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The Bain Way: Let the States Pick Up the Tab on National Debt?

Thursday, 13 September 2012 00:00 By Dina Rasor, Truthout | News Analysis

Mitt Romney.Mitt Romney, the Republican presidential candidate. (Photo: Jim Wilson / The New York Times)

Here's how government could be run "The Bain Way": Strip the assets of 50 companies (states) by selling off parks and universities, raiding pension funds and privatizing prisons to pay off debts and favored lobbyists. Why didn't Lincoln think of this?

SolutionsRepublican presidential candidate Mitt Romney has touted his business acumen as one of his biggest assets to solving America's economic problems. He even mused that perhaps you should not be able to run for president until you had a couple of years of running a business under your belt.

Romney has had one major business experience - founding and running a private equity firm called Bain Capital, something very different than his father, who ran a car company. In the past several weeks there have been two detailed investigative stories on how he ran his private equity firm, and there has been much discussion in the media on how he ran his business differently than others: It has been dubbed, "The Bain Way."

I know that he believes that he can structure the American tax and regulation codes in a way to help small and large American businesses bloom, and then just get out of the way and watch the economy grow. But that isn't the main thing that he will have to deal with immediately if he gets into office in January.

He will be facing the problem of making a "grand bargain" debt deal with the Congress on what to do about the federal government deficit and its long-term debt. Right now, as pointed out by Bill Clinton, Romney's debt plans "arithmetic" is not adding up using the old Washington ways, so he may have to fall back on his business acumen.

So how would he use that hard-earned knowledge in private equity to get us out of this mess? I have some suggestions using The Bain Way and the assets of the United States - and I do mean states. But first we have to learn, through these two investigative reports, how The Bain Way made Mr. Romney and his investors very rich.

Matt Taibbi of Rolling Stone Magazine, and Jesse Eisinger of ProPublica, lay out part of The Bain Way of doing business. First from Taibbi:

Here's how Romney would go about "liberating" a company: A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent. When an LBO [leveraged buyout] is done without the consent of the target, it's called a hostile takeover; such thrilling acts of corporate piracy were made legend in the 80s, most notably the 1988 attack by notorious corporate raiders Kohlberg Kravis Roberts against RJR Nabisco, a deal memorialized in the book "Barbarians at the Gate."

Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company's management with lucrative bonuses. Once management is on board, the rest is just math. So if the target company is worth $500 million, Bain might put down $20 million of its own cash, then borrow $350 million from an investment bank to take over a controlling stake.

But here's the catch. When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt...

Once all that debt is added, one of two things can happen. The company can fire workers and slash benefits to pay off all its new obligations to Goldman Sachs and Bain, leaving it ripe to be resold by Bain at a huge profit. Or it can go bankrupt - this happens after about 7 percent of all private equity buyouts - leaving behind one or more shuttered factory towns. Either way, Bain wins. By power-sucking cash value from even the most rapidly-dying firms, private equity raiders like Bain almost always get their cash out before a target goes belly up.

Now from Eisinger and ProPublica:

...Romney's firm wasn't always looking for startups or troubled companies that it could turn around.

Private equity companies conduct a variety of transactions other than buying startups with growth potential, or troubled firms ripe for a turnaround. Some seek out family-run operations under the theory that those typically have a lot of fat to cut. Some like "roll-ups," buying up a bunch of small operations in one industry and combining them into a powerhouse with economies of scale. Firms buy divisions of large corporations that are trying to streamline their operations. Some acquisitions fit more than one of these descriptions. The constant is debt, and plenty of it. Private equity firms use such borrowed money to maximize their gains.

The Romney campaign says Bain did various types of deals. And it celebrates that Bain helped launch or rebuild some American corporate stalwarts, like Staples, Bright Horizons and Sports Authority.

Yet in addition, under Romney's tenure, Bain often sought out solid businesses that didn't need to be turned around. The reason: Such companies could operate under the burden of the enormous debt that Bain would layer on them.

