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Greed and Debt: The True Story of Mitt Romney and Bain Capital
How the GOP presidential candidate and his private equity firm staged an epic wealth
grab, destroyed jobs – and stuck others with the bill
by: Matt Taibbi
Source: Rolling Stone
Mitt Romney illustration
Illustration by Robert Grossman
The great criticism of Mitt Romney, from both sides of the aisle, has always been that
he doesn't stand for anything. He's a flip-flopper, they say, a lightweight, a cardboard
opportunist who'll say anything to get elected.
The critics couldn't be more wrong. Mitt Romney is no tissue-paper man. He's closer
to being a revolutionary, a backward-world version of Che or Trotsky, with tweezed
nostrils instead of a beard, a half-Windsor instead of a leather jerkin. His legendary
flip-flops aren't the lies of a bumbling opportunist – they're the confident
prevarications of a man untroubled by misleading the nonbeliever in pursuit of a
single, all-consuming goal. Romney has a vision, and he's trying for something big:
We've just been too slow to sort out what it is, just as we've been slow to grasp the
roots of the radical economic changes that have swept the country in the last
The incredible untold story of the 2012 election so far is that Romney's run has been
a shimmering pearl of perfect political hypocrisy, which he's somehow managed to
keep hidden, even with thousands of cameras following his every move. And the
drama of this rhetorical high-wire act was ratcheted up even further when Romney
chose his running mate, Rep. Paul Ryan of Wisconsin – like himself, a self-righteously
anal, thin-lipped, Whitest Kids U Know penny pincher who'd be honored to tell Oliver
Twist there's no more soup left. By selecting Ryan, Romney, the hard-charging,
chameleonic champion of a disgraced-yet-defiant Wall Street, officially succeeded in
moving the battle lines in the 2012 presidential race.
Like John McCain four years before, Romney desperately needed a vice-presidential
pick that would change the game. But where McCain bet on a combustive mix of
clueless novelty and suburban sexual tension named Sarah Palin, Romney bet on an
idea. He said as much when he unveiled his choice of Ryan, the author of a hair-
raising budget-cutting plan best known for its willingness to slash the sacred cows of
Medicare and Medicaid. "Paul Ryan has become an intellectual leader of the
Republican Party," Romney told frenzied Republican supporters in Norfolk, Virginia,
standing before the reliably jingoistic backdrop of a floating warship. "He understands
the fiscal challenges facing America: our exploding deficits and crushing debt."
Debt, debt, debt. If the Republican Party had a James Carville, this is what he would
have said to win Mitt over, in whatever late-night war room session led to the Ryan
pick: "It's the debt, stupid." This is the way to defeat Barack Obama: to recast the race
as a jeremiad against debt, something just about everybody who's ever gotten a bill in
the mail hates on a primal level.
Last May, in a much-touted speech in Iowa, Romney used language that was literally
inflammatory to describe America's federal borrowing. "A prairie fire of debt is
sweeping across Iowa and our nation," he declared. "Every day we fail to act, that fire
gets closer to the homes and children we love." Our collective debt is no ordinary
problem: According to Mitt, it's going to burn our children alive.
And this is where we get to the hypocrisy at the heart of Mitt Romney. Everyone
knows that he is fantastically rich, having scored great success, the legend goes, as a
"turnaround specialist," a shrewd financial operator who revived moribund companies
as a high-priced consultant for a storied Wall Street private equity firm. But what most
voters don't know is the way Mitt Romney actually made his fortune: by borrowing vast
sums of money that other people were forced to pay back. This is the plain, stark
reality that has somehow eluded America's top political journalists for two consecutive
presidential campaigns: Mitt Romney is one of the greatest and most irresponsible
debt creators of all time. In the past few decades, in fact, Romney has piled more debt
onto more unsuspecting companies, written more gigantic checks that other people
have to cover, than perhaps all but a handful of people on planet Earth.
By making debt the centerpiece of his campaign, Romney was making a calculated
bluff of historic dimensions – placing a massive all-in bet on the rank incompetence of
the American press corps. The result has been a brilliant comedy: A man makes a
$250 million fortune loading up companies with debt and then extracting million-dollar
fees from those same companies, in exchange for the generous service of telling
them who needs to be fired in order to finance the debt payments he saddled them
with in the first place. That same man then runs for president riding an image of
children roasting on flames of debt, choosing as his running mate perhaps the only
politician in America more pompous and self-righteous on the subject of the evils of
borrowed money than the candidate himself. If Romney pulls off this whopper, you'll
have to tip your hat to him: No one in history has ever successfully run for president
riding this big of a lie. It's almost enough to make you think he really is qualified for the
The unlikeliness of Romney's gambit isn't simply a reflection of his own artlessly
unapologetic mindset – it stands as an emblem for the resiliency of the entire
sociopathic Wall Street set he represents. Four years ago, the Mitt Romneys of the
world nearly destroyed the global economy with their greed, shortsightedness and –
most notably – wildly irresponsible use of debt in pursuit of personal profit. The sight
was so disgusting that people everywhere were ready to drop an H-bomb on Lower
Manhattan and bayonet the survivors. But today that same insane greed ethos, that
same belief in the lunatic pursuit of instant borrowed millions – it's dusted itself off, it's
had a shave and a shoeshine, and it's back out there running for president.
