Bain Capital Explained By Tony Soprano

May 24, 2012 2:29 PM

"The national debate over private equity so far has hinged on the question of whether experience in the field qualifies Mitt Romney, the former Bain Capital executive, for the presidency. But a more vexing, and largely unanswered, question lies just beneath the surface: How is it, exactly, that an investment company can make millions even as the company it's ostensibly trying to turn around goes bust? For that answer, we turned to what may seem like a less-than-reliable source: Tony Soprano [NSFW: language]."
posted by ericb (54 comments total)

Mitt Romney, Bain Capital, and Tony Soprano.
posted by ericb at 2:29 PM on May 24, 2012 [1 favorite]

I wrote Bain Capital a letter asking for verification of one Willard Mitt Romney, since he's thinking of working for me. They haven't replied. I wrote Mitt and asked for a copy of his birth certificate, since it only seems fair. He hasn't replied.

As far as I can tell, Mitt wasn't working at Bain as an illegal alien only because he never worked there!

That's my story until proven otherwise.
posted by cjorgensen at 2:40 PM on May 24, 2012 [21 favorites]

"taking money out," not "committing rape"

I wish people wouldn't do this.
posted by shakespeherian at 2:42 PM on May 24, 2012 [2 favorites]

Let us now praise private equity.
posted by John Cohen at 2:47 PM on May 24, 2012

I wish people wouldn't do this.

Corporations are people, my friend.
posted by goethean at 2:52 PM on May 24, 2012 [4 favorites]

And Henry Hill, too.
posted by chavenet at 2:57 PM on May 24, 2012 [2 favorites]

How is it, exactly, that an investment company can make millions even as the company it's ostensibly trying to turn around goes bust?

I don't understand why there's so much confusion about this. They bought companies and either a) turned them around and sold them for more than they paid or b) sold off the valuable assets of the company and liquidated the rest.

Why am I supposed to believe that this is evil?
posted by downing street memo at 2:58 PM on May 24, 2012 [4 favorites]

Alas, poor lefties got panties in a bunch because something that is fully legal is being done by...a Republican...the real issue, as Pres Obama made clear, is that Mittens knows how to make lots of money for his investors but the president's job is making a living for ALL Americans.
posted by Postroad at 3:01 PM on May 24, 2012 [1 favorite]

Jay Carney on Solyndra: That's The Way Business Works

Q: You probably heard overnight that yesterday [Solyndra], after getting half a billion dollars in government money, attention from the President, a visit, is filing for Chapter 11 and laying off 1,100 people. What does it say about the President’s policies so far, as he gets ready for this new plan, if this company he promoted, gave government money to, is going bankrupt and is laying off 1,100 people?

A: ...There are no guarantees in the business world about success and failure. That is just the way business works, and everyone recognizes that.

posted by BobbyVan at 3:03 PM on May 24, 2012 [2 favorites]

It's evil because they took profitable companies and rendered them down, destroyed them and all of the employees. There is nothing good about it. It's totally predatory and economy destroying.
posted by snsranch at 3:11 PM on May 24, 2012 [10 favorites]

Maybe people are outraged that profitable companies which employed thousands of workers, and sometimes supported entire towns, were turned to scrap and sold off for parts to help make investors who were already outrageously rich even richer. Illegal? No. Immoral? You bet your butt.

Kind of the difference between seeing a person as a living being versus seeing her as a pile of perfectly good organs ripe for transplant. Because corporations are people.
posted by 1adam12 at 3:13 PM on May 24, 2012 [26 favorites]

It's evil because they took profitable companies and rendered them down, destroyed them and all of the employees. There is nothing good about it. It's totally predatory and economy destroying.

If what you said was true, no one would ever, ever loan money to a Bain-owned company.
posted by BobbyVan at 3:13 PM on May 24, 2012

Why am I supposed to believe that this is evil?

Evil? No. Immoral? Yes. Or at least some of us do. For occasions when the model was buying a company, driving it into massive debt, extracting much of that debt as Bain's profit rather than investment. Removing any support for the pension fund such that when the company is inevitably bankrupted the government has to bail out the pension fund.