...The Wall Street Journal found that many of the businesses Bain bought went bust, even when Bain reaped big financial wins. The paper analyzed 77 businesses Bain invested in while Mr. Romney led the firm, from its 1984 start until early 1999, finding that 22 percent either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested. An additional 8 percent ran into so much trouble that all of the money Bain invested was lost. But overall, the hits more than made up for the losses, and Bain recorded 50 percent to 80 percent annual gains in the period, the paper found.

Now how does Romney face the huge debt problem once he is president? Can't raise taxes because he took Grover Norquist's no-tax pledge. He has to cut taxes for the wealthy to help the millionaires and billionaires who gave so much money to the Super PACS.

He was able to get through the election by never saying what tax loopholes he was going to close, but he also knows that he will not be able to get rid of the middle class' favorite tax break, the home mortgage deduction - and the churches would go nuts if he eliminated the charitable deductions. The Senate would surely filibuster those suggestions because of the pressure.

He can't cut the Pentagon because he promised the neocons to up its budget trillions of dollars beyond what the Pentagon even wants. And it would be very hard to really cut the social programs to the bone because it isn't enough to get you going to a balanced budget and those pesky Democrats would probably filibuster that too.

If he only had some companies to leverage and suck out their assets...

But wait, he has to think government now, but apply his business knowledge. It is the United States, so he already has 50 companies to look to - they are now called states.

After looking at the fiscal health of these company states, he also found that they don't all pull their fiscal weight evenly. Some states get much more in federal aid than they pay in taxes, and other states get much less federal aid than they pay in taxes. All of them have state assets to use for the national debt, but let's leverage the tax slackers first.

Turns out that the lion's share of states who get more from the feds than they pay in taxes are ironically Republican (red) or Republican-leaning states.

These states are underwater to the federal government - the fed's money to them is larger than what they give us back. Hmmm...it is mainly the Democratic (blue) states that are pulling more than their share of the load and are paying in more to the feds to pay on the debt.

This is a sticky political situation, but he has four years before he has to face the red states again in an election and he has plenty of billionaire friends who can deluge the airways to spin his actions...he decides to first go after the slacker states who aren't producing and pulling their weight.

So what would be The Bain Way of doing this? The federal government is already highly leveraged in debt, in part because of the slacker states who take so much from the federal government. So he needs to get to their assets and strip as much as he can out of the states to pay our debts, get some profit for the executive branch and some favors for his favorite lobbyists.

It doesn't matter what it would do to the state that is suppose to, by law, balance its budget. Let them cut their budgets to pay up because what else are they going to do?

Let's take one of the worst offenders of underwater states, Mississippi. It is not a rich state, with the median income of only around $38,000 a year compared to $52,000 nationwide. But it has eight state universities, with its pride and joy, the University of Mississippi - Ole Miss - at the top of list.

These universities could be liquidated for their acreage; Ole Miss alone has 2500 acres. Or he could sell them to the growing number of for-profit universities. Wonder if University of Phoenix could pick up some of the smaller ones - or even go after Ole Miss?

Mississippians love their Ole Miss football program, so maybe he could sell it as an NFL team.

Mississippi also has 14 state prisons and six private prisons, so he could unload the state prisons on several of the largest private prison companies. I'm sure that would go over well in the state, because don't all Republicans love privatization? Think of all the money he could save laying off state prison guards. Mississippi also has 22 state parks that he could sell off - they aren't anything like California state parks, but you got to work with what you have.

And of course, he needs to go to the honey hole of most state money, the state employee pension fund. Mississippi's fund, which is rated in pretty good fiscal health, as it pays out $1.8 billion annually.

Once he scoops out the assets of the fund to pay our debt, and for Mississippi to pay our executive branch consulting fees on how to liquidate their state, he can dump 90,000 retirees who are receiving pensions now and make sure that the 162,000 state employees who are paying into the fund don't get their hands on pension fund assets that are needed for the federal debt.