Mitt Romney, it turns out, is the perfect frontman for Wall Street's greed revolution.
He's not a two-bit, shifty-eyed huckster like Lloyd Blankfein. He's not a sighing, eye-
rolling, arrogant jerkwad like Jamie Dimon. But Mitt believes the same things those
guys believe: He's been right with them on the front lines of the financialization
revolution, a decades-long campaign in which the old, simple, let's-make-stuff-and-
sell-it manufacturing economy was replaced with a new, highly complex, let's-take-
stuff-and-trash-it financial economy. Instead of cars and airplanes, we built swaps,
CDOs and other toxic financial products. Instead of building new companies from the
ground up, we took out massive bank loans and used them to acquire existing firms,
liquidating every asset in sight and leaving the target companies holding the note.
The new borrow-and-conquer economy was morally sanctified by an almost religious
faith in the grossly euphemistic concept of "creative destruction," and amounted to a
total abdication of collective responsibility by America's rich, whose new thing was
making assloads of money in ever-shorter campaigns of economic conquest, sending
the proceeds offshore, and shrugging as the great towns and factories their parents
and grandparents built were shuttered and boarded up, crushed by a true prairie fire
Mitt Romney – a man whose own father built cars and nurtured communities, and was
one of the old-school industrial anachronisms pushed aside by the new generation's
wealth grab – has emerged now to sell this make-nothing, take-everything, screw-
everyone ethos to the world. He's Gordon Gekko, but a new and improved version,
with better PR – and a bigger goal. A takeover artist all his life, Romney is now trying
to take over America itself. And if his own history is any guide, we'll all end up paying
for the acquisition.
Willard "Mitt" Romney's background in many ways suggests a man who was born to
be president – disgustingly rich from birth, raised in prep schools, no early exposure
to minorities outside of maids, a powerful daddy to clean up his missteps, and timely
exemptions from military service. In Romney's bio there are some eerie early-life
similarities to other recent presidential figures. (Is America really ready for another
Republican president who was a prep-school cheerleader?) And like other great
presidential double-talkers such as Bill Clinton and George W. Bush, Romney has
shown particular aptitude in the area of telling multiple factual versions of his own life
"I longed in many respects to actually be in Vietnam and be representing our country
there," he claimed years after the war. To a different audience, he said, "I was not
planning on signing up for the military. It was not my desire to go off and serve in
Like John F. Kennedy and George W. Bush, men whose way into power was
smoothed by celebrity fathers but who rebelled against their parental legacy as
mature politicians, Mitt Romney's career has been both a tribute to and a repudiation
of his famous father. George Romney in the 1950s became CEO of American Motors
Corp., made a modest fortune betting on energy efficiency in an age of gas guzzlers
and ended up serving as governor of the state of Michigan only two generations
removed from the Romney clan's tradition of polygamy. For Mitt, who grew up
worshipping his tall, craggily handsome, politically moderate father, life was less rocky:
Cranbrook prep school in suburban Detroit, followed by Stanford in the Sixties, a
missionary term in which he spent two and a half years trying (as he said) to persuade
the French to "give up your wine," and Harvard Business School in the Seventies.
Then, faced with making a career choice, Mitt chose an odd one: Already married and
a father of two, he left Harvard and eschewed both politics and the law to enter the at-
the-time unsexy world of financial consulting.
"When you get out of a place like Harvard, you can do anything – at least in the old
days you could," says a prominent corporate lawyer on Wall Street who is familiar with
Romney's career. "But he comes out, he not only has a Harvard Business School
degree, he's got a national pedigree with his name. He could have done anything –
but what does he do? He says, 'I'm going to spend my life loading up distressed
companies with debt.' "
Romney started off at the Boston Consulting Group, where he showed an aptitude for
crunching numbers and glad-handing clients. Then, in 1977, he joined a young
entrepreneur named Bill Bain at a firm called Bain & Company, where he worked for
six years before being handed the reins of a new firm-within-a-firm called Bain Capital.
