Relevant and even prescient commentary on news, politics and the economy.

Jonathan Bernstein Nails the Mad Hatter

Beautiful. (I was thinking the same thing during the debate, but since no one afterward pointed it out, I thought I must have misunderstood.) 

Just wondering whether Romney still has his old calculator around.  The one from his Bain days.  The one that could actually add and subtract!  And multiply and divide and perform algebraic, trigonometric and calculus equations, and do amazing other types of calculations too, apparently.  

You know.  The one that tallied up the funds in that Caymans IRA and in the Swiss and Bermuda accounts and shell corporations.

Better still: Maybe he can borrow a calculator from Brad Malt, his family’s trust-fund trustee and lawyer.  Or from that PriceWaterhouseCoopers accountant who did his taxes for the last two decades or whatever.

Oh.  Wait.  He did.

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The Federal Bailout That Saved Bain Capital & Mitt Romney

The Federal Bailout That Saved Bain Capital & Mitt Romney

Government documents prove the candidate’s mythology is just that

by: Tim Dickinson

Mitt Romney likes to say he won’t “apologize” for his success in business. But what he never says is “thank you” – to the American people – for the federal bailout of Bain & Company that made so much of his outsize wealth possible.

In fact, government documents on the bailout obtained by Rolling Stone show that the legend crafted by Romney is basically a lie. The federal records, obtained under the Freedom of Information Act, reveal that Romney’s initial rescue attempt at Bain & Company was actually a disaster – leaving the firm so financially strapped that it had “no value as a going concern.” Even worse, the federal bailout ultimately engineered by Romney screwed the FDIC – the bank insurance system backed by taxpayers – out of at least $10 million. And in an added insult, Romney rewarded top executives at Bain with hefty bonuses at the very moment that he was demanding his handout from the feds.

Under normal circumstances, such ample reserves would have made liquidating Bain an attractive option: Creditors could simply divvy up the stockpiled cash and be done with the troubled firm.

What’s more, the bonus loophole gave Romney a perverse form of leverage: If the banks and the FDIC didn’t give in to his demands and forgive much of Bain’s debts, Romney would raid the firm’s coffers, pushing it into the very bankruptcy that the loan agreement had been intended to avert. The losers in this game would not only be Bain’s creditors – including the federal government – but the firm’s nearly 1,000 employees worldwide.

The FDIC considered finding a buyer to take over its loans to Bain, but analysts concluded that “Bain has no value as a going concern.” And the government wasn’t likely to get much out of Bain if it allowed the firm to go bankrupt:

How had Romney scored such a favorable deal at the FDIC’s expense? It didn’t hurt that he had close ties to the agency – the kind of “crony capitalism” he now decries. A month before he closed the 1991 loan agreement, Romney promoted a former FDIC bank examiner to become a senior executive at Bain. He also had pull at the top: FDIC chairman Bill Seidman, who had served as finance chair for Romney’s father when he ran for president in 1968.

The federal documents also reveal that, contrary to Romney’s claim that he returned full time to Bain Capital in 1992, he remained involved in bailout negotiations to the very end….

This story is from the September 13, 2012 issue of Rolling Stone.

(Hat tip Barry Ritholtz via Spencer)

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Is Harry Reid’s Bain-Investor Friend the Gawker Leaker?

Having now read the Gawker articles summarizing some of the Bain documents leaked to Gawker and published there today, I’m speculating that the leaker of the documents is also Harry Reid’s source for Reid’s allegation that Romney paid no taxes for at least a decade, and that the leaker believes that the documents suggest either that Romney paid nowhere near the 13% per year that he claims to have paid, or that in 2009 Romney back-paid taxes as part of the IRS’s temporary amnesty program that year, so that his annual tax rate then came to at least 13%.

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Does, or did, Romney own shares in the Bain fund that is an owner of HCA (which appears to be engaging in Medicare fraud)?*

During the Great Recession, when many hospitals across the country were nearly brought to their knees by growing numbers of uninsured patients, one hospital system not only survived — it thrived.

In fact, profits at the health care industry giant HCA, which controls 163 hospitals from New Hampshire to California, have soared, far outpacing those of most of its competitors.

The big winners have been three private equity firms — including Bain Capital, co-founded by Mitt Romney, the Republican presidential candidate — that bought HCA in late 2006.

HCA’s robust profit growth has raised the value of the firms’ holdings to nearly three and a half times their initial investment in the $33 billion deal. The financial performance has been so impressive that HCA has become a model for the industry. Its success inspired 35 buyouts of hospitals or chains of facilities in the last two and a half years by private equity firms eager to repeat that windfall.