To me that's a legal loophole of transferring money from taxpayers to their pockets (ignoring the loss of the company and jobs). But maybe not evil.
posted by NailsTheCat at 3:14 PM on May 24, 2012 [5 favorites]

NailsTheCat - the "Obama For America" campaign shouldn't be linked as an authority on what Bain Capital did or did not do.
posted by BobbyVan at 3:17 PM on May 24, 2012

It's evil because they took profitable companies and rendered them down, destroyed them and all of the employees. There is nothing good about it. It's totally predatory and economy destroying.

These are largely the exception, not the rule. No industry is perfect, and guaranteed you screw up at your job sometimes, too.

PE/LBO's main source of profits is selling the firms they buy, either to another company or on the public markets. It has every incentive to increase - not decrease - the long-term value of its asset. Does that sometimes mean layoffs? Of course. But if it means layoffs, the layoffs were coming anyway; private equity is the proximate, not the real cause.
posted by downing street memo at 3:18 PM on May 24, 2012 [2 favorites]

no one would ever, ever loan money to a Bain-owned company. Why not? Don't the lenders get a cut too?
posted by snsranch at 3:19 PM on May 24, 2012 [1 favorite]

Uh, when a company goes bankrupt, its creditors typically take a haircut. That's where the common critique that Bain "loads these companies with debt and bankrupts them" falls apart. Because if that were the case, no lender would take on the risk of lending to a Bain-owned company.
posted by BobbyVan at 3:22 PM on May 24, 2012 [1 favorite]

NailsTheCat - the "Obama For America" campaign shouldn't be linked as an authority on what Bain Capital did or did not do.

Is there an incorrect fact there? From the NY Times: "Bain took $242 million out of the business in a transaction that, according to bankruptcy documents and several former Dade officials, weakened the company."
posted by NailsTheCat at 3:29 PM on May 24, 2012 [1 favorite]

They bought companies and either a) turned them around and sold them for more than they paid or b) sold off the valuable assets of the company and liquidated the rest

or c) acquired complimentary companies and combined them into a single, stronger company. Wait, that's not evil either.
posted by Blue Meanie at 3:29 PM on May 24, 2012 [2 favorites]

Alas, poor lefties got panties in a bunch because something that is fully legal is being done by...a Republican.

Well thank goodness that this thread has started out with a tone of respectful debate.
posted by Saxon Kane at 3:31 PM on May 24, 2012 [11 favorites]

Well, MY panties got all in a bunch for minute there.
posted by snsranch at 3:32 PM on May 24, 2012

If a company has transferable assets, declining sales, and is saddled with a large debt in the form of an employee/retiree pension plan shortfall then a company like Bain will buy the company for less than the value of the assets, sell them off for a profit, then tank the company into bankruptcy thereby screwing over all the workers.
Just because that's legal doesn't make it okay.
posted by rocket88 at 3:33 PM on May 24, 2012 [3 favorites]

Is there an incorrect fact there? From the NY Times: "Bain took $242 million out of the business in a transaction that, according to bankruptcy documents and several former Dade officials, weakened the company."

Not incorrect, just incomplete. Dade spent two months in bankruptcy in 2002, recovered, and was purchased by Siemens for more than $6 billion in 2007.
posted by BobbyVan at 3:35 PM on May 24, 2012 [2 favorites]

If a company has transferable assets, declining sales, and is saddled with a large debt in the form of an employee/retiree pension plan shortfall then a company like Bain will buy the company for less than the value of the assets, sell them off for a profit, then tank the company into bankruptcy thereby screwing over all the workers.

This is so incoherent, I don't even know where to start. (Not to mention, its not the only model for PE/LBO) Let's take your hypothetical company. If Bain didn't step in, the "transferable assets" would be left to rot with the bad stuff, like a high structural debt load and the ineffective parts of the company with declining sales. Society would lose out on all the good shit in the transferable assets, no one would make any money, and everyone at the company - not just the employees working for non-performing parts - would lose their job.