In Romney's version of the tale, Bain Capital – which evolved into what is today known
as a private equity firm – specialized in turning around moribund companies (Romney
even wrote a book called Turnaround that complements his other nauseatingly self-
complimentary book, No Apology) and helped create the Staples office-supply chain.
On the campaign trail, Romney relentlessly trades on his own self-perpetuated
reputation as a kind of altruistic rescuer of failing enterprises, never missing an
opportunity to use the word "help" or "helped" in his description of what he and Bain
did for companies. He might, for instance, describe himself as having been "deeply
involved in helping other businesses" or say he "helped create tens of thousands of
The reality is that toward the middle of his career at Bain, Romney made a fateful
strategic decision: He moved away from creating companies like Staples through
venture capital schemes, and toward a business model that involved borrowing huge
sums of money to take over existing firms, then extracting value from them by force.
He decided, as he later put it, that "there's a lot greater risk in a startup than there is
in acquiring an existing company." In the Eighties, when Romney made this move, this
form of financial piracy became known as a leveraged buyout, and it achieved iconic
status thanks to Gordon Gekko in Wall Street. Gekko's business strategy was
essentially identical to the Romney–Bain model, only Gekko called himself a
"liberator" of companies instead of a "helper."
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 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 Eighties,
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.
Now your troubled firm – let's say you make tricycles in Alabama – has been taken
over by a bunch of slick Wall Street dudes who kicked in as little as five percent as a
down payment. So in addition to whatever problems you had before, Tricycle Inc. now
owes Goldman or Citigroup $350 million. With all that new debt service to pay, the
company's bottom line is suddenly untenable: You almost have to start firing people
immediately just to get your costs down to a manageable level.
"That interest," says Lynn Turner, former chief accountant of the Securities and
Exchange Commission, "just sucks the profit out of the company."
Fortunately, the geniuses at Bain who now run the place are there to help tell you
whom to fire. And for the service it performs cutting your company's costs to help you
pay off the massive debt that it, Bain, saddled your company with in the first place,
Bain naturally charges a management fee, typically millions of dollars a year. So
Tricycle Inc. now has two gigantic new burdens it never had before Bain Capital
stepped into the picture: tens of millions in annual debt service, and millions more in
"management fees." Since the initial acquisition of Tricycle Inc. was probably greased
by promising the company's upper management lucrative bonuses, all that pain
inevitably comes out of just one place: the benefits and payroll of the hourly workforce.
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 seven 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.
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."
Private equity firms aren't necessarily evil by definition. There are many stories of
successful turnarounds fueled by private equity, often involving multiple floundering
businesses that are rolled into a single entity, eliminating duplicative overhead.
Experian, the giant credit-rating tyrant, was acquired by Bain in the Nineties and went
on to become an industry leader.
But there's a key difference between private equity firms and the businesses that
were America's original industrial cornerstones, like the elder Romney's AMC.
Everyone had a stake in the success of those old businesses, which spread
prosperity by putting people to work. But even private equity's most enthusiastic
adherents have difficulty explaining its benefit to society. Marc Wolpow, a former Bain
colleague of Romney's, told reporters during Mitt's first Senate run that Romney erred
in trying to sell his business as good for everyone. "I believed he was making a
mistake by framing himself as a job creator," said Wolpow. "That was not his or Bain's
or the industry's primary objective. The objective of the LBO business is maximizing
returns for investors." When it comes to private equity, American workers – not to
mention their families and communities – simply don't enter into the equation.
Take a typical Bain transaction involving an Indiana-based company called American
Pad and Paper. Bain bought Ampad in 1992 for just $5 million, financing the rest of
the deal with borrowed cash. Within three years, Ampad was paying $60 million in
annual debt payments, plus an additional $7 million in management fees. A year later,
Bain led Ampad to go public, cashed out about $50 million in stock for itself and its
investors, charged the firm $2 million for arranging the IPO and pocketed another $5
million in "management" fees. Ampad wound up going bankrupt, and hundreds of
workers lost their jobs, but Bain and Romney weren't crying: They'd made more than
$100 million on a $5 million investment.
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."
Romney has always kept his distance from the real-life consequences of his
profiteering. At one point during Bain's looting of Ampad, a worker named Randy
Johnson sent a handwritten letter to Romney, asking him to intervene to save an
Ampad factory in Marion, Indiana. In a sterling demonstration of manliness and
willingness to face a difficult conversation, Romney, who had just lost his race for the
Senate in Massachusetts, wrote Johnson that he was "sorry," but his lawyers had
advised him not to get involved. (So much for the candidate who insists that his way is
always to "fight to save every job.")
