Here is a link to an analysis that the Wall Street Journal did back in January. They say right up front that both sides will find it full of ammunition for their particular views. (ie paradigms)
WSJ Bain 77 Analysis
I am copying in some of Hiram's comments from our "Economic Theory" discussions to get us started. Is Romney God, the Devil or just another human with flaws and strengths? Maybe we can do this about Obama next so my Conservative readers can expel some of their angst... Have fun !!!!
"Mitt Romney made his fortune selling America short. In an economic environment where expansion was becoming more difficult, he focused his career on contraction. If you look at his tax returns, what you find is a lot of investments designed to insulate himself and his fortunes from the problems of America's economy. These strategies worked out well for him, and on a personal level, I don't have any problem with that. But those aren't strategies which contribute to growth or demonstrate any understanding at all of how America can grow. And the problem with Mitt is that is huge personal success has blinded him to the limitations of that success and how it was achieved. For one thing, as a guy who made a fortune laying people off, he views hiring someone, not as a contract engaged in for an unsentimental mutual benefit, but as an act of compassion as his recent tin-eared commercial demonstrates." Hiram
"By the way, this emphasis on predictability that was essential to the Romney way of doing business, is ironic. The key to the Romney way is to select businesses which are save. Office supplies, pizzas, gym shoes, these are all things that are relatively immune to innovation. The demand for them is relatively constant, there isn't much product differentiation, so the key to profitability in those businesses is to cut costs. Romney's access to capital which made it possible for the businesses he involved himself with gave him economies of scale which he could use to drive the local mom and pop stores that previously dominated those market sectors, out of business. What was hard to foresee then, but is very clear now is that those businesses aren't risk free at all, and that the risk doesn't come from product innovation, but from the internet. The business model of category killer retailers, so predictable in the past, is now under pressure from the internet. I noted in the Journal the other day that Staples, one of the Romney success stories, is now closing stores, laying off workers and refocusing on internet sales. It's strength has become it's weakness, since it's lack of product differentiation makes what it has to sell ideal for selling over the internet. That makes it no longer a Mitt Romney kind of business of which there are fewer all the time." Hiram
"There are a lot of objective truths around. Four years ago, the country was in disastrous shape for a variety of reasons. One of them is that we got lazy. We stopped making things. We confused the inflation of bubbles with the creation of value. We fooled ourselves into thinking that folks like Mitt Romney could create wealth by shuffling paper around, allowing our country to become a Ponzi Scheme. And as with all Ponzi Schemes, the delusion has continued long after the reality. We think if we try one more time, give the Mitt Romney's of the world one more chance, they will make it all right. It's not going to happen. The only way things get better is if we get back to work, start making things again, start dealing with the problems Republicans want to kick down the road in hopes that some confidence fairy will make things all better again." Hiram
23 comments:
Maybe at this point, I should say that I don't regard Romney as the devil. I don't think he is a bad person and he has many qualities that I admire. But in terms of the economy and what needs to be done to turn around this country, his business experience is largely irrelevant. If you look at the Wall Street Journal article, note how unspecific it is. Few companies are mentioned, and they are mostly the usual suspects. A vision care company was mentioned, and described as a success, But what kind of success?
--Hiram
Wesley Jesson, the company described in the Journal article, is in the contact lens business. Note that this is a classic Romney business. It's predictable; a certain portion of the population will always need corrective lenses. It isn't terribly vulnerable to innovation, although the development of lasix surgery may give them the occasional fright. Bain made a lot of money on the deal, but the article didn't go into how. Did Bain Wesley revolutionize Jesson's business? Were Bain scientists engaging innovative cutting edge research from which Jesson benefited? Something that would have created value in the company and for the economy generally? The article doesn't say. But in all likelihood not. What Bain does is buy these companies with very little down. They make changes which increases the value, or at least the perception of the value of the company, and then, because of the leveraged nature of the investment, sell out at a huge profit. Money is made for investors, but no real value is added to the economy. And this can work in the other direction just as dramatically. The downside of that deleveraging engaged in by folks like Mitt Romney is what we have witnessed in the last decade or so.
This has affected Mitt's business too. It seems much safer than it is. Bain's parent company nearly went bankrupt in the early '90s when the market turned against them. They were saved by government intervention in the form of foregone debts from the FDIC, which in practical terms, amounted to a direct government subsidy to Bain.
--Hiram
Hiram,
Sorry... I took creative license with that 666 thing.
Most companies in America are not in the innovation business. They create a product, provide a service or sell product, while continually trying to make marginal improvements to reduce cost, improve value, grow market share, etc. So I am very puzzled by your concern that these were the companies that Bain invested in.