Instead, the good stuff gets saved. Now, you're right in that if Bain doesn't manage the company's debt well, that company might have trouble once its sold off. But buyers do due diligence; if PE/LBO systemically racked up high debt loads in companies it bought, they'd have no buyers when they tried to sell off those companies, and like BobbyVan said, no one would lend money to PE-backed companies. But, of course, they do.
posted by downing street memo at 3:41 PM on May 24, 2012 [2 favorites]

Not incorrect, just incomplete.

I've read the Wikipedia article too. But that doesn't change the fact that the taxpayer is having to support pensions at a company bankrupted by Bain and from which Bain extracted huge profits, profits that I think should have been shoring up the pension. That still happened didn't it?

I accept that it's legal and not evil. Do you think it's moral?
posted by NailsTheCat at 3:41 PM on May 24, 2012 [3 favorites]

I've read the Wikipedia article too. But that doesn't change the fact that the taxpayer is having to support pensions at a company bankrupted by Bain and from which Bain extracted huge profits, profits that I think should have been shoring up the pension. That still happened didn't it?

So, you don't like the bankruptcy code? Firms go belly-up all the time, Bain-run or not.
posted by downing street memo at 3:50 PM on May 24, 2012

Why am I supposed to believe that this is evil?

Good or evil, it should hopefully raise a question or two of how Romney might manage the country's finances. Given what has happened to taxpayers and employees after Bain Capital works its magic, what would the country as a whole look like, after being run through a similar Bain-esque chop shop?

Bain's profitability was backed by government insurance bailout programs, particularly — "austerity" measures propped up by the average taxpayer. How are those measures working out for other industrialized economies?
posted by Blazecock Pileon at 3:51 PM on May 24, 2012 [3 favorites]

Good or evil, it should hopefully raise a question or two of how Romney might manage the country's finances.

Come on, think hard about this. Why would it, at all? Romney ran a firm that pursued a particular investment strategy. How does that connect to running a macro-economy?

I mean, yeah, the guy would probably try to cut spending a bit. He's a Republican. But that's an entirely separate issue from the work the guy did under very different assumptions and circumstances.
posted by downing street memo at 3:54 PM on May 24, 2012 [2 favorites]

Why am I supposed to believe that this is evil?

Well I won't tell you whether to think it's evil or not, but I think you're misunderstanding how it works, on a mechanical level.

In many going-private transactions, the private equity firm does not just buy the company; they do so with loans that are then secured using the business assets themselves as collateral. The effect is that the newly "bought" company has a huge debt burden that it did not have before - it's more like the PE firm is making the company borrow money to buy itself. The PE money is effectively not on the line, or only to the extent of like 20-50% of the purchase price.

The newly private company then has a huge debt obligation every month in addition to its previous expenses, so former profits are redirected to debt service and/or other expenses (like salaries and pensions) are squeezed. This often puts the company in an untenable situation where it can't operate effectively anymore and gets liquidated. Note that even if the liquidation is a money LOSING proposition - if it goes for less than the previous fair market value - the PE firm might already have cashed out using large dividends (which in turn exacerbated the debt problem), so it can destroy real value while reaping a profit.

Again, it's legal, you don't have to think it's evil if you don't want to, but it also doesn't seem like the best idea in the world for most stakeholders.
posted by Joey Buttafoucault at 3:57 PM on May 24, 2012 [17 favorites]

Mr. Romney, I knew Tony Soprano. Tony Soprano was a friend of mine. You, sir, are no Tony Soprano.
posted by Joey Michaels at 4:03 PM on May 24, 2012 [4 favorites]

Come on, think hard about this. Why would it, at all?

For real? Is this really a serious question? We're only now getting out of the last vestiges of an illegal war started by a guy who was in charge of the country for eight long years, a former oil company executive and family friend to Saudi Arabian royalty, whose energy/military contractor VP friend gave sweet, no-bid contracts to his former employer.

