Bain Capital: Privatized gains, socialized losses

An interesting breakdown of the deals that made Bain Capital successful:
http://www.bloomberg.com/news/2012-07-15/romney-s-bain-yielded-private-gains-socialized-losses.html

Note that these were deals that took place from 1986 to the late 1990s, when there is no dispute that Romney was in charge.

One such deal:

Bain borrowed heavily to purchase the company, then had the company borrow even more heavily to pay off Bain. The debt load pushed the company into bankruptcy, which socializes the loss. Bain, which destroyed Ampad, walked away with a 20-fold profit, while employees lost their jobs and creditors lost their money.

That is vulture capitalism at its worst.

They did the exact same thing in 1994, destroying another, larger company:

Tell me, what value did Bain create in those deals?

 

Interesting. I think the article makes a point early on that Romeny needs to make the case for how his experiences at Bain translate to running the country. I think there might be something there, but if he doesn't figureo out how to articulate it, and expend some resources doing so, than the public is only going to have Obama's "he made money by outsourcing" version.

Now, if I'm understanding the article correctly, what occured was that during the boom times of the 90's Bain was able to get crazy amounts of credit. Buying companies with relatively little up front. These companies then did very well for a time.

Then you have the dot bomb and companies start going belly up. Bain would then have taken a soaking as their stock value plumeted. However what I think this article is trying to say is that the gains during the good times were more than enough to offset the losses so Bain came out ahead.

Now, I think what the article wants to claim is that people work for free and there is free scientific equipment and office space lying arround all over, and so those companies had no need or use for capital in the first place. Which I don't think is fair. The reality is that laid off employees might never have just been unemployed in the first place without Bain funds. So at least they came out ahead for however long they worked.

I think the case Romeny would need to make is that in this era of stimulous spending the US government is essentially same business as Bain capital he's good enough at picking promising companies and providing various managment assistance to them such that they come out ahead net, even when things go bad, whereas Obama's picks like Soylandra just promptly nosedive.

The counter case would be that Romeny is shortsighted and his investments just looked good on paper while investors were hosing money and loans all over, allowing him to make short terms gains while unwisely (or deliberately with malice) overextending the companies resulting in companies tanking that otherwise would have survived the dot-bomb.

Given how hard various companies in those sectors took it during that era, I think Romeny might be able to make a solid case. But again, he'd have to actually try and make it.

 

Nope, The loss is limited to stock owners and those who chose to extend credit to the bankrupt company.

 

I think his experience as Governor of Mass translates to running the country. His experience at Bain capital translates into an understanding of how the real economic world works. Obamas experience consisted of community organizing and Chicago politics. Nothing more. He looks sharp in a suit, but it is still an empty suit.

 

I think it's pretty hard to defend the concept of using ridiculous amounts of leverage to buy a company, then loading that company up with massive debt to pay yourself off, then walking away and letting the company crash.

In the case of Ampad, for instance, they used just $5 million of their own money to buy the company. They then took Ampad's debt from $11 million to $444 million in just two years -- leaving the company with an annual debt payment that was three times cash flow. They *knew* that was unsustainable, but didn't care. Why? Because they used $108 million of that borrowed money to pay themselves $60 million in dividends and then have Ampad pay Bain $48 million to buy out their equity stake as Ampad lurched toward bankruptcy under its ridiculous debt load.

Bain created *no* value in that deal. They *destroyed* value by loading the company up with debt, then ordering the debt-laden company to pay Bain a ridiculous amount of money.

 

No need to continue with the facade.

It is quite evident, upon reading the entire OP, that you look upon capitalism per se with disdain--the adjective, "vulture," seems superfluous; you appear to view the capiralist system as despicable--so it would probably be better if you would just discontinue the pretense that it is only a certain form of capitalism that you hold in contempt...

 

Interesting. What part of the OP gave you that idea?

Because your post seems a convenient way to avoid grappling with the actual facts of the OP.

For the record, I do not have a problem with capitalism itself. It is superior to the alternatives, such as socialism. Capitalism does one thing particularly well: it harnesses self-interest in the service of society. In general that leads to innovation, efficiency and productivity.

But capitalism, like any system, is open to abuse. That is why regulation is necessary: To curb the excesses of capitalism.