There will probably be a lot of screaming, picketing and yelling by Mississippians when the layoffs and privatization hits, but Romney can get past executives - called governors in state language - to help him pull it off, as well paid consultants. Former governor Haley Barbour who already is now a lobbyist, sounds like a good first hire.

Besides, what is Mississippi going to do? Secede? They tried that and the feds now have a bigger army.

Because Romney has such a big debt to tackle, he is going to have to march down the list of slacker states - West Virginia, New Mexico, Alaska, Alabama, South Carolina, Montana and so forth. But remember, part of The Bain Way is to also leverage company states that are in good shape with larger assets, that "could operate under the burden of the enormous debt."

One of the states that fits that bill is blue state California. They are having some trouble with their current budget but wow, what assets they have! If California would break off as its own country, it would be the eighth largest economy in the world and could join the G8.

It has one of the largest university systems in the country, with a very high rating that could bring big money if it was privatized or sold off for the land. State parks make up a large portion of the state, because this blue state embraced the environmental movement early on, and also saved very valuable old growth redwood trees that could be cut for good money. And many of the state parks would sell high on the real estate market, especially the ones right on the picturesque California coast - wonder what Pfeiffer State Park in Big Sur would bring?

California also has 33 prisons that could be privatized, and so much money could be saved by laying off their highly-paid, union-organized prison guards. The notorious San Quentin prison has 275 acres with beautiful views of San Francisco Bay and could be leveled for luxury homes. Just the land has been estimated to cost up to $664 million, so with the high price of real estate in California, that could be real money.

And California has two very large state pension funds, one for the public employees and one for the teachers, that are underfunded since the recession; but the sheer size of these two funds will still be very lucrative in paying off the debt.

Of course, Romney has to hope that the wily Democratic governor, Jerry Brown, doesn't get smart and present the federal government with a bill for all the taxes it paid into the federal government that it didn't get back in benefits. Californians are pushy that way against authority.

I have obviously taken this to the point of absurdity. Governments don't exist to make profits, but are suppose to serve the people. The executive branch doesn't get consulting fees, 50 percent to 80 percent annual return on its money or giant multimillion dollar profits.

Even knowing how to do business The Bain Way is not going to enhance the rest of American business, especially manufacturing and service businesses, which need to build and invest for the long-term future. Much of the American public has been stunned or sickened at the thought of callously laying off American workers to ship jobs overseas, and watching long-term companies and their towns fail. Most Americans cannot even fathom how Romney turned his IRA account into $100 million.

After reading about the extremes of The Bain Way, even for the most aggressive capitalists, it is clear that the federal government needs to be run like a government, not a high stakes profit and loss game.

Our American government assets that are tied up in our states, are for everyone and are to be conserved and cherished not only for ourselves, but the next generation. We do need to get our fiscal house in order, but after reading about The Bain Way and Mr. Romney's love of his business acumen, I disagree, more than ever, on his musings about the necessity of a business background to be president.

Herbert Hoover and George W. Bush had the most business acumen and training of all our presidents. Abraham Lincoln and Harry Truman were failed businessmen. I know out of those four who I would pick to be president. After studying The Bain Way, isn't it obvious?

Copyright, Truthout. May not be reprinted without permission.

Dina Rasor

Dina Rasor is an investigator, journalist and author. Rasor has been fighting waste while working for transparency and accountability in government for three decades. In 1981, Rasor founded the Project on Military Procurement (now called the Project on Government Oversight, or POGO) to serve as a nonprofit, nonpartisan watchdog over military and related government spending. Rasor's most recent book, "Betraying Our Troops: The Destructive Results of Privatizing War," chronicles first-hand accounts of the devastating consequences of privatized war support for troops and the overall war effort in Iraq. She also founded the Bauman & Rasor Group that helps whistleblowers file lawsuits under the federal qui tam False Claims act and has been involved in cases which have returned over $100 million back to the US Treasury.