This is typical Romney, who consistently adopts a public posture of having been
above the fray, with no blood on his hands from any of the deals he personally
engineered. "I never actually ran one of our investments," he says in Turnaround.
"That was left to management."
In reality, though, Romney was unquestionably the decider at Bain. "I insisted on
having almost dictatorial powers," he bragged years after the Ampad deal. Over the
years, colleagues would anonymously whisper stories about Mitt the Boss to the
press, describing him as cunning, manipulative and a little bit nuts, with "an ability to
identify people's insecurities and exploit them for his own benefit." One former Bain
employee said that Romney would screw around with bonuses in small amounts, just
to mess with people: He would give $3 million to one, $3.1 million to another and $2.9
million to a third, just to keep those below him on edge.
The private equity business in the early Nineties was dominated by a handful of
takeover firms, from the spooky and politically connected Carlyle Group (a favorite
subject of conspiracy-theory lit, with its connections to right-wingers like Donald
Rumsfeld and George H.W. Bush) to the equally spooky Democrat-leaning assholes
at the Blackstone Group. But even among such a colorful cast of characters, Bain had
a reputation on Wall Street for secrecy and extreme weirdness – "the KGB of
consulting." Its employees, known for their Mormonish uniform of white shirts and red
power ties, were dubbed "Bainies" by other Wall Streeters, a rip on the fanatical
"Moonies." The firm earned the name thanks to its idiotically adolescent Spy Kids
culture, in which these glorified slumlords used code names, didn't carry business
cards and even sang "company songs" to boost morale.
The seemingly religious flavor of Bain's culture smacks of the generally cultish ethos
on Wall Street, in which all sorts of ethically questionable behaviors are justified as
being necessary in service of the church of making money. Romney belongs to a true-
believer subset within that cult, with a revolutionary's faith in the wisdom of the pure
free market, in which destroying companies and sucking the value out of them for
personal gain is part of the greater good, and governments should "stand aside and
allow the creative destruction inherent in the free economy."
That cultlike zeal helps explains why Romney takes such a curiously unapologetic
approach to his own flip-flopping. His infamous changes of stance are not little wispy
ideological alterations of a few degrees here or there – they are perfect and absolute
mathematical reversals, as in "I believe that abortion should be safe and legal in this
country" and "I am firmly pro-life." Yet unlike other politicians, who at least recognize
that saying completely contradictory things presents a political problem, Romney
seems genuinely puzzled by the public's insistence that he be consistent. "I'm not
going to apologize for having changed my mind," he likes to say. It's an attitude that
recalls the standard defense offered by Wall Street in the wake of some of its most
recent and notorious crimes: Goldman Sachs excused its lying to clients, for example,
by insisting that its customers are "sophisticated investors" who should expect to be
lied to. "Last time I checked," former Morgan Stanley CEO John Mack sneered after
the same scandal, "we were in business to be profitable."
Within the cult of Wall Street that forged Mitt Romney, making money justifies any
behavior, no matter how venal. The look on Romney's face when he refuses to
apologize says it all: Hey, I'm trying to win an election. We're all grown-ups here. After
the Ampad deal, Romney expressed contempt for critics who lived in "fantasy land."
"This is the real world," he said, "and in the real world there is nothing wrong with
companies trying to compete, trying to stay alive, trying to make money."
In the old days, making money required sharing the wealth: with assembly-line
workers, with middle management, with schools and communities, with investors. Even
the Gilded Age robber barons, despite their unapologetic efforts to keep workers from
getting any rights at all, built America in spite of themselves, erecting railroads and oil
wells and telegraph wires. And from the time the monopolists were reined in with
antitrust laws through the days when men like Mitt Romney's dad exited center stage
in our economy, the American social contract was pretty consistent: The rich got to
stay rich, often filthy rich, but they paid taxes and a living wage and everyone else
rose at least a little bit along with them.
But under Romney's business model, leveraging other people's debt means you can
carve out big profits for yourself and leave everyone else holding the bag. Despite
what Romney claims, the rate of return he provided for Bain's investors over the years
wasn't all that great. Romney biographer and Wall Street Journal reporter Brett
Arends, who analyzed Bain's performance between 1984 and 1998, concludes that
the firm's returns were likely less than 30 percent per year, which happened to track
more or less with the stock market's average during that time. "That's how much
money you could have made by issuing company bonds and then spending the
money picking stocks out of the paper at random," Arends observes. So for all the
destruction Romney wreaked on Middle America in the name of "trying to make
money," investors could have just plunked their money into traditional stocks and
gotten pretty much the same returns.