Come on. This is why these types run for office in the first place. It's a story as old as Roman emperors: it's so much easier to loot and help out your buddies when you're in charge. Legalities become plastic niceties.
posted by Blazecock Pileon at 4:10 PM on May 24, 2012 [8 favorites]

How Did Mitt Romney Get So Obscenely Rich? Robert Reich Explains

Steps 4, 5, 7 and 8 are of particular importance.
posted by Benny Andajetz at 4:59 PM on May 24, 2012 [7 favorites]

Oh, for pity's sake.
posted by valkyryn at 5:02 PM on May 24, 2012

Alas, poor lefties got panties in a bunch because something that is fully legal is being done by...a Republican

Something being legal or not, is a poor gauge of whether it's a net good for the society at large or not. The reason is extremely simple: law creation is in perpetual catchup mode to the reality created on the ground. We found murder to be a bad thing for society, so we created laws against it. Slavery was a net loss to society, so we outlawed it - again, playing catchup (some of the catching up can take millennia!).

The entire history of laws governing economic activity , from tribal economic structures to the latest capitalism, is laws catching up with the economic activities of those in position of power. We got rid of child labor - once upon a time it was legal. We won the 8 hour workday and the right to unionize (perhaps we lost those again!), and work safety rules - those laws were made because the PREVIOUSLY ENTIRELY LEGAL reality was intolerable, and it took terrible tragedies or strife to get a new legal framework.

Banking laws, labor laws, consumer laws - the same thing.

So perhaps what the Bains of today's world are doing is quite legal. The question still remains: but is it good? I think the experience of the past few decades gives us ample grounds to clamor for reform - the fact that there are many who will defend the status quo is not surprising either, that's always been the case, sometimes as bitter as a civil war.
posted by VikingSword at 5:06 PM on May 24, 2012 [19 favorites]

downing street memo: "I mean, yeah, the guy would probably try to cut spending a bit. He's a Republican."

You say this based on what evidence? Spending went *up* last couple R presidents, going back to Reagan. Granted, that spending went into miltary contractors, not ordinary citizens...
posted by notsnot at 5:12 PM on May 24, 2012 [3 favorites]

Alas, poor lefties got panties in a bunch because something that is fully legal is being done by...a Republican

Right wing, frothing, dismissive, and sexist. You sure you came to the eight site?
posted by Bunny Ultramod at 5:32 PM on May 24, 2012 [9 favorites]

er, right site.

Good night, my dear.

Saved my life for ever.

Right site, good night my dear!

The ship is a-coming and the time's drawing near!
posted by Bunny Ultramod at 5:33 PM on May 24, 2012

I wonder if in some cases boards decided to take a chance with Bain to free themselves from things like the SEC and SOX so they could get down and dirty with bleeding out the company. Does not absolve Bain for their part by any means, I just wonder about those stories of otherwise healthy companies betting themselves on this strategy.
posted by lordaych at 6:29 PM on May 24, 2012

So, you don't like the bankruptcy code? Firms go belly-up all the time, Bain-run or not.

Not at all. I am all in favor of laws to protect creditors & employees and give firms breathing space to restructure. What I don't like is cynical exploitation of them to extract money from the government. But then you knew that didn't you. Do you think it's moral?
posted by NailsTheCat at 6:30 PM on May 24, 2012 [3 favorites]

That was a really lame mash-up. The Huffington Post has really dropped in quality.
posted by koeselitz at 6:40 PM on May 24, 2012

I really don't understand people who think that everything that is legal is something people should do. I also don't understand people who think PE deals like Reich describes are AOK. There's a fairly strong case that, done right, private equity forces companies to be more efficient, which is a net gain for all of us. (if the created value is distributed somewhat fairly, anyway)

Problem is that there's too much of the corrupt kind and not enough of the not-corrupt kind going on.
posted by wierdo at 6:48 PM on May 24, 2012

