Matt Taibbi has a new piece in Rolling Stone about Mitt Romney’s time at Bain Capital, and how Bain used large amounts of debt to execute its buyouts. The overall theme is one of financial engineering vs. making things, of pillaging companies to generate wealth vs. building companies to create jobs.
Like most things Taibbi writes, this article is:
- Very funny
- Savagely mean
- Only about 75% accurate, and you need to know a lot about Wall Street to know which quarter is wrong
However, in light of my prior post on private equity, there are two paragraphs that I wanted to quote because they are both amusing and apt.
Talking about the private equity model of loading up a company with debt and then paying fees and dividends to the buyout firm, Taibbi says:
This business model wasn’t really “helping,” of course – and it wasn’t new. Fans of mob movies will recognize what’s known as the “bust-out,” in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company’s credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money. Reduced to their most basic level, the leveraged buyouts engineered by Romney followed exactly the same business model. “It’s the bust-out,” one Wall Street trader says with a laugh. “That’s all it is.”
And then, comparing Romney’s speeches decrying America’s level of debt with his Bain Capital strategy of loading up companies with debt, Taibbi writes:
To recap: Romney, who has compared the devilish federal debt to a “nightmare” home mortgage that is “adjustable, no-money down and assigned to our children,” took over Ampad with essentially no money down, saddled the firm with a nightmare debt and assigned the crushing interest payments not to Bain but to the children of Ampad’s workers, who would be left holding the note long after Romney fled the scene. The mortgage analogy is so obvious, in fact, that even Romney himself has made it. He once described Bain’s debt-fueled strategy as “using the equivalent of a mortgage to leverage up our investment.”
I like that one because it makes the connection between private equity and mortgages, as I did in my post.
Again, I’m not fully supporting Taibbi’s reporting or his conclusions, but he makes some good points.