The only ones who profited in a big way from all the job-killing debt that Romney
leveraged were Mitt and his buddies at Bain, along with Wall Street firms like Goldman
and Citigroup. Barry Ritholtz, author of Bailout Nation, says the criticisms of Bain
about layoffs and meanness miss a more important point, which is that the firm's profit-
producing record is absurdly mediocre, especially when set against all the trouble and
pain its business model causes. "Bain's fundamental flaw, at least according to the
math," Ritholtz writes, "is that they took lots of risk, use immense leverage and
charged enormous fees, for performance that was more or less the same as [stock]
'I'm not a Romney guy, because I'm not a Bain guy," says Lenny Patnode, in an Irish
pub in the factory town of Pittsfield, Massachusetts. "But I'm not an Obama guy,
either. Just so you know."
I feel bad even asking Patnode about Romney. Big and burly, with white hair and the
thick forearms of a man who's stocked a shelf or two in his lifetime, he seems to
belong to an era before things like leveraged debt even existed. For 38 years,
Patnode worked for a company called KB Toys in Pittsfield. He was the longest-
serving employee in the company's history, opening some of the firm's first mall
stores, making some of its canniest product buys ("Tamagotchi pets," he says,
beaming, "and Tech-Decks, too"), traveling all over the world to help build an empire
that at its peak included 1,300 stores. "There were times when I worked seven days a
week, 16 hours a day," he says. "I opened three stores in two months once."
Then in 2000, right before Romney gave up his ownership stake in Bain Capital, the
firm targeted KB Toys. The debacle that followed serves as a prime example of the
conflict between the old model of American business, built from the ground up with
sweat and industry know-how, and the new globalist model, the Romney model, which
uses leverage as a weapon of high-speed conquest.
In a typical private-equity fragging, Bain put up a mere $18 million to acquire KB Toys
and got big banks to finance the remaining $302 million it needed. Less than a year
and a half after the purchase, Bain decided to give itself a gift known as a "dividend
recapitalization." The firm induced KB Toys to redeem $121 million in stock and take
out more than $66 million in bank loans – $83 million of which went directly into the
pockets of Bain's owners and investors, including Romney. "The dividend recap is like
borrowing someone else's credit card to take out a cash advance, and then leaving
them to pay it off," says Heather Slavkin Corzo, who monitors private equity takeovers
as the senior legal policy adviser for the AFL-CIO.
Bain ended up earning a return of at least 370 percent on the deal, while KB Toys fell
into bankruptcy, saddled with millions in debt. KB's former parent company, Big Lots,
alleged in bankruptcy court that Bain's "unjustified" return on the dividend recap was
actually "900 percent in a mere 16 months." Patnode, by contrast, was fired in
December 2008, after almost four decades on the job. Like other employees, he
didn't get a single day's severance.
I ask Slavkin Corzo what Bain's justification was for the giant dividend recapitalization
in the KB Toys acquisition. The question throws her, as though she's surprised
anyone would ask for a reason a company like Bain would loot a firm like KB Toys. "It
wasn't like, 'Yay, we did a good job, we get a dividend,'" she says with a laugh. "It was
like, 'We can do this, so we will.' "
At the time of the KB Toys deal, Romney was a Bain investor and owner, making him
a mere beneficiary of the raping and pillaging, rather than its direct organizer.
Moreover, KB's demise was hastened by a host of genuine market forces, including
competition from video games and cellphones. But there's absolutely no way to look
at what Bain did at KB and see anything but a cash grab – one that followed the
business model laid out by Romney. Rather than cutting costs and tightening belts,
Bain added $300 million in debt to the firm's bottom line while taking out more than
$120 million in cash – an outright looting that creditors later described in a lawsuit as
"breaking open the piggy bank." What's more, Bain smoothed the deal in typical
fashion by giving huge bonuses to the company's top managers as the firm headed
toward bankruptcy. CEO Michael Glazer got an incredible $18.4 million, while CFO
Robert Feldman received $4.8 million and senior VP Thomas Alfonsi took home $3.3
And what did Bain bring to the table in return for its massive, outsize payout? KB Toys
had built a small empire by targeting middle-class buyers with value-priced products. It
succeeded mainly because the firm's leaders had a great instinct for what they were
making and selling. These were people who had been in the specialty toy business
since 1922; collectively, they had millions of man-hours of knowledge about how the
industry works and how toy customers behave. KB's president in the Eighties, the late
Saul Rubenstein, used to carry around a giant computer printout of the company's
inventory, and would fall asleep reading it on the weekends, the pages clasped to his
chest. "He knew the name and number of all those toys," his widow, Shirley, says
proudly. "He loved toys."