I mean it sounds like they started with a venture capitalist business model and found that there was lower hanging fruit available. Therefore they started buying companies that had fallen out of favor with the market, heading the wrong direction and were therefore significantly undervalued.
Then as I said before, they bought this oyster (ie company) for $1, removed the pearl (ie cash), shined it up (ie made it profitable), and sold it to the restaurant guy for a $1.
Everybody was making these deals of their own free will. I assume
GAAP was followed and information was relatively transparent. They all thought they would get value from the transaction. And apparently no laws were broken. So what's the issue.
As for the FDIC issue, the bank that made the loan to Bain and then folded seems to have been the guilty party here. Bain's management simply out negotiated the FDIC loan collectors.
I am not sure how this is any different than people I know who have gotten turned around on their mortgage and chose to walk away from the house even though they could pay it.. It may frustrate me that they made that decision or got in that deep. However are we going to call all of them unprincipled for doing that, when it is the right financial decision?
Typically the Liberals would feel for the poor homeowner and curse the evil banker who gave them such a big loan in the first place. In this case it is 2 businesses, so I guess you get to blame both of them.
Background for newer readers.
G2A RS, Romney and Bain
G2A Taibbi Normal
I wonder if a friend had a gift for buying cars at a low price, pulling off the expensive equipment and selling what remained for a high price.
Would they impress you?
or
Would they disgust you?
Maybe that is the difference here...
The issue is that these deals don't create value for the economy. And Romney presents himself as a guy with a business career that proves he can do that. It is in fact the unravelling of those deals, the unwinding of the debt the Mitt Romneys stuck other people with that is the cause of the economic difficulties we are now in.
--Hiram
"U wonder if a friend had a gift for buying cars at a low price, pulling off the expensive equipment and selling what remained for a high price."
How many jobs did your friend create? In olden times, folks like Mitt used to do this a lot with companies. They often understood that the break up value of companies exceeded their market value. Markets were often inefficient that way. You see a lot less of that these days. In the terms of the analogy, buyers have gotten a lot more sophisticated in valuing the parts. Your guy now has to deal with a guy who isn't in the dark about the value of the parts. He knows he can get accurate pricing for them on the internet. So does the guy who sold him the car originally. What you find generally, is that your guy is getting his profit margin squeezed on both ends, and that if he did the numbers, his profit is illusory, and that what he is getting paid for is roughly the cost of his labor in breaking up the car.
--Hiram
The thing you are missing is that he didn't "stick" anyone with the debt. They freely and happily accepted it in hopes of making even more money. Just like the person buying the oyster w/o a pearl, or a car without the high end radio...
He seems to have a gift for making deals happen and negotiating aggressively, no wonder you don't want him in the White House. He may be able to break the gridlock and get some stuff done. Of course it is likely stuff that you wouldn't agree with. Though it may be good for America... (now we're back to economic theory)
"The thing you are missing is that he didn't "stick" anyone with the debt. They freely and happily accepted it in hopes of making even more money."
But he does. Bain buys these companies and then uses it's control of them to borrow money, using the company's assets as security. Bain then flips the debt impaired company back into the market place. Bain has stuck it's bill for "special dividends", and "management fees", on the company it acquired, permanently weakening it. In some cases, the company goes bankrupt, and that means the FDIC ends up eating the debt, an indirect subsidy to Bain's risky business model.
Even back in the day, there were very few companies that could withstand this treatment. Bain would sift through hundreds of companies in search of candidates with sufficient and predictable cash flow which it could use to convince lenders that the deal was creditworthy. In any event, such deals have very little to do with improving the economy as a whole; the real problem the next president will face.
==Hiram
At Bain he was helping to lead a business to successfully attain its goals. Whether you like the business or its model... He did this pretty well apparently.
As President he would be helping to lead the USA to attain its goals. The same skills he used to lead Bain through their hard times would be useful right now.
Unless you see gridlock as the better alternative. I don't think so though given the current deficit and National Debt.
There is a case to be made for Romney. But it isn't based on his business experience. And more and more, the case depends on the suspension of belief. We have to assume that Mitt isn't as stupid as he seems, that he doesn't believe what he says, That he has an understanding of how Americans live, which is contradicted by what he says. I just don't know why we should make those assumptions. The argument that we should vote for Mitt because he is other than what he seems to be is one I don't find compelling.
--Hiram
Given Romney being a practicing Mormon and his dedication to charitable giving, I am fascinated that you don't believe in the sincerity of his caring for the less fortunate.