If Romney gets elected I can see him buying up Greece, moving the Parthenon to Miami and auctioning off the cute little Greek islands to Russian venture capitalists. Go Romney!
posted by storybored at 8:20 PM on May 24, 2012 [1 favorite]

NTC

Private equity is neither moral nor immoral. Also upthread, banks don't lend to distressed companies, as a rule. PE certainly doesn't look to increase the number of jobs except if required for growth. Good business. Businesses have some societal responsibilities but as 'people' can also act to serve thier own interests. Snark about the people thing, intended. Investors have a right to extract capital. If I have 250m of machinery and property, big pension and accrued vacation liabilities, and my business is obsoleted, taking the company out is a valid move. Often jobs will be lost, but would have been lost anyway. Not always or maybe even often. Its people, and we don't know enough about each deal to judge Romney's role and motivations, not that I would vote for him though.

Isn't the question rather, does this qualify Romney to specifically target his 'job creation' skills. He can, I guess. Stupid gambit if you ask me. Easily backfire.

He can't seem to get out of his own way. although I don't know if I am alone in this, but I am glad it was Romney who emerged from the primaries. I'm nervous about the outcome. I don't expect Obama to blow it but the cray cray in the air right now...Any of those other guys...can you imagine sending Rick Santorum to meet Putin or China? Jesus.
posted by sfts2 at 9:22 PM on May 24, 2012 [1 favorite]

wierdo: “I really don't understand people who think that everything that is legal is something people should do.”

Indeed. Like making crappy Youtube mashup videos. That's not illegal, but you sure as hell shouldn't do it.
posted by koeselitz at 10:13 PM on May 24, 2012

Uh, when a company goes bankrupt, its creditors typically take a haircut.

...banks don't lend to distressed companies, as a rule.

That isn't true in all cases. Banks lend to distressed companies all the time, just at a higher rate. Then they repackage the deals into tranches and sell the debt to others at a lower rate, making a tidy profit with virtually no risk involved. If the bank can find a ratings agency to simply say that the tranches are low risk by rating them highly, then that lowers the rate the bank has to pay and increases profits. And everybody wins; the bank, the private equity firm, the ratings agency.

Well, all except the final owner of the debt. But hey, that may be laid off workers anyways, with their 401Ks buying all that AAA debt (oh, yeah, the bank made money on that transaction, too)!
posted by roquetuen at 10:32 PM on May 24, 2012 [3 favorites]

Jay Carney on Solyndra: That's The Way Business Works yt

Q: You probably heard overnight that yesterday [Solyndra], after getting half a billion dollars in government money, attention from the President, a visit, is filing for Chapter 11 and laying off 1,100 people. What does it say about the President’s policies so far, as he gets ready for this new plan, if this company he promoted, gave government money to, is going bankrupt and is laying off 1,100 people?

A: ...There are no guarantees in the business world about success and failure. That is just the way business works, and everyone recognizes that.

BobbyVan, aside from the fact that Solyndra is also a US company that went bankrupt, what relevance does this have? Are you under the delusion that the POTUS had any authority or responsibilities in the day-to-day or strategic business decisions of Solyndra?

And, BTW, a little fact for you: companies do go bankrupt; even companies that receive financial assistance from the government. In fact, nearly every company that has gone bankrupt has benefited from some government policy at some point, so I'm more than a little tired of the idiotic suggestion that Solyndra is somehow an indictment of anything ar all about our government (except perhaps that the US is being outspent in R&D by China).
posted by IAmBroom at 11:33 PM on May 24, 2012 [2 favorites]

roquetuen

I said, as a rule. I guess it depends on what you mean by distressed. I mean those that cannot get financing to the point where they become targets fo LBO etc activities. Its almost definitional. Also, I am not readily aware of securitized corporate debt. Those instruments survive and are traded/held discretely. So, no I don't think so.
posted by sfts2 at 4:57 AM on May 25, 2012

Not at all. I am all in favor of laws to protect creditors & employees and give firms breathing space to restructure. What I don't like is cynical exploitation of them to extract money from the government. But then you knew that didn't you. Do you think it's moral?

