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Steven Rattner Misses the Point (Romney’s and Obama’s) – POSTSCRIPT ADDED 5/16*

Last February, in the lead-up to the all-important Michigan primary, Romney wrote an op-ed piece in the Detroit News titled “U.S. autos bailout ‘was crony capitalism on a grand scale’.”  The dual purpose of the piece was to defend the recommendation he made in a November 18, 2008 op-ed article in the New York Times titled “Let Detroit Go Bankrupt” by saying falsely that GM and Chrysler did not need federal funds to proceed successfully through bankruptcy reorganization rather than having to liquidate, and to complain that the terms of the federally-financed bankruptcy outcome included an agreement by which the UAW received shares of stock in GM in exchange for the union’s assuming the company’s healthcare liability. 
In a rebuttal op-ed in the New York Times, Steven Rattner, the Obama administration’s auto taskforce chief advisor and himself a venture capitalist, deconstructed Romney’s claims, especially the statement that private capital was available to fund the reorganization process.  Rattner wrote:

In late 2008 and early 2009, when G.M. and Chrysler had exhausted their liquidity, every scrap of private capital had fled to the sidelines.

I know this because the administration’s auto task force, for which I was the lead adviser, spoke diligently to all conceivable providers of funds, and not one had the slightest interest in financing those companies on any terms. If Mr. Romney disagrees, he should come forward with specific names of willing investors in place of empty rhetoric. I predict that he won’t be able to, because there aren’t any.

So even though Rattner is a venture capitalist, I was a little surprised to read that he characterized a new Obama ad as unfair for targeting Romney’s work as a venture capitalist for Bain Capital by illustrating what that work actually entailed.  The ad, which responds to Romney’s claim to have created 100,000 jobs while at Bain, shows what happened at a Kansas City steel mill that Bain bought not for the purpose of creating jobs but for the purpose of shuttering it after Bain had made some money from it. 

Rattner said that the two candidates should not pretend that the purpose of venture capitalism is to create jobs.  Romney, he said, should not have claimed that he created 100,000 jobs while at Bain.  And Obama should not complain that Bain’s brand of venture capitalism often was to buy ongoing businesses, milk them quickly, and disassemble them in liquidation or for the value of their parts.

“Bain Capital’s responsibility was not to create 100,000 jobs or some other number. It was to create profits for its investors,” Rattner is quoted as saying. “This is part of capitalism, this is part of life.  I don’t think there’s anything Bain Capital did that they need to be embarrassed about.”

Well, okay.  And the more common types of venture capitalism—of the funding-of-Silicon-Valley-or-biotech-start-up variety, for example—will, if all goes well, create profits for the investors and create jobs.  But that’s not the type of venture capitalist Romney was. 

Yet the entire premise of Romney’s campaign is that he’ll use his business acumen, demonstrated during his Bain years, to create jobs, not that he’ll use it to create profits for investors.  He’s running for president, not for chairman of the board of Goldman Sachs.  Which is why he says he created 100,000 jobs as head of Bain Capital.  And which is why Obama wants to show that, well, Bain Capital’s responsibility was not to create 100,000 jobs or some other number; it was instead to create profits for its investors.  And that it created profits for its investors.  And exactly how it did that, and what the consequence was for the employees who were the collateral damage.  (“Like watching an old friend bleed to death,” one of the former steel mill employees says in the ad.)

Rattner’s right that it is indeed part of capitalism, part of life.  And Bain Capital may not have done anything it needs to be embarrassed about.  But Bain Capital is not running for president claiming that its purpose is to create jobs and that it knows how to have the economy create hundreds of thousands of jobs each month, when in fact its sole purpose is to make a profit for its investors and all it has demonstrated is that it can do that well and that job creation and job loss are irrelevant to its purpose and to the outcomes.  Romney, by contrast, is running for president claiming exactly that.  An ad by his opponent pointing out that, contrary to his incessant assertions, Romney’s work at Bain was disconnected from job creation in both purpose and result is not only fair but directly on point.  

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*POSTSCRIPT: In the comments to this post, reader SW wrote:

Isn’t this completely obvious to everyone except those who are paid to confuse the issue?  Or who are incredibly stupid?

I responded:

I would think so, and for that reason I debated whether to write the post.  I decided to write it because I’ve been surprised that there has been almost no public discussion, best as I can tell, about the difference between the type of venture capitalism that helps startups or helps companies expand, and the type of venture capitalism—appropriately nicknamed vulture capitalism—that Romney practiced at Bain Capital.  For example, the prominent Silicon Valley venture capitalists do not (to my knowledge) buy companies in order to strip them down or outright liquidate them. The key paragraph in my post is:

Well, okay.  And the more common types of venture capitalism—of the funding-of-Silicon-Valley-or-biotech-start-up variety, for example—will, if all goes well, create profits for the investors and create jobs.  But that’s not the type of venture capitalist Romney was. 

I’d love to see mainstream news outlets and the Obama campaign discuss this.  

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Obama Bucket Shop act

Yves Smith  points us to information on our notions of new business and venture capital:

Amar Bhide, who has written the classic, The Origin and Evolution of New Businesses, has decisively debunked the idea underlying the Obama Bucket Shop act, which is that public stock offering are an important source of funding for new businesses.

The problem is, as Bhide explained, is that academics focus on the easy to study but relatively inconsequential venture capital funded companies which look to IPOs as an exit. Bhide found that only 1% of new and young businesses were funded by venture capital. Similarly, his multi-year study of Inc 500 companies found that a comparatively small portion had VC backing, and even then, many got VCs in at a late stage, not because they needed the money but having the “right” VCs would lead to a much bigger premium when they went public.

Bhide found that most new businesses are based on an insight about an business opportunity that the founders discovered as employees (ie, they saw a market niche that incumbents were ignoring).
These ventures were funded by savings, friends and family, and credit cards.


Similarly, the idea of venture capital or stock promoter funding as some sort of boon for entrepreneurs is wildly overstated.  The value added of venture capital is questionable. It produces stock-market type returns with more volatility. A colleague who founded a successful venture capital firm left when it went to do a second round of funding (the junior partners stayed on). He gave a long form, compelling analysis as to why: when you actually went through the numbers, the returns to the entire asset class depended on the returns of a very few firms, and even at them, of a very very few deals

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