HCA’s emergence as a powerful leader in the hospital industry is all the more remarkable because only a decade ago the company was badly shaken by a wide-ranging Medicare fraud investigation that it eventually settled for more than $1.7 billion.

Among the secrets to HCA’s success: It figured out how to get more revenue from private insurance companies, patients and Medicare by billing much more aggressively for its services than ever before; it found ways to reduce emergency room overcrowding and expenses; and it experimented with ways to reduce the cost of medical staff, a move that sometimes led to conflicts with doctors and nurses over concerns about patient care.

In late 2008, for instance, HCA changed the billing codes it assigned to sick and injured patients who came into the emergency rooms. Almost overnight, the numbers of patients who HCA said needed more care, which would be paid for at significantly higher levels by Medicare, surged.

HCA, which had lagged the industry for those high-paying categories, jumped ahead of its competitors and was reimbursed accordingly. The change, which HCA’s executives said better reflected the service being provided, increased operating earnings by nearly $100 million in the first quarter of 2009.

To some, HCA successfully pushed the envelope in its interpretation of existing Medicare rules. “If HCA can do it, why can’t we?” asked a hospital consulting firm, the Advisory Board Company, in a presentation to its clients.

In one instance, HCA executives said a private insurer, which it declined to name, questioned the new billing system, forcing it to return some of the money it had collected.

Let me speculate here: Might Romney’s tax returns for the few years preceding 2010 show an interest in the Bain fund that continues to own a large share in HCA even though HCA went public last year?*  

Just asking.

*The New York Times article explains:

In the spring of 2011, in one of the most closely watched public offerings since the financial crisis, HCA became a public company once again. Its three buyout owners each sold another $500 million worth of stock, allowing them to recoup all their initial investment.

Last fall, HCA agreed to buy back the stake held by Bank of America, which had purchased Merrill Lynch in 2009, for $1.5 billion, giving the bank a return of two and a half times its initial investment. And earlier this year, HCA paid out $900 million in dividends, of which $360 million went to K.K.R. and Bain.

The 40 percent stake in HCA still held by K.K.R. and Bain is worth about $4.8 billion at current levels, giving them a potential profit, with the dividends they have received, of three and a half times their initial investment of $1.2 billion each.

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Yglesias Misses the Point. Again. [with correction]

Rules requiring firms to restrict employment to their country of origin would be hideously inefficient if applied on a global basis, and they would be every bit as devastating to American employees of foreign firms as offshoring by American firms is to workers who lose their jobs here. (One might also ask where the borders of corporate patriotism ought to be. If it’s wrong for a Michigan-based car company to have a supply chain that extends to Mexico, why is Ohio OK? After all, it hardly makes a difference to a laid-off worker where exactly his job went—the bad news is that he lost his job.)

Over the long run, we’re all going to be more prosperous if we live in a world where firms are allowed to locate work where it’s most efficient to locate it. This is exactly why, despite some tough ads, the Obama administration has not proposed any policies to restrict firms’ freedom to shift work across state or national boundaries.

Romney’s unwillingness to make the case for outsourcing reflects, in part, political timidity. But more broadly, it underscores that although he’s been an eager participant in contemporary capitalism, he’s not willing to mount a policy response to its vicissitudes.

Offshoring Is Fine. Why won’t Mitt Romney defend Bain’s record?Matthew Yglesias, Slate, yesterday afternoon.

It’s surely true that rules requiring firms to restrict employment to their country of origin would be hideously inefficient if applied on a global basis, and they would be every bit as devastating to American employees of foreign firms as offshoring by American firms is to workers who lose their jobs here.

But, to my knowledge, the only one who’s equated the absence of* government policy (of necessity on this issue, statutes) that would restrict corporate employment to the country of the corporation’s origin, and a private equity firm’s investment in companies that specialize in assisting American corporations with offshoring employment, is Yglesias.  Even Romney apparently recognizes the distinction. Not sure why Yglesias doesn’t.

It’s one thing to argue that utterly unfettered globalization of employment by corporations worldwide ultimately has a positive effect on the American economy—as Yglesias does. But it’s another thing entirely to actually convince a majority of the public that this is so even in light of current trends and actual facts. 

And it’s one thing to argue that laws that forbid companies from relocating jobs from the company’s home country to another one would have a negative side to it because of possible retaliatory laws in other countries, and another thing to equate that with decisions by corporations themselves about whether to offshore or not. (And, setting aside the obvious constitutional bar to prohibiting a corporation’s relocation of jobs from one state to another, it’s a lot easier for families to relocate from Michigan to Ohio than from Michigan to Mexico.)