Vulture capitalism is a good example of such excess. Companies like Bain that destroyed companies in order to make a profit added no economic value to the system. They did nothing to justify their payouts. They simply found a way to make money with minimal risk by privatizing gains and socializing losses. As such, they *weaken* capitalism.

 

What I find interesting as someone who lends companies large amounts of money for a living is that someone approved those loans! They never hit my desk, I can tell you that. We've done some leveraged buyouts and what not, but none of them have gone bad. And we don't allow them to pay huge dividends or sell the company until we get paid back. So I would like to see who approved those loans. It makes no sense. Well, for Bain it does.

 

Agreed! Although one wonders if the lenders made the loans on the assumption that the company was an ongoing concern, not one that was being gutted by Bain.

 

You can prevent dividends from being paid out. And you can certainly do all sorts of cash flow analysis showing you will never get paid back. Now, there is a lot speculative money out there that will lend the money in exchange for high rates and warrants. But they could not make money on your example, either. So I am perplexed. Truly.

 

Wait, even with the dot bomb and housing bubble your company never had a leveraged buyout loan go bad?

Anyway would your insight indicate that maybe things went down differently than Ratyri paints them? Most healthy companies operate with some debt, they don't pay it all off before paying out a dividend or paying management fees correct? And the article indicates that Ampad was gaining debt by "making aquisitions." Could it have continued to get loans if its asset to liability ratio looked good? It seems the company stock was doing quite well during this time, otherwise Bain wouldn't have been able to come out ahead after taking a significant loss during the backruptcy. And it seems they had a solid IPO. So it seems they would have been able to make a good case that things were OK and they were gaining market share, getting a leg up in the .com era, or whatever it was they were angling for.

But then they get shallacked as the "e"conomy went from boom to bomb and they went into bankruptcy as many companies would soon be doing.

On a side note, the company seems to be doing fine now.

I can't say that you're wrong. But you're speculating. And to pull that off in a malicious manner they'd have had to pull the wool over investors, creditors, regulators, investigators, and it would seem Obama's campaign staff since they focus on outsourcing instead of this. Not impossible I'll grant, but still....

Given how things can be spun, and how little experience seems to count among swing voters, I'm increasingly thinking being a blank slate is a good thing for a politician.

 

Do you really mean to say that someone "chose to extend credit to the bankrupt company" ?? That would violate logic, business sense, and very liely the AMERICAN WAY !!!

 

You know I am not as worried about the Romney Boy's business accumen as I am by the low moral standards that he has showed us during his reign of economic terror at BAIN...

 

Privatized gains/socialized losses. We've been getting closer to Republican nirvana for 30 years now. See any reason they should quit?

 

We all know how the real world works. Buy something with somebody else's cash, enhance it with somebody else's cash, get out before before the first payment comes due, let investors howl for a bailout, let government pay for the bailout. Everybody goes home happy except those that have to PAY the government which, by the way, can be put off for decades by borrowing from the Chinese. Because, well, we all know Americans ain't gonna pay no more taxes. It's called the 'grandchild of the taxpayer residual method' and Romney could have written the manual.

 

Bain Capital: Privatized gains, socialized losses


That's the way it always is with Republican capitalism. Just like the NFL whose owners are all wealthy Republicans - they demand that the public pay for their billion dollar stadiums just like they got in Minneapolis a few weeks back, but the profits are put into their pockets. All the while they proclaim themselves to be such "independent" types who never take a cent from government. This is hypocrisy and stupidity of the worse kind.

Vote for Romney and you will get more such corporate communism and welfare.

 

No need dear fellow to pull wool over anyone's eyes. As the new owners they can do what they like and as long as enough investors are paid off in the end then most of the people tha really matter are satisfied.

Those that dont matter, the workers, are laid off because the company suddenly needs to reduce its cost base due to all this new unproductive borrowing.

Nevertheless, as the new company with less workers can now finance its debts and continue to pay its investors, then Bain capital can still take out hundreds of millions in profit for itself.

Moreover no one can see a problem with any of this as the details only come years later when the state has long been picking up the bill for helping out all those newly unemployed workers.

This is much like what Mitt will likely do with the US government and economy, continue to run deficits, take tax cuts that will benefit high earners to the tune of millions. Is there for example any reason to think he will not run his government in exactly the same way as George W Bush?

Id love to know anyone's thoughts on the matter.

