David Brooks has a rather melancholy offering today, framing the Obama campaign’s attacks on Mitt Romney’s record at Bain Capital as the inevitable move of a struggling incumbent -- a move that Romney is inexplicably unready to counter. Brooks, like many more orthodox conservatives in recent days, wishes that Romney would respond to the attacks with a more forthright, self-assured defense of the world of American business, rather than trying so frantically to distance himself from Bain’s activities after his sorta-departure in 1999. Brooks concludes:
Romney is going to have to define a vision of modern capitalism. He’s going to have to separate his vision from the scandals and excesses we’ve seen over the last few years. He needs to define the kind of capitalist he is and why the country needs his virtues.
Let’s face it, he’s not a heroic entrepreneur. He’s an efficiency expert. It has been the business of his life to take companies that were mediocre and sclerotic and try to make them efficient and dynamic. It has been his job to be the corporate version of a personal trainer: take people who are puffy and self-indulgent and whip them into shape.
That’s his selling point: rigor and productivity. If he can build a capitalist vision around that, he’ll thrive. If not, he’s a punching bag.
But here’s the thing: once upon a time, Romney did try to sell the "capitalist vision." In 1994, when Ted Kennedy’s campaign started hitting Romney over unsavory Bain deals such as the Ampad takeover in Indiana, Romney had this to say, according to The Real Romney, the definitive new biography by Michael Kranish and Scott Helman: "This is not fantasyland. This is the real world. And in the real world, there is nothing wrong with companies trying to compete, trying to stay alive, trying to make money."
Well, we know how that went. Kennedy kept hitting Romney over Bain and ended up winning by 17 points despite that year’s Republican wave. So it’s perhaps not surprising that in Romney’s next campaign, in 2002, he responded to Shannon O’Brien’s Bain attacks not with theories of creative destruction but with the excuse that is now again under scrutiny: that the deals she was talking about had gone down after he sorta-left Bain in 1999.
But here’s the bigger reason why Romney is unlikely to take up Brooks’ advice and "define the capitalist he is" as separate and superior to the unattractive sorts that the country has been confronted with these past few years: Bain Capital’s sort of capitalism specialized in exactly the sort of stuff that strikes many Americans as so unappealing and unfair about the world of high finance. Brooks focuses on Obama’s attacks on Bain’s ventures into outsourcing, attacks that can indeed be challenged in light of the widespread acceptance of outsourcing and off-shoring across American business, including by firms and figures that Obama touts as success and allies, such as General Electric and Jeffrey Immelt. But Romney and Bain’s problems go well beyond off-shoring. As a comprehensive new Vanity Fair piece describes, the primary critique of Bain is the way it loaded up companies it bought with debt and slashed workers’ pay and benefits, as a precursor to paying its partners huge dividends regardless of the companies’ performance; the primary critique of Romney himself is the way he used havens like the Cayman Island and Bermuda to gain tax advantages for his outsized income from these deals. The article’s most damning section is its retelling of the saga of a company called Dade Behring:
In 1994, Bain bought Dade International, a medical-diagnostics company, then added the medical-diagnostics division of DuPont in 1996 and a German medical-testing company called Behring in 1997. Former Dade president Bob Brightfelt says the operation started well: the Bain managers were “pretty smart guys,” he recalls, and they did well cutting out overlap, and exploiting synergies.
Then brutal cost cutting began. Bain cut R&D spending to an average of 8 percent of sales, a little more than half what its competitors were doing. Cindy Hewitt, Dade’s human-resources manager, remembers how the firm closed a Puerto Rico plant in 1998, a year after harvesting $7.1 million in local tax breaks aimed at job creation, and relocated some staff to Miami, then the company’s most profitable plant. Based on reassurances she had received from her superiors, she told those uprooting themselves from Puerto Rico that their jobs in Miami were safe for now—but then Bain closed the Miami plant. “Whether you want to call it misled, or lied, or manipulated, I do not believe they provided full information about what discussions were under way,” she says. “I would never want to be part of even unintentionally treating people so poorly.”
Bain engaged in startling penny-pinching with the laid-off employees. Their contracts stipulated that if they left early they would have to pay back the costs of relocating to Miami—but in spite of all that Dade had done to them, it refused to release the employees from this clause. “They said they would go after them for that money if they left before Bain was finished with them,” Hewitt recalls. Not only that, but the company declined to give workers their severance pay in lump sums to help them fund their return home.
In 1999, generous pensions were converted into less generous benefits, wages were cut, and more staff members were laid off. Some employees contacted Norman Stein, then the director of the pension-counseling clinic at the University of Alabama law school, with a view to challenging the conversions. Stein says the employees were “extraordinarily nervous,” so fearful, in fact, that they refused to let lawyers even make copies of pension documents. “I have been dealing with pensions issues for over 25 years and I never saw anything like this,” recalls Stein. The spooked employees did not go to court. Stein says that, while breaking pension contracts like this was not unheard of, the practice at that time was “questionable,” adding that Dade may have saved $10 to $40 million from converting its pensions.
The beauty—or savagery—of leverage is that it can magnify any and all cash-flow boosts, such as this one. Take $10 to $40 million squeezed from a pension pot, then use that to create new, rosier financial projections to borrow several times that amount, and then pay yourself a big special dividend from the borrowed funds, many times the size of the pension savings. That is just what Bain Capital did: the same month it converted the pensions, it created new financial projections as a basis to borrow an extra $421 million—from which Bain, its co-investor Goldman Sachs, and top Dade management extracted $365 million in dividends. According to Kosman, “Bain and Goldman—after putting down only $85 million … made out like bandits—a $280 million profit.” Dade’s debt rose to more than $870 million. Romney had left operational management of Bain that year, though his disclosures show that he owned 16.5 percent of the Bain partnership responsible for the Dade investment until at least 2001.
To put it simply: Bain loaded up Dade with debt and slashed labor costs, to the point of demanding workers return the moving costs of their own displacement to Florida, and from this single deal Romney personally reaped millions on millions. To most Americans, "personal trainer" is not exactly the metaphor that comes to mind here. Romney seems to have grasped some time ago that the reality of what was involved in making him a very wealthy man is not necessarily an easy sell for voters. Those, like Brooks, who are now urging Romney to make himself the tribune of American capitalism ought to consider more closely just how poorly suited a Bain man is for this role. If American conservatives wanted the 2012 election to be a grand argument about the true character of American capitalism, they probably ought to have gone with someone other than Willard Mitt Romney.
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