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The Bain Way: Let the States Pick Up the Tab on National Debt?

Thursday, 13 September 2012 00:00 By Dina Rasor, Truthout | News Analysis

Mitt Romney.Mitt Romney, the Republican presidential candidate. (Photo: Jim Wilson / The New York Times)

Here's how government could be run "The Bain Way": Strip the assets of 50 companies (states) by selling off parks and universities, raiding pension funds and privatizing prisons to pay off debts and favored lobbyists. Why didn't Lincoln think of this?

SolutionsRepublican presidential candidate Mitt Romney has touted his business acumen as one of his biggest assets to solving America's economic problems. He even mused that perhaps you should not be able to run for president until you had a couple of years of running a business under your belt.

Romney has had one major business experience - founding and running a private equity firm called Bain Capital, something very different than his father, who ran a car company. In the past several weeks there have been two detailed investigative stories on how he ran his private equity firm, and there has been much discussion in the media on how he ran his business differently than others: It has been dubbed, "The Bain Way."

I know that he believes that he can structure the American tax and regulation codes in a way to help small and large American businesses bloom, and then just get out of the way and watch the economy grow. But that isn't the main thing that he will have to deal with immediately if he gets into office in January.

He will be facing the problem of making a "grand bargain" debt deal with the Congress on what to do about the federal government deficit and its long-term debt. Right now, as pointed out by Bill Clinton, Romney's debt plans "arithmetic" is not adding up using the old Washington ways, so he may have to fall back on his business acumen.

So how would he use that hard-earned knowledge in private equity to get us out of this mess? I have some suggestions using The Bain Way and the assets of the United States - and I do mean states. But first we have to learn, through these two investigative reports, how The Bain Way made Mr. Romney and his investors very rich.

Matt Taibbi of Rolling Stone Magazine, and Jesse Eisinger of ProPublica, lay out part of The Bain Way of doing business. First from Taibbi:

Here's how Romney would go about "liberating" a company: A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent. When an LBO [leveraged buyout] is done without the consent of the target, it's called a hostile takeover; such thrilling acts of corporate piracy were made legend in the 80s, most notably the 1988 attack by notorious corporate raiders Kohlberg Kravis Roberts against RJR Nabisco, a deal memorialized in the book "Barbarians at the Gate."

Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company's management with lucrative bonuses. Once management is on board, the rest is just math. So if the target company is worth $500 million, Bain might put down $20 million of its own cash, then borrow $350 million from an investment bank to take over a controlling stake.

But here's the catch. When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt...

Once all that debt is added, one of two things can happen. The company can fire workers and slash benefits to pay off all its new obligations to Goldman Sachs and Bain, leaving it ripe to be resold by Bain at a huge profit. Or it can go bankrupt - this happens after about 7 percent of all private equity buyouts - leaving behind one or more shuttered factory towns. Either way, Bain wins. By power-sucking cash value from even the most rapidly-dying firms, private equity raiders like Bain almost always get their cash out before a target goes belly up.

Now from Eisinger and ProPublica:

...Romney's firm wasn't always looking for startups or troubled companies that it could turn around.

Private equity companies conduct a variety of transactions other than buying startups with growth potential, or troubled firms ripe for a turnaround. Some seek out family-run operations under the theory that those typically have a lot of fat to cut. Some like "roll-ups," buying up a bunch of small operations in one industry and combining them into a powerhouse with economies of scale. Firms buy divisions of large corporations that are trying to streamline their operations. Some acquisitions fit more than one of these descriptions. The constant is debt, and plenty of it. Private equity firms use such borrowed money to maximize their gains.

The Romney campaign says Bain did various types of deals. And it celebrates that Bain helped launch or rebuild some American corporate stalwarts, like Staples, Bright Horizons and Sports Authority.

Yet in addition, under Romney's tenure, Bain often sought out solid businesses that didn't need to be turned around. The reason: Such companies could operate under the burden of the enormous debt that Bain would layer on them.

