Hostile Takeover of the USA

2012-09-10 – Your homework for today is to read an article in Rolling Stone called “Greed and Debt: The True Story of Mitt Romney and Bain Capital.”

Sadly, this story is a bit shrill and the writer over-makes his case. The article would have been far more damning if he had just given us the fact (and just the facts relevant to Mitt Romney, not his fellow travelers). Here’s the story in a nutshell.

Romney’s business model for Bain Capital, while he was the head of it, was the leveraged buyout. This means that Bain would put up 5 or 10 percent to acquire a company that was on the ropes. They borrowed the rest, kinda like making a 5 or 10 percent down payment when you buy a house and taking out a mortgage for the rest.

But unlike the home mortgage, Bain had no intention of paying the loan off. As soon as they had control of the company, they directed the company to incur debt and pay the proceeds out to Bain as a special dividend. This special dividend paid of the “mortgage” Bain took out to acquire the stock. So now the corporation is on the hook for what essentially amounts to its own purchase price, and Bain is off the hook.

So if the company was worth $500 million, Bain put up $25 million to buy it. After the special dividend, the debt (around $475 million) is owed by the company, not Bain. So Bain has a company that is now worth somewhat less than $500 million (due to the additional debt) purchased for $25 million. Now it is a race to unload their stock before the market realizes that they stripped out most of the value of the company. If they only make $100 million selling the stock, they’ve still made 400% on their money. Sometimes it was much more.

There is, of course, many more details, but that’s the gist of it. Sound familiar?

Think of the Bush years. The focus of Bush policy was to create a special dividend for the wealthy in the form of tax breaks, defense contracts, what have you. They financed this by borrowing (certainly not by taxes, though that would have been bad enough). The country is now left holding the bag.

When they say that Obama is inexperienced, they are right. Mitt is the only candidate running for president who knows how to do this leveraged buyout thing. He’s done it to many companies. And so he is prepared to do it to you and me.

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