Wednesday, August 29, 2012

The Bain Model

Matt Taibbi wrote an incredibly important article on Bain Capital. Not so much because it explains what Romney did to get his fortune, which it does, but more importantly as a general explanation of the process of financialization. Bain is an equity firm. Taibbi basically tells you what equity firms do. In his words:
"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 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.

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."
A win-win as they say, unless you actually work in a company acquired by an equity firm. Here is an example of an actual company.
"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."
This is not only legal, but it is also possible because of a tax loophole that allows deductions on the interest on the money borrowed to take over productive firms. As Matt Taibbi tells us:
"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."
So Taibbi is right when he says that Romney complaining about excessive debt is ironic, to say the least.

3 comments:

  1. So, are you ready for an Apple buyout? It's a rich prize, and extremely vulnerable.

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  2. A very good complement for the Taibbi article:

    The Revolt of the Rich, by Mike Lofgren http://www.theamericanconservative.com/articles/revolt-of-the-rich/

    It's important not only due to the things it says, but because of the person who says them and the place where it is published. Just have a look at the URL and read Lofgren's brief profile at the bottom of the article.

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  3. Yup, this will be required reading in Principles....

    ReplyDelete