The thing that Yglesias doesn’t get is that Romney’s claiming that his private-sector career demonstrates his ability to create not just wealth for investors but jobs en masse for the public. There’s really no way for him to make that claim persuasively, because it plainly isn’t true. He can defend offshoring as a corporate strategy, but corporate strategy is a different matter than economic strategy.

Unless, of course, Romney wants to argue that encouraging offshoring by American corporations is good government policy. Hope he does.  But then, I’m a Democrat.

*Sentence corrected to insert the words “the absence of”.

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Was Romney’s Bain-Era IRA Tactic Really Legal In That Circumstance? [with UPDATE from Business Insider]

In a comment to my post yesterday titled “Romney’s VERY Private Equity,” which asked how Romney was able to metasticze his Bain-era IRA account to accumulate more than $100 million—Investment in Apple stock?  In precious-metals funds?  A quiet Louvre heist? I asked—reader Steve Hamlin wrote:


Re: Romney’s IRA contributions, there was a WSJ article in the past several days that talked about them – they were often a special share class of the PE deals that Bain invested in, where the majority of the value of the company was assigned to the other share class. There are examples of these “low-value class” shares making 600% in several years.

The tax strategy (made sense at the time, less so now) was to put these high(?)-risk, high-reward share classes in your IRA, and your mandatory allocation of the other (lower risk, lower reward) share class in to your taxable brokerage account.

The article quotes tax professionals who question the aggressiveness of the Bain share class valuations.


I wrote up a reply to Steve’s comment, but the Comments function won’t let me post it there because the comment is too long.  So, here it is:

Thanks, Steve.  When I read your comment, I remembered reading something about this in the Vanity Fair article (which I read only once, on Jul. 3), and just went back and reread that part of it.  Here’s what it says:

The Romneys won’t say, but Mark Maremont, writing in The Wall Street Journal, uncovered a likely explanation. When Bain Capital bought companies, it would create two classes of shares, named A and L. The A shares were risky common shares, to which they would assign a very low value. The L shares were preferred shares, paying a high dividend but with the payoff frozen, and most of the value was assigned to them. Bain employees would then put the exciting A shares in their I.R.A. accounts, where they grew tax-free. With all the risk of the deal, the A shares stood to gain a lot or collapse. But if the deal succeeded, the springing value could be stunning: Bain employees saw their A shares from one particularly fruitful deal grow 583-fold, 16 times faster than the underlying stock.

The Romneys won’t tell us how, or even if, they assigned super-low values to the A shares, but there are a couple of ways to do it. One is to use standard options models to price the shares—then feed inappropriate assumptions into those models. Romney could alternatively have used a model called liquidation valuation, which Kleinbard [Ed Kleinbard, a USC tax law professor whom the author contacted in researching the issue] says would have been “completely inappropriate.” Without seeing the assumptions used on Romney’s tax returns from the years when those lowball A shares were squirted into his I.R.A., we cannot know how he did it. Whatever methods he used, however, the valuations were, according to Andrew Smith, of Houlihan Capital in Chicago, “pushing the envelope.” (Andrea Saul retorts, “Why should successful investments be criticized?”)

I remembered that when I read those paragraphs last week, I said to myself in answer to Saul’s rhetorical question: “The relevant question here is not whether successful investments should be criticized, but instead whether illegalinvestments should be criticized.”  The investments themselves weren’t illegal, but the classification of the stock into two arbitrarily-divided classifications in order to give falsely low valuations on one class in order to create huge nontaxable profits, sure as hell sounds to me like it wasillegal.

Krugman says there possible legal ways that the IRA gains could have been so huge.  But the way described in the Vanity Fair article and in the WSJ article doesn’t appear to be legal in Romney’s instance, even though this tactic would be legal in other instances—i.e., when there is some actual tangible difference between the risk and value of the two classes of stocks, and when the stock placed in the IRA is given a legitimate, rather than fraudulently low, value.

The relevant paragraphs of the WSJ article read:

The tax-deferral opportunity stemmed from the way Bain often chose to structure the shares of companies after taking them over.

Even if the companies had only one share class, Bain frequently gave them two classes, usually called Class L and Class A, according to former employees, Bain internal documents and securities filings. Because Bain controlled the companies, it had flexibility in assigning values to the classes.