...The Wall Street Journal found that many of the businesses Bain bought went bust, even when Bain reaped big financial wins. The paper analyzed 77 businesses Bain invested in while Mr. Romney led the firm, from its 1984 start until early 1999, finding that 22 percent either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested. An additional 8 percent ran into so much trouble that all of the money Bain invested was lost. But overall, the hits more than made up for the losses, and Bain recorded 50 percent to 80 percent annual gains in the period, the paper found.

Now how does Romney face the huge debt problem once he is president? Can't raise taxes because he took Grover Norquist's no-tax pledge. He has to cut taxes for the wealthy to help the millionaires and billionaires who gave so much money to the Super PACS.

He was able to get through the election by never saying what tax loopholes he was going to close, but he also knows that he will not be able to get rid of the middle class' favorite tax break, the home mortgage deduction - and the churches would go nuts if he eliminated the charitable deductions. The Senate would surely filibuster those suggestions because of the pressure.

He can't cut the Pentagon because he promised the neocons to up its budget trillions of dollars beyond what the Pentagon even wants. And it would be very hard to really cut the social programs to the bone because it isn't enough to get you going to a balanced budget and those pesky Democrats would probably filibuster that too.

If he only had some companies to leverage and suck out their assets...

But wait, he has to think government now, but apply his business knowledge. It is the United States, so he already has 50 companies to look to - they are now called states.

After looking at the fiscal health of these company states, he also found that they don't all pull their fiscal weight evenly. Some states get much more in federal aid than they pay in taxes, and other states get much less federal aid than they pay in taxes. All of them have state assets to use for the national debt, but let's leverage the tax slackers first.

Turns out that the lion's share of states who get more from the feds than they pay in taxes are ironically Republican (red) or Republican-leaning states.

These states are underwater to the federal government - the fed's money to them is larger than what they give us back. Hmmm...it is mainly the Democratic (blue) states that are pulling more than their share of the load and are paying in more to the feds to pay on the debt.

This is a sticky political situation, but he has four years before he has to face the red states again in an election and he has plenty of billionaire friends who can deluge the airways to spin his actions...he decides to first go after the slacker states who aren't producing and pulling their weight.

So what would be The Bain Way of doing this? The federal government is already highly leveraged in debt, in part because of the slacker states who take so much from the federal government. So he needs to get to their assets and strip as much as he can out of the states to pay our debts, get some profit for the executive branch and some favors for his favorite lobbyists.

It doesn't matter what it would do to the state that is suppose to, by law, balance its budget. Let them cut their budgets to pay up because what else are they going to do?

Let's take one of the worst offenders of underwater states, Mississippi. It is not a rich state, with the median income of only around $38,000 a year compared to $52,000 nationwide. But it has eight state universities, with its pride and joy, the University of Mississippi - Ole Miss - at the top of list.

These universities could be liquidated for their acreage; Ole Miss alone has 2500 acres. Or he could sell them to the growing number of for-profit universities. Wonder if University of Phoenix could pick up some of the smaller ones - or even go after Ole Miss?

Mississippians love their Ole Miss football program, so maybe he could sell it as an NFL team.

Mississippi also has 14 state prisons and six private prisons, so he could unload the state prisons on several of the largest private prison companies. I'm sure that would go over well in the state, because don't all Republicans love privatization? Think of all the money he could save laying off state prison guards. Mississippi also has 22 state parks that he could sell off - they aren't anything like California state parks, but you got to work with what you have.

And of course, he needs to go to the honey hole of most state money, the state employee pension fund. Mississippi's fund, which is rated in pretty good fiscal health, as it pays out $1.8 billion annually.

Once he scoops out the assets of the fund to pay our debt, and for Mississippi to pay our executive branch consulting fees on how to liquidate their state, he can dump 90,000 retirees who are receiving pensions now and make sure that the 162,000 state employees who are paying into the fund don't get their hands on pension fund assets that are needed for the federal debt.

