prove to be legal - but shooting a neighbor's teenager just because has some serious non-legal implications, and if he's acquitted it won't translate to his being right.

    I'm also skeptical of suggestions that Bain set out with malice aforethought to destroy businesses. But I'm also skeptical that claims of absence of malice implies presence of conscience. Bain may not have intended to kill Ampad or GS Steel - but they didn't care what happened to the businesses as long as their investors got paid and as long as they received healthy paychecks and bonuses just for doing their jobs. You don't need to be evil to kill a business if that's what keeps you and your investors profitable, you just need to be an amoral, sociopathic b#####d, and that's the impression I keep getting from Romney's Bain tenure.

    What Bain did is most likely legal for the most part; the question isn't as much whether Bain committed fraud, or whether they were just unethical businesspeople. Lack of ethics in modern business is to a certain extent expected, and working for your investors at the expense of every other individual or institution involved has become accepted if not exactly respected. But that's how you run a business: it's not how you run a country. Romney's history makes me think that as pResident he'd at least explore selling Louisiana back to France as a bad investment, and he might just replace a yacht with a new DDG and hide it from the books as "non-monetary compensation"; it's also probable that he'd work with a small subset of US allies exclusively for material or religious gain at the expense of other relationships or domestic and global tranquillity. These might be good things for Romney, and they'll probably help his backers, but it would hurt the US as a whole.

    We don't need a politician who shows every sign of treating some parts of the country he claims to run the way he treated Ampad just because they're not doing so well: if a state or region folds it's not like he can sell it on the market and recruit new citizens from Myanmar. Bain's success has come from finding buyers for its investments (usually) within the US market, and hiring/firing businesses' staff with the assumption that they can find employment in the same locale inside the same country. You can't follow those patterns as President unless you're ready for a mass exodus of US citizens to other countries that offer jobs and services or unless you're comfortable spending US tax dollars to hire foreign enterprises to fill functions that should be kept at home.

  • TCinLA on July 19, 2012 2:18 PM:

    Fanos of the Sopranos might remember the "bust out" Tony and the boys did of the sporting goods store owned by a guy who had gambling debts with them. The difference between the "organized crime" of companies like Bain and the organized crime of Organized Crime is the Bain boys get theirs made legal.

  • yocona on July 21, 2012 11:47 AM:

    "You don't need to be evil to kill a business if that's what keeps you and your investors profitable, you just need to be an amoral, sociopathic b#####d, and that's the impression I keep getting from Romney's Bain tenure. . . .
    Lack of ethics in modern business is to a certain extent expected, and working for your investors at the expense of every other individual or institution involved has become accepted if not exactly respected. But that's how you run a business: it's not how you run a country."

    Word. You said it all in three sentences. Thank you, boatboy.

  • Mike Conley on July 25, 2012 1:00 AM:

    Charlie Sheen: "Why'd you wreck the company?"
    Michael Douglas: "Because it was wreckable!"

  • Daddy Love on August 06, 2012 4:18 PM:

    Yes, it does have similarities to The Sopranos and Goodfellas. But those and similar methods have certainly been on the table and in the open at least since the 1980s "corporate riders" schtick. Just saying that it's not new.

  • jollyroger on August 10, 2012 7:30 PM:

    Con respetto, I believe I was occupying this meme before Balloon Juice. (Last January, in point of fact.) As an interesting footnote to the Sopranos story, the actual sporting goods store in question in fact once went into receivership (usually an indication that a bust out like diversion of receipts is feared) during which time I and my brother-in-law enjoyed high-pay, low-effort sinecures courtesy of my mother's law firm, which represented the receiver.