The Obama campaign’s attacks on Mitt Romney’s tenure at Bain are not attacks on free enterprise, capitalism or even private equity.
Capitalism did not require Bain to issue debt that GS Steel could not afford to repay, mainly to put money in the pockets of Bain partners. Capitalism did not require Bain to take tens of millions in profits while workers lost their livelihoods. Private equity is not to blame for the company underfunding its pensions system and sticking the government with the bill.
Capitalism does lead to “creative destruction,” in Schumpeter’s famous phrase. Free enterprise does entail risk and the freedom to fail. Private equity exists to make profits. None of that is inherently evil.
The critiques are not focused on the system or the process, or even the failures themselves. Everyone is entitled to some. Rather, the doubts revolve around the decisions Romney made and the values those decisions reflect. And if candidates’ decisions and values are not appropriate considerations in an election, nothing is.
Bain bought GS Steel for $75 million after putting only $8 million of its own into the deal. Smart business. Less than a year after gaining control of the company, Romney and his Bain partners made a decision — to put the company into debt to the tune of $125 million. Some of that money was put to good capitalist use, modernizing the factory. However, a significant chunk of the borrowed cash, $36 million, was handed back to Bain in the form of a dividend. That’s right, less than a year after buying the company, Bain decided to reward itself for its wisdom by putting GS Steel into debt so Romney and his partners could take home more than four times what they put into the deal.
It was a profitable decision for Bain, but was it wise? GS Steel’s income was less than one-tenth its debt — hardly reassuring to those concerned about our national finances. In short, Bain risked the company only to put unearned cash in its own pockets.
Although Bain’s partners were pulling down millions from the investment, they asked Kansas City for a $3 million tax break. If the company could afford to pay Bain partners $36 million, what justification could they have for asking the city for a $3 million subsidy — money that the citizens of Kansas City could not use for schools or law enforcement because it ended up in Romney’s pocket, 1,300 miles away?
When GS Steel went under, Bain decided to keep every penny it had taken out of the company but renege on its commitment to pay healthcare and severance for employees. Greed? Yes. Capitalism? Not really.
Neither is underfunding pensions a natural consequence of capitalism. It reflects a conscious decision to evade obligations. And that’s what Bain did. It simply decided not to meet its legal responsibilities. The end result: The federal government was stuck with a $44 million bill. Do we want a president who cannot be trusted to keep his signed contracts, let alone his word? Do we want a president who is willing to leave the government holding the bag for his failures to meet his obligations?
To constitute an attack on business, on capitalism or even on private equity, the Obama campaign would have to be asserting that most businesses operate this way. That is exactly the opposite of what they are claiming. They are asserting that a particular company, run by candidate Romney, acted irresponsibly, leaving employees with nothing while it took millions and shifted responsibilities to government that the company refused to meet. Most businesses don’t operate that way.
Instead of taking umbrage, private-equity firms would be wise to join the chorus of condemnation and explain that most of them are not like Bain.
Mellman is president of The Mellman Group and has worked for Democratic candidates and causes since 1982. Current clients include the Majority Leader of the Senate and the Democratic Whip in the House.