Rock Mormon Social Giving
LDS Charity
Romney, at least at one point, advocated tax cuts for the wealthy which would have required tax increases for everyone else. Not a policy that suggests to me that he cares for the less fortunate. In any event, Mitt shows a really surprising lack of understanding of many of the things people rely on, and have a right to expect. Among other things, Mitt thinks that hiring someone for a job is an act of compassion. He is just a very weird guy. Really, I think the Republicans made a mistake in not more thoroughly vetting him. For a guy who has been politics for nearly two decades, even today we know very little about Mitt Romney.
--Hiram
Which is the the more compassionate act?
Giving someone money for nothing?
or
Paying an employee for productive work?
Though both are necessary at times, I'll vote for paying the employee for useful work.
Money for nothing is a BAD thing if you want to feed the soul and help people out of poverty.
Youtube The Danger of Free Stuff Make them work or train for their cash...
Youtube Welfare
Is the employee exercising compassion in performing services his employer needs? Was the FDIC exercising compassion in forgiving the loans to Bain, which were pushing them into bankruptcy? Or to paraphrase "The Godfather", were these things just business and not personal.
--Mitt
Hello Mitt and welcome,
I'm not sure how to answer that.
I believe that everything can be done in 2 ways. One is where you see the recipient as a person, and the other is when you see the recipient as an object. One you empathize with the other person and the other you see them as less than human or an obstacle.
So one get give people "free" money or give them a job from either place. What do you think?
G2A Conflict
Well for whatever reason, Mitt doesn't understand how ordinary Americans live, and it really shows. It's why at this moment, his political career, purchased at such a high price, is in ruins.
--Hiram
Hiram,
I thought it was because his Obama is offering free money to those who vote for him. And Obama is also the incumbent and therefore hard to unseat.
I am not saying that Romney is Superman... He is not... He is human, and therefore fallible. I just like his vision of America much more than Obama's.
Romney's being that individuals are responsible for their lives, for better or worse. Whereas Obama seems to believe that government is. (ie "I'm here for that Obama money..." That was priceless..)
Mitt,
Sorry, I was in a hurry and screwed up my last sentence.
"So one can give people "free" money or give them a job from either place. What do you think?"
In more detail, the huge government health and human services bureaucracy may likely forget that they are there to serve individual "human" tax payers by using their money effectively.(ie paying taxes takes away from tax payers quality of life) And they may see the "human" folks that really need help as nuisances, headaches and job security. (ie just give them a check, I want to get home)
I know that there are caring and responsible people in the HHS Bureaucracy, however the transaction will likely become less compassionate with every set of hands the money has to go through. That's why volunteering or giving money directly to a needy person is likely the most compassionate act that has the most rewards for all.
As for Employers and FDIC. I believe in employment is equal to volunteerism. The employer could select a variety of employees for a price and the employee could select a variety of jobs for an income. So the employer/employee relationship is really a free will agreement. So yes the the employee working can be considered a compassionate act. (depending on intent...) I mean they have the choice to work hard for their money and add value, or they can strive to just keep their job.
The FDIC representative may have tried to prevent the bankruptcy in order to help the company and its employees. Odds are though that they would have recovered less of the principal had they driven through to bankruptcy. So maybe both...
Now Hiram, Anything else about Romney's intent and past you want to get of your chest before we move forward?
Thought this, from a Washington Post profile of Mitt Romney, was fascinating:
"When Romney goes to the movies, he pops a bag of his own popcorn at home, stuffs it into his wife’s purse and sneaks it into the movie theater so he doesn’t have to buy a snack he considers overpriced."
Bright guy he may be, Mitt doesn't understand the very simple economics of the movie theater. Theaters make their profit on the popcorn, not the movie. In terms of being overpriced, you have to look at the total cost of a trip to the movies, not it's component parts. That is, while the popcorn might be overpriced, since it has a large profit margin, the movie is underpriced, since the theater makes no profit on it at all. It evens out. The product he is buying is a trip to the theater, not the movies. And by violating the rules of the theater he voluntarily accepted when he bought his ticket, in economic terms, Mitt is stealing, in much the same way as if he grabbed and candy bar at Target without paying. But in business terms, I suspect Mitt just sees himself as driving a tough bargain, because he knows the theater doesn't have the power to enforce it's rules.
--Hiram
WP Mitt's Spending
I loved it. I thought they were talking about my parents... If that is the case, I doubt he goes to many movies.
Though if he truly brings his own popcorn, that is taking stinginess too far. However it seems he has spent more than enough in other areas to keep the economy going.
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