Bain's experience in the toy industry, by contrast, was precisely bupkus. They didn't
know a damn thing about the business they had taken over – and they never cared to
learn. The firm's entire contribution was $18 million in cash and a huge mound of
borrowed money that gave it the power to pull the levers. "The people who came in
after – they were never toy people," says Shirley Rubenstein. To make matters worse,
former employees say, Bain deluged them with requests for paperwork and reports,
forcing them to worry more about the whims of their new bosses than the demands of
their customers. "We took our eye off the ball," Patnode says. "And if you take your
eye off the ball, you strike out."
In the end, Bain never bothered to come up with a plan for how KB Toys could meet
the 21st-century challenges of video games and cellphone gadgets that were the
company's ostensible downfall. And that's where Romney's self-touted reputation as a
turnaround specialist is a myth. In the Bain model, the actual turnaround isn't
necessary. It's just a cover story. It's nice for the private equity firm if it happens,
because it makes the acquired company more attractive for resale or an IPO. But it's
mostly irrelevant to the success of the takeover model, where huge cash returns are
extracted whether the captured firm thrives or not.
"The thing about it is, nobody gets hurt," says Patnode. "Except the people who
Romney was a prime mover in the radical social and political transformation that was
cooked up by Wall Street beginning in the 1980s. In fact, you can trace the whole
history of the modern age of financialization just by following the highly specific corner
of the economic universe inhabited by the leveraged buyout business, where Mitt
Romney thrived. If you look at the number of leveraged buyouts dating back two or
three decades, you see a clear pattern: Takeovers rose sharply with each of Wall
Street's great easy-money schemes, then plummeted just as sharply after each of
those scams crashed and burned, leaving the rest of us with the bill.
In the Eighties, when Romney and Bain were cutting their teeth in the LBO business,
the primary magic trick involved the junk bonds pioneered by convicted felon Mike
Milken, which allowed firms like Bain to find easy financing for takeovers by using
wildly overpriced distressed corporate bonds as collateral. Junk bonds gave the
Gordon Gekkos of the world sudden primacy over old-school industrial titans like the
Fords and the Rockefellers: For the first time, the ability to make deals became more
valuable than the ability to make stuff, and the ability to instantly engineer billions in
illusory financing trumped the comparatively slow process of making and selling
products for gradual returns.
Romney was right in the middle of this radical change. In fact, according to The
Boston Globe – whose in-depth reporting on Romney and Bain has spanned three
decades – one of Romney's first LBO deals, and one of his most profitable, involved
Mike Milken himself. Bain put down $10 million in cash, got $300 million in financing
from Milken and bought a pair of department-store chains, Bealls Brothers and Palais
Royal. In what should by now be a familiar outcome, the two chains – which Bain
merged into a single outfit called Stage Stores – filed for bankruptcy protection in
2000 under the weight of more than $444 million in debt. As always, Bain took no
responsibility for the company's demise. (If you search the public record, you will not
find a single instance of Mitt Romney taking responsibility for a company's failure.)
Instead, Bain blamed Stage's collapse on "operating problems" that took place three
years after Bain cashed out, finishing with a $175 million return on its initial investment
of $10 million.
But here's the interesting twist: Romney made the Bealls-Palais deal just as the
federal government was launching charges of massive manipulation and insider
trading against Milken and his firm, Drexel Burnham Lambert. After what must have
been a lengthy and agonizing period of moral soul-searching, however, Romney
decided not to kill the deal, despite its shady financing. "We did not say, 'Oh, my
goodness, Drexel has been accused of something, not been found guilty,' " Romney
told reporters years after the deal. "Should we basically stop the transaction and blow
the whole thing up?"
In an even more incredible disregard for basic morality, Romney forged ahead with
the deal even though Milken's case was being heard by a federal district judge named
Milton Pollack, whose wife, Moselle, happened to be the chairwoman of none other
than Palais Royal. In short, one of Romney's first takeover deals was financed by dirty
money – and one of the corporate chiefs about to receive a big payout from Bain was
married to the judge hearing the case. Although the SEC took no formal action, it
issued a sharp criticism, complaining that Romney was allowing Milken's money to
have a possible influence over "the administration of justice."
After Milken and his junk bond scheme crashed in the late Eighties, Romney and
other takeover artists moved on to Wall Street's next get-rich-quick scheme: the tech-
Internet stock bubble. By 1997 and 1998, there were nearly $400 billion in leveraged
buyouts a year, as easy money once again gave these financial piracy firms the
ammunition they needed to raid companies like KB Toys. Firms like Bain even have a
colorful pirate name for the pools of takeover money they raise in advance from
pension funds, university endowments and other institutional investors. "They call it
dry powder," says Slavkin Corzo, the union adviser.