I do so detest "when did you stop beating your wife" level arguments.
posted by kjs3 at 7:25 AM on May 25, 2012

So we're okay with a corporate raider taking over the country?
posted by goethean at 7:43 AM on May 25, 2012 [1 favorite]

BobbyVan, aside from the fact that Solyndra is also a US company that went bankrupt, what relevance does this have?

And, BTW, a little fact for you: companies do go bankrupt; even companies that receive financial assistance from the government. In fact, nearly every company that has gone bankrupt has benefited from some government policy at some point, so I'm more than a little tired of the idiotic suggestion that Solyndra is somehow an indictment of anything ar all about our government (except perhaps that the US is being outspent in R&D by China).

That's rich. A $500 million handout to a private company isn't "financial assistance from the government;" it's speculative taxpayer-funded crony capitalism.

And to answer your question, Solyndra is relevant because the government basically played the role of a private equity investor: it made a $500 million investment, after which the company levered up, paid itself handsome bonuses, and proceeded to go bankrupt. What makes Solyndra worse is that taxpayers took it on the chin (as opposed to risk/yield hungry private investors). In fact, "the Obama administration restructured a half-billion dollar federal loan to a troubled solar energy company in such a way that private investors — including a fundraiser for President Barack Obama — moved ahead of taxpayers for repayment in case of a default, government records show." (AP)
posted by BobbyVan at 8:13 AM on May 25, 2012

I'd point out, BobbyVan, that Solyndra and Bain still have nothing to do with each other; one can happily believe (as I do) that both are evidence of corruption. You clearly only bring it up because you want to snipe against Obama where others are sniping against Romney.

However, it would be kind of silly to bring that up, because the sniping was really dumb in the first place. The whole premise of this conversation is dumb. BAIN = TONY SOPRANO, OH NOES!!! Whatever. It'd be nice if we could minimize this crap.
posted by koeselitz at 11:02 AM on May 25, 2012

sfts2: I am not readily aware of securitized corporate debt. Those instruments survive and are traded/held discretely. So, no I don't think so.

Securitized corporate debt is very common. Financial folks loved securitization of mortgages, why would you think they would not use it for corporate debt? Here is a link to a NYT article about just such securitization melting down, the money quote: "In this case the culprit was a financial instrument called a collateralized loan obligation, which helped issuers repackage corporate loans much as subprime mortgages were sliced, diced and then resold to other investors. That made many more risky loans available." Bain and KKR are specifically mentioned in that article, not exactly small players in the business.

If you think that these are hard to get hold of, just let me know how many banks/investments were free of toxic assets from the subprime mortgage CDOs.

I guess it depends on what you mean by distressed. I mean those that cannot get financing to the point where they become targets fo LBO etc activities. Its almost definitional.

Definitional by circular definition? So, was it "distressed" when the bank wouldn't lend it money to keep on its own books, but then it wasn't distressed when the bank decided to lend it money that it could repackage and sell off the debt and get that crap off its own books ASAP?

Securitization helps to make money simply through the transaction. This was true with the subprime mortgages as well. Saying Bain and the banks won't make money if the business doesn't grow isn't the whole truth, there are many ways to make money and let someone else have the risk.
posted by roquetuen at 12:46 PM on May 25, 2012

BobbyVan, Solyndra is a bit more complex than that. The program which allows the government to lone Solyndra that money was started under Bush as was Solyndra's application. Obama screwed up because he chose to make it to make it an example of green programs while ignoring the advice of advisors that showed it wasn't a great investment. But the accusation of crony capitalism couldn't be further from the truth- and really shows a lack of understanding of the situation.
posted by [insert clever name here] at 1:27 PM on May 25, 2012

This 'crony capitalism' phrase being used against the Democrats should alert one to the fact that the person is not engaging in a meaningful conversation, but is instead indiscriminately spewing undigested BS.
posted by goethean at 8:18 AM on May 27, 2012