Yours Creation

 

this would of been pre-enron, so employees may have been forced to invest in the corporation

 

Raytri doesnt know what he is talking about. Bankruptcy doesnt socializes the loss.

 

Employees arent forced to invest in the corporation.

 

No. At least not from those things. But for the most part those were start-ups, which we never touch. And most dot coms were funded via private equity then went public. I'm sure we made fees from the IPO's, but in terms of loans, etc. it is not something we would touch. There were not many (actually none I know of) leveraged buyouts of tech firms during the bubble. And the housing issue certainly did not involve leveraged buyouts.

Don't know. Someone lent them the money, though.

The first part is true. Nearly all companies have debt. But the second part depends solely on the purpose of the debt. In a deal where you are leveraging up the company to do a buyout of the owners or for another company there will typically be tons of restrictions regarding where your cash can go until we get paid. If you are a trucking company buying a crap load of new trucks (essential use equipment) the restrictions would be far less.

Far more goes into it than a single ratio. But regardless, when you buy a company it almost always creates Goodwill, which is an intangible asset and is excluded from your asset base in any calculation. So the ratio would normally look bad (that is what leverage is, after all. Too much debt and not enough assets and/or earnings).

When you have a crushing debt load and drop it via bankruptcy it helps your stock. All else being equal, of course. But someone was left holding the bag. It wasn't me, I know that.

 

A moderately clever bit of semantical sophistry, but not nearly clever enough to fool the y-man.

 

C'mon, man, the crony "I'll scratch your back..." loan committees approved those loans.

 

Not here they didn't! We have no such thing, I can assure you. Want to make sure you lose your job? Get loans like that approved.

 

There are two (or more) companies in play here. You've got Bain and in this example Ampad. Bain was stated to have used a large amount of leverage to aquire Ampad, but there is no indication that Ampad was using a particularly large amount of leverage in its aquisitions, and we don't know if they were aquiring other companies or if they were aquiring manufacturing facilities.

The picture some here want to paint is that Bain bought the company, and had them take out big fat loans they couldn't pay back for the chief purpose of giving money to Bain, and then a bunch of investors thought that sounded awesome and bought a ton of stock in an IPO which further enriched Bain, the creditors then loan more money and then the company goes into bankruptcy which shrinks the company and costs Bain less than they've gain, but mostly lands on the backs of banks(or whatever entities provided the loans), private stockholders, and employees(because no new employees were hired you just have employees losing jobs they would have kept with Bain).

You're more the expert, but that scenario seems a bit implausable and illegal.

The alternative scenario would be one where Ampad looked like it was doing fine, until the bomb loomed and then it wasn't

Corporate raiding happens. However I note that Ampad was not liquidated. I strongly suspect the situation is being spun heavily in this article, and that's why Obama's team isn't bringing any of this stuff up in their commercials, because refuting it would be easy and make Romney look good. Instead focusing on outsourcing and the possibility that Romney engaged in various tax evasion schemes. Though I suppose it's possible that Obama's crew thinks this is too complicated to explain to voters.

In any case the sad, or perhaps unavoidable, fact is that votes aren't going to tolerate "taking their medicine" and taking the austarity route at this point. Both Obama and Romeny will be probably be paying the Bain game of using debt spending to make some gambles in various ways, alongside other policies that affect business and spending.

Obama's business picks are dubious. Soylandra is somewhat infamous. Stimulous spending on performing arts was pretty much a money trap from the start, as are various policies paying people to not work. The auto bailouts depend on how you want to spin things as he didn't so much save the companies as prevent them from screwing the unions via bankruptcy proceedings. Obamacare is a known job killer as buisnesses that could and would hire instead just sit on money for fear employees are about to become massively more expensive. Similarly some moves like Keystone were straight up job killers. There are possible environmental advantages, but they're just bad economics. High corporate taxes to pay for that are also hurting employment.

I think if he wants to win Romney needs to make the case that he'd be able to do better. In many cases that seems pretty straightforward, although tax cuts for the wealthy is going to be a hard sell, as the benifits are generally long term at a time when people are looking for short term solutions.

While Raytri probably doesn't have much love for the big banks that would probably be soaking the bulk of the pain from the bankruptcy, they have the idea that the end result was employees getting fired due to malicious business practices and maybe some private shareholders getting hosed, which is what they're refering to.