What Romney Bain Actually Did That People Don't Like

For all the back and forth about Bain, what CAPITALIST Warren Buffett mentions is the key point. And there was a way they did this with that portion of their business, including Bain. People seem to be missing it.

When I ask whether Mitt Romney is a job creator or destroyer, Buffett says that while businesses shouldn't keep people they don't need, "I don't like what private-equity firms do in terms of taking out every dime they can and leveraging [companies] up so that they really aren't equipped, in some cases, for the future."

First, you go in and stream-line the company for maximum profitability. That makes it look golden. Then you take it public with an IPO. In different cases, Bain would raise tens of millions of dollars, but they would also take out millions in profit. Their margins were often far above what the margin of the company might be on an ongoing basis. So, Bain's profits weren't what one who was building a business over the long haul might expect. It represented a huge, one-time hit. That also puts the lie to Romney's job creation numbers for that portion of their business. They weren't in it for the long haul.

Investors who partook in the IPO were investing money in a specific business. But the tens of millions Bain would take out were no longer available to the business if they hit hard times, or wanted to use it to upgrade, or expand. That isn't to say they were left with no money by any means. But Bain took huge profits from the IPO, not the ongoing business concern.

It would take more detailed analysis to determine just how much, or if Bain's profit taking hurt the business they took public. But that information is extremely hard to gather and Bain isn't interested in releasing it, nor is Romney cooperating.

People can judge it as they see fit. But that is, in essence, what Buffett is referring to when his says companies like Bain often left businesses unequpped to deal with the future because of the huge profit they took after taking them public. In extreme cases, it worked almost like a scam. In other cases, they would borrow against the company, then take that money and invest it somewhere else. That might be fine. But the company was also on the hook to re-pay what was borrowed, meaning their profitability had to remain high, or they couldn't service the debt. Hit a rough patch, and you could easily end up without enough of a cushion to survive.

 

Comments

[Ragspierre]

Amazing, Dan.

First, you quote Warren "Raise Taxes" Buffett, Obama's man.

Second, you chant "huge profits".

Third, ever hear of the Rule of 78s?

MOST lenders front-load their returns. Likewise, agents.

Fourth, with at-risk companies, to NOT take the Bain stockholders' due at the first opportunity would have been outright irresponsible.

[section9]

Well, to be sure Romney and his partners were front-loading the firms in order to strip them down and kill them. That's standard vulture capitalism. Happened all the time back in the Eighties.

However, quoting Warren Buffett as a call to authority is suspect, Dan. Buffett is one of Obama's bankster masters and has made a killing during Obama's time in office.

Let's not go there.

[Dan Riehl]

My point is, he knows how to make money but he also has a reputation for long, stable investment, year after year. So, he has some credibility on this particular issue.

[Ragspierre]

Horsesh!t.

[John Galt Jr.]

Ok, you've been outed... Your out of the closet as a Marxist-Lenenist...

Here is some appropriate music for the Riehl World

http://www.youtube.com/watch?v=0yDrtNEr_5M

[Koozebane]

As a free market advocate, I am absolutely, positively free to criticize those who abuse the system and use unethical means to turn a profit.

Criticism and reputation are integral parts of truly free system regardless of which big political party it embarrasses.

I am not a herd animal who must remain in step with the pack.

Blindly going along with the collective...as well as affixing derogative labels to dissent in order to quash criticism...are for liberals.

In a truly free market system, Romney's business practices are fair game for anyone to examine and criticize.

[Ragspierre]

"Romney's business practices are fair game for anyone to examine and criticize."

Truthfully. With facts.

Only then. Otherwise, others are free to criticize you.

Agreed?

[Koozebane]

My issue is with criticism for merely questioning the status quo and daring to examine the actions of favored individuals.

Freedom to criticize for unscrupulous acts of any sort is universal.

So, of course, it goes both ways.

[Ragspierre]

"...for merely questioning the status quo and daring to examine..."

Isn't that rather disingenuous? Who criticized anyone for that?

The critique was for the obvious smear, and the use of Collectivist hyperbole.

Certainly on my part.

[Koozebane]

Look, if you have any evidence that Warren Buffet stripped anyone of their pensions and left the taxpayer holding the bill, by all means, we'd all love to read about it.

Until then, monosyllabic expletives aren't much of a response.

I don't agree with Mr. Buffet's views on taxation in any sense of the imagination, but he certainly has far more success than most Americans in the free market system.

Make a case, or continue dancing by yourself.

[Ragspierre]

Psst...

The wheels fell off your rational wagon.

[gary gulrud]

"The wheels fell off your rational wagon."

Thomas Sowell has endorsed Newt. Maybe you should read some of his work and put an axle on your wagon.

[Ragspierre]

I read Dr. Sowell regularly, gary.

So. The. Fluck. What?

[Ragspierre]

"Look, if you have any evidence that Warren Buffet stripped anyone of their pensions and left the taxpayer holding the bill, by all means, we'd all love to read about it."

You are (perhaps intentionally) comparing apples to oranges.

Buffett is a "position player". He takes positions in companies based on his estimation that they are undervalued. He offers nothing by way of management to the company (though the very fact he has invested in them has an impact on their valuation by others). He is passive WRT the company (as a generality). He makes no claim to being a management guru.

There are two "Bains". The first is a management consulting company. They sell management expertise. The second, formed largely by Romney, is a venture capital company.

In the venture capital company, the business model called for the firm to acquire (by voluntary exchange) an ownership position in a troubled firm (which Buffett would have steered clear of). They were highly pro-active in their management style, in keeping with what you would expect from a "turn-around" specialist. This makes them categorically different from Buffett.

If I understand the model correctly, they NEVER planned a long-term "position" strategy. The model called for them to get in, turn things around by use of sound business practice, and get out. This often entailed an infusion of new capital, sometimes via an IPO. Just FYI, the due diligence for an IPO is IMMENSE, DETAILED, and EXHAUSTIVE. Anyone claiming a "surprise" is lying unless there is fraud.

You can look up Buffett's investments, which DO include bailed out institutions (i.e., Goldman Sachs). He is not an angel. Just a human being. Kinda like Romney. (See Buffet, Warren)

Bain developed a model that is taught in business schools today, and they are OFTEN heavily influence by Collectivist faculty.