Class L shares, akin to preferred stock, were safer and had a higher initial value. They had priority if the company paid dividends, and holders of these shares were the first to receive proceeds from a sale or liquidation. The shares also accrued interest, often at 10% to 12%.

Bain assigned a much lower value to Class A shares, which were riskier but potentially more profitable.

If Bain sold or liquidated a company it had taken over for less than was owed to Class L shareholders, the Class A shares lost all of their value.

But once Class L shareholders got their money, Class A shareholders received the bulk of additional gains, often as much as 90% of them, according to the documents and former employees. In successful deals, the A shares could skyrocket.

Can it really be that all that was legally necessary was to simply separate objectively identically-valuable stocks from a single company into two classes of stocks whose only difference is the arbitrary value that the company assigns the stocks, rather than the actual tangible value of the stocks?


UPDATE: To my utter knock-me-over-with-a-feather astonishment, Business Insider’s Henry Blodget posted an article early this morning based partly on, and linking to, um … um … my “Romney’s VERY Private Equity” post from yesterday.  The link to my post is in the sentence “This ‘structuring’ has also likely taken advantage of offshore accounts, the contribution of hard-to-value securities at low valuations to Romney’s IRA (whereupon they exploded in value), ….” 

Cool! Thanks, Mr. Blodget! 

Then this afternoon, he posted a follow-up titled “Wait—MaybeTHIS Is How Mitt Romney Got So Rich…,” in he explains (based on the surprising revelation in the Boston Globe article that during the period of 1999 to 2002Romney owned 100% of Bain stock), how Romney’s IRA account might actually have acquired so much money legally. 

Since Blodget may well have figured out how that IRA came to be worth so much, without even having to channel Sherlock Holmes, I thought I should let readers know.  Although I think he may be wrong and that Bain really did stage a quiet Louvre heist.  Has anyone noticed whether Mona Lisa looks slightly more like a Bain CEO than she used to?

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Romney’s VERY Private Equity (with UPDATE)

By now there’s been a lot of discussion in the media about the Vanity Fair and Associated Press exposés of Romney’s and his wife’s offshore bank accounts, to the limited extent that information about them is publicly available.  Romney is now likening overseas bank accounts and shell/money-laundering corporations to investing in real overseas companies—as if investments in overseas companies guarantee profit rather than loss in the same way that Bain and its executives usually were guaranteed profits, through financial-transaction fees and “consulting” fees they arranged for themselves irrespective of whether the acquisitioned company made money or instead collapsed under the weight of the debt Bain forced it to incur, in large part, in order to pay Bain those fees.  And as if personal profits from overseas investments aren’t taxable here in the United States unless those profits are stored in bank accounts elsewhere. 

Romney’s refusal to disclose enough specifics about these foreign bank accounts, where the money actually came from and under what circumstances, and how it has been invested gives new meaning to the term “private equity,” at least in Romney’s case.  And this refusal, too, has been and will continue to be widely discussed.

But there’s one aspect of the investigative reports that I think has not been given enough attention and analysis: that Romney’s IRA account from his 15 years as CEO of Bain Capital—a period of time when annual IRA investments could be no more than $2,000—now has assets of more than $100 million.  The Vanity Fair article quotes an expert that the author consulted as saying he believes that they only way that this could have happened would be if Romney significantly undervalued the actual value of the assets he was placing into that account.  Paul Krugman in his New York Times column on Monday discussed the IRA and said there were conceivable legal ways to accomplish this but, because of the secrecy, no way for the public to know whether these wealth was accumulated legally or not. 

Krugman didn’t discuss how this could have happened legally, so I’m wondering: what kinds of investments would there have to have been for this money to have so wildly metastasized?  Apple stock?  If so, how much Apple stock?  Precious-metal funds?  A quiet Louvre heist? 

But there’s another issue concerning Romney’s and Bain’s peculiar brand of investment—this one involving the realdefinition of private equity, not the pun one I used in the title of this post—that also hasn’t received enough media attention: the difference between Bain-style private equity and Silicon Valley-style venture capital.  That difference being the one I alluded to above regarding the investor’s forcing the invested-in company to borrow large sums from banks and use some of the borrowed money or some of its profits to pay huge fees to the investor.  Or, in Bain’s case, apparently, not to all the investors, just to the investment company itself and to its executives—thus eliminating, for them, the usual risk inherent in capitalist investment.  You know; the risk so vaunted by uber-capitalist-advocates like Romney.  Not to mention Romney himself. 
Slate writer Will Oremus has an article there today in which he argues that the real difference between the federal government as an angel investor in startups such as Solyndra and private venture capitalists is that the former can only recoup its investment, while the latter can make substantial—sometimes huge—profits.