After the Internet bubble burst and private equity started cashing in on Wall Street's
mortgage scam, LBO deals ballooned to almost $900 billion in 2006. Once again,
storied companies with long histories and deep regional ties were descended upon by
Bain and other pirates, saddled with hundreds of millions in debt, forced to pay huge
management fees and "dividend recapitalizations," and ridden into bankruptcy amid
waves of layoffs. Established firms like Del Monte, Hertz and Dollar General were all
taken over in a "prairie fire of debt" – one even more destructive than the government
borrowing that Romney is flogging on the campaign trial. When Hertz was conquered
in 2005 by a trio of private equity firms, including the Carlyle Group, the interest
payments on its debt soared by a monstrous 80 percent, forcing the company to
eliminate a third of its 32,000 jobs.
In 2010, a year after the last round of Hertz layoffs, Carlyle teamed up with Bain to
take $500 million out of another takeover target: the parent company of Dunkin'
Donuts and Baskin-Robbins. Dunkin' had to take out a $1.25 billion loan to pay a
dividend to its new private equity owners. So think of this the next time you go to
Dunkin' Donuts for a cup of coffee: A small cup of joe costs about $1.69 in most
outlets, which means that for years to come, Dunkin' Donuts will have to sell about
2,011,834 small coffees every month – about $3.4 million – just to meet the interest
payments on the loan it took out to pay Bain and Carlyle their little one-time dividend.
And that doesn't include the principal on the loan, or the additional millions in debt
that Dunkin' has to pay every year to get out from under the $2.4 billion in debt it's
now saddled with after having the privilege of being taken over – with borrowed
money – by the firm that Romney built.
If you haven't heard much about how takeover deals like Dunkin' and KB Toys work,
that's because Mitt Romney and his private equity brethren don't want you to. The
new owners of American industry are the polar opposites of the Milton Hersheys and
Andrew Carnegies who built this country, commercial titans who longed to leave
visible legacies of their accomplishments, erecting hospitals and schools and libraries,
sometimes leaving behind thriving towns that bore their names.
The men of the private equity generation want no such thing. "We try to hide
religiously," explained Steven Feinberg, the CEO of a takeover firm called Cerberus
Capital Management that recently drove one of its targets into bankruptcy after
saddling it with $2.3 billion in debt. "If anyone at Cerberus has his picture in the paper
and a picture of his apartment, we will do more than fire that person," Feinberg told
shareholders in 2007. "We will kill him. The jail sentence will be worth it."
Which brings us to another aspect of Romney's business career that has largely been
hidden from voters: His personal fortune would not have been possible without the
direct assistance of the U.S. government. The taxpayer-funded subsidies that
Romney has received go well beyond the humdrum, backdoor, welfare-sucking that all
supposedly self-made free marketeers inevitably indulge in. Not that Romney hasn't
done just fine at milking the government when it suits his purposes, the most obvious
instance being the incredible $1.5 billion in aid he siphoned out of the U.S. Treasury
as head of the 2002 Winter Olympics in Salt Lake – a sum greater than all federal
spending for the previous seven U.S. Olympic games combined. Romney, the
supposed fiscal conservative, blew through an average of $625,000 in taxpayer
money per athlete – an astounding increase of 5,582 percent over the $11,000
average at the 1984 games in Los Angeles. In 1993, right as he was preparing to run
for the Senate, Romney also engineered a government deal worth at least $10 million
for Bain's consulting firm, when it was teetering on the edge of bankruptcy. (See "The
Federal Bailout That Saved Romney")
But the way Romney most directly owes his success to the government is through the
structure of the tax code. The entire business of leveraged buyouts wouldn't be
possible without a provision in the federal code that allows companies like Bain to
deduct the interest on the debt they use to acquire and loot their targets. This is the
same universally beloved tax deduction you can use to write off your mortgage
interest payments, so tampering with it is considered political suicide – it's been called
the "third rail of tax reform." So the Romney who routinely rails against the national
debt as some kind of child-killing "mortgage" is the same man who spent decades
exploiting a tax deduction specifically designed for mortgage holders in order to bilk
every dollar he could out of U.S. businesses before burning them to the ground.
Because minus that tax break, Romney's debt-based takeovers would have been
unsustainably expensive. Before Lynn Turner became chief accountant of the SEC,
where he reviewed filings on takeover deals, he crunched the numbers on leveraged
buyouts as an accountant at a Big Four auditing firm. "In the majority of these deals,"
Turner says, "the tax deduction has a big enough impact on the bottom line that the
takeover wouldn't work without it."