There will probably be a lot of screaming, picketing and yelling by Mississippians when the layoffs and privatization hits, but Romney can get past executives - called governors in state language - to help him pull it off, as well paid consultants. Former governor Haley Barbour who already is now a lobbyist, sounds like a good first hire.

Besides, what is Mississippi going to do? Secede? They tried that and the feds now have a bigger army.

Because Romney has such a big debt to tackle, he is going to have to march down the list of slacker states - West Virginia, New Mexico, Alaska, Alabama, South Carolina, Montana and so forth. But remember, part of The Bain Way is to also leverage company states that are in good shape with larger assets, that "could operate under the burden of the enormous debt."

One of the states that fits that bill is blue state California. They are having some trouble with their current budget but wow, what assets they have! If California would break off as its own country, it would be the eighth largest economy in the world and could join the G8.

It has one of the largest university systems in the country, with a very high rating that could bring big money if it was privatized or sold off for the land. State parks make up a large portion of the state, because this blue state embraced the environmental movement early on, and also saved very valuable old growth redwood trees that could be cut for good money. And many of the state parks would sell high on the real estate market, especially the ones right on the picturesque California coast - wonder what Pfeiffer State Park in Big Sur would bring?

California also has 33 prisons that could be privatized, and so much money could be saved by laying off their highly-paid, union-organized prison guards. The notorious San Quentin prison has 275 acres with beautiful views of San Francisco Bay and could be leveled for luxury homes. Just the land has been estimated to cost up to $664 million, so with the high price of real estate in California, that could be real money.

And California has two very large state pension funds, one for the public employees and one for the teachers, that are underfunded since the recession; but the sheer size of these two funds will still be very lucrative in paying off the debt.

Of course, Romney has to hope that the wily Democratic governor, Jerry Brown, doesn't get smart and present the federal government with a bill for all the taxes it paid into the federal government that it didn't get back in benefits. Californians are pushy that way against authority.

I have obviously taken this to the point of absurdity. Governments don't exist to make profits, but are suppose to serve the people. The executive branch doesn't get consulting fees, 50 percent to 80 percent annual return on its money or giant multimillion dollar profits.

Even knowing how to do business The Bain Way is not going to enhance the rest of American business, especially manufacturing and service businesses, which need to build and invest for the long-term future. Much of the American public has been stunned or sickened at the thought of callously laying off American workers to ship jobs overseas, and watching long-term companies and their towns fail. Most Americans cannot even fathom how Romney turned his IRA account into $100 million.

After reading about the extremes of The Bain Way, even for the most aggressive capitalists, it is clear that the federal government needs to be run like a government, not a high stakes profit and loss game.

Our American government assets that are tied up in our states, are for everyone and are to be conserved and cherished not only for ourselves, but the next generation. We do need to get our fiscal house in order, but after reading about The Bain Way and Mr. Romney's love of his business acumen, I disagree, more than ever, on his musings about the necessity of a business background to be president.

Herbert Hoover and George W. Bush had the most business acumen and training of all our presidents. Abraham Lincoln and Harry Truman were failed businessmen. I know out of those four who I would pick to be president. After studying The Bain Way, isn't it obvious?

Copyright, Truthout. May not be reprinted without permission.

Dina Rasor

Dina Rasor is an investigator, journalist and author. Rasor has been fighting waste while working for transparency and accountability in government for three decades. In 1981, Rasor founded the Project on Military Procurement (now called the Project on Government Oversight, or POGO) to serve as a nonprofit, nonpartisan watchdog over military and related government spending. Rasor's most recent book, "Betraying Our Troops: The Destructive Results of Privatizing War," chronicles first-hand accounts of the devastating consequences of privatized war support for troops and the overall war effort in Iraq. She also founded the Bauman & Rasor Group that helps whistleblowers file lawsuits under the federal qui tam False Claims act and has been involved in cases which have returned over $100 million back to the US Treasury.


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