But venture capitalists, unlike Bain and its executives, also can lose all or some of their investment, just as the government can.  ((Does Andreesson Horwitz load up the startups it invests in with huge bank debt and use some of the loan money to pay the venture capitalist firm huge financial-transaction and consulting fees?)*  Just as there’s a difference between Silicon Valley-type venture capitalism and Bain-style private equity—something that Obama should point out—there’s a difference between making off like a bandit and being one.


UPDATE: Well, as implied in my reply to a comment below, I was unaware that Romney was the sole owner of Bain; I thought Bain was a closely-held corporation in which Romney was the main, but not the sole, shareholder.  But a jaw-dropping Boston Globe investigative report today, titled “Mitt Romney stayed at Bain 3 years longer than he stated,” makes clear—among, um, other things—that Romney was the sole owner of Bain.

ALSO: On the subject of what types of investments Romney would have to have placed in his Bain-years IRA in order for it to have gained so much wealth, I just emailed Paul Krugman at his Princeton email address, told him about my post and about the speculation in the comments by Mike and Kaleberg, and asked whether he could write on his blog or even in his column about the various possibilities.  So … we’ll see ….

*Parenthetical added on 7/12 at 11:15 a.m.  Should have included it in the original yesterday.  Couldn’t resist adding it now.

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Bain Capital vs. Berkshire Hathaway**

Matthew Yglesias channels … me!

Yep, that’s right.  And now that, as Yglesias discusses, Newark Mayor Cory Booker has given the Obama campaign permission to explain the differences between the various types of venture capital “models” (as Yglesias calls them), conceding that, yes, that may really be more relevant to the key issues in the campaign than Obama’s earlier relationship with Jeremiah Wright, I strongly urge the Obama campaign to do that—in detail, with as much specificity as is necessary to illustrate it. 

In my earlier post, I mentioned the distinction between, say, the funding-of-Silicon-Valley-startups venture capital model and the leveraged-buyout-to-extract-value-and-then-close-the-company model that Bain engaged in (apparently) regularly when Romney headed it.  Yglesias doesn’t mention the former but contrasts the latter with the genuine-turnaround model, which is the model that Bain and Romney claim was (and Bain claims, is)** theirs. 

Yglesias is right to point out that the genuine-turnaround model is distinct from the extract-value-and-then-close-the-company one.  But I think there’s also a distinction between the leveraged-buyout-to-extract-value-and-then-close-the-company model that Bain engaged (and, I assume, still engages) in, in which the intent is to “flip” the company as soon as possible, and the (to my knowledge) Berkshire Hathaway model, in which the venture capital firm, fund or holding company invests in companies, long-term, including buying some companies outright with the intent to actually own them for the foreseeable future.  (From Wikipedia: “Berkshire Hathaway Inc. … is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies.”)
Surely there are differences between the decisions a Bain-like company makes vis-à-vis the businesses it acquires in order to flip quickly for large profits and a Berkshire Hathaway-like firm whose interest in the acquired business is long-term, because the very purpose of the investment is different.  Those differences matter.  A lot, I would think.

As for Booker, his short-term interest seems analogous to the Bain venture-capital model.  Yglesias says he’s receiving quite a bit of campaign funding from finance types. Including, presumably, those of the Bain model.  (Or maybe Booker just doesn’t recognize the distinction.)*

*This parenthetical was added after the original posting.

**This parenthetical was corrected for clarity.

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Guest post: Another Romney/Bain Firm Got Subsidies (Then Closed a Plant)

by Kenneth Thomas

Another Romney/Bain Firm Got Subsidies (Then Closed a Plant)

The Tampa Bay Times reports (via Jed Lewison) that another Bain-owned company, Dade Behring, was a recipient of $7.1 million in subsidies from Puerto Rico and the federal government the year before it laid off 300 workers there. A common problem with many subsidized projects, it took the money and ran without any consequences.
As I have pointed out before, another Bain-owned company, Steel Dynamics, received at least $95 million in incentives from state and local governments in Indiana, for two separate investments. In fact, this exceeds the $85 million Bain made in profit from the firm.

Now we have a third example of Bain-owned companies getting government subsidies. For a candidate who claims to be about private enterprise, Romney clearly doesn’t walk the walk. As Jed Lewison has noted before, it’s clear that when Romney talks about crony capitalism, he’s talking about himself.

How many other government subsidies are in Bain’s past? Inquiring minds want to know.

crossposted with Middle class political economist

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