Thanks to the tax deduction, in other words, the government actually incentivizes the
kind of leverage-based takeovers that Romney built his fortune on. Romney the
businessman built his career on two things that Romney the candidate decries:
massive debt and dumb federal giveaways. "I don't know what Romney would be
doing but for debt and its tax-advantaged position in the tax code," says a prominent
Wall Street lawyer, "but he wouldn't be fabulously wealthy."
Adding to the hypocrisy, the money that Romney personally pocketed on Bain's
takeover deals was usually taxed not as income, but either as capital gains or as
"carried interest," both of which are capped at a maximum rate of 15 percent. In
addition, reporters have uncovered plenty of evidence that Romney takes full
advantage of offshore tax havens: He has an interest in at least 12 Bain funds, worth
a total of $30 million, that are based in the Cayman Islands; he has reportedly used a
squirrelly tax shelter known as a "blocker corporation" that cheats taxpayers out of
some $100 million a year; and his wife, Ann, had a Swiss bank account worth $3
million. As a private equity pirate, Romney pays less than half the tax rate of most
American executives – less, even, than teachers, firefighters, cops and nurses. Asked
about the fact that he paid a tax rate of only 13.9 percent on income of $21.7 million
in 2010, Romney responded testily that the massive windfall he enjoys from exploiting
the tax code is "entirely legal and fair."
Essentially, Romney got rich in a business that couldn't exist without a perverse tax
break, and he got to keep double his earnings because of another loophole – a pair
of bureaucratic accidents that have not only teamed up to threaten us with a Mitt
Romney presidency but that make future Romneys far more likely. "Those two tax
rules distort the economics of private equity investments, making them much more
lucrative than they should be," says Rebecca Wilkins, senior counsel at the Center for
Tax Justice. "So we get more of that activity than the market would support on its own."
Listen to Mitt Romney speak, and see if you can notice what's missing. This is a man
who grew up in Michigan, went to college in California, walked door to door through
the streets of southern France as a missionary and was a governor of Massachusetts,
the home of perhaps the most instantly recognizable, heavily accented English this
side of Edinburgh. Yet not a trace of any of these places is detectable in Romney's
diction. None of the people in any of those places bled in and left a mark on the man.
Romney is a man from nowhere. In his post-regional attitude, he shares something
with his campaign opponent, Barack Obama, whose background is a similarly jumbled
pastiche of regionally nonspecific non-identity. But in the way he bounced around the
world as a half-orphaned child, Obama was more like an involuntary passenger in the
demographic revolution reshaping the planet than one of its leaders.
Romney, on the other hand, is a perfect representative of one side of the ominous
cultural divide that will define the next generation, not just here in America but all over
the world. Forget about the Southern strategy, blue versus red, swing states and
swing voters – all of those political clichés are quaint relics of a less threatening era
that is now part of our past, or soon will be. The next conflict defining us all is much
That conflict will be between people who live somewhere, and people who live
nowhere. It will be between people who consider themselves citizens of actual
countries, to which they have patriotic allegiance, and people to whom nations are
meaningless, who live in a stateless global archipelago of privilege – a collection of
private schools, tax havens and gated residential communities with little or no
connection to the outside world.
Mitt Romney isn't blue or red. He's an archipelago man. That's a big reason that
voters have been slow to warm up to him. From LBJ to Bill Clinton to George W. Bush
to Sarah Palin, Americans like their politicians to sound like they're from somewhere,
to be human symbols of our love affair with small towns, the girl next door, the little
pink houses of Mellencamp myth. Most of those mythical American towns grew up
around factories – think chocolate bars from Hershey, baseball bats from Louisville,
cereals from Battle Creek. Deep down, what scares voters in both parties the most is
the thought that these unique and vital places are vanishing or eroding – overrun by
immigrants or the forces of globalism or both, with giant Walmarts descending like
spaceships to replace the corner grocer, the family barber and the local hardware
store, and 1,000 cable channels replacing the school dance and the gossip at the
Obama ran on "change" in 2008, but Mitt Romney represents a far more real and
seismic shift in the American landscape. Romney is the frontman and apostle of an
economic revolution, in which transactions are manufactured instead of products,
wealth is generated without accompanying prosperity, and Cayman Islands
partnerships are lovingly erected and nurtured while American communities fall apart.
The entire purpose of the business model that Romney helped pioneer is to move
money into the archipelago from the places outside it, using massive amounts of
taxpayer-subsidized debt to enrich a handful of billionaires. It's a vision of society
that's crazy, vicious and almost unbelievably selfish, yet it's running for president, and
it has a chance of winning. Perhaps that change is coming whether we like it or not.
Perhaps Mitt Romney is the best man to manage the transition. But it seems a little
early to vote for that kind of wholesale surrender.