gracchusdixit

As soon as Newt Gingrich and Rick Perry started to criticize Mitt Romney for the way he made his fortune at the private equity firm of Bain Capital, the Republican establishment started circling the wagons in his defense.   Some called criticism of Romney’s money-making un-American.  Others, like John McCain, asserted that the only alternative to people like Romney is communism.  Romney himself accused critics of “the bitter politics of envy.”  The excuse for all this hysteria is that Gingrich and Perry are doing President Obama’s work and thus undermining the Republican Party’s likely nominee.

But that’s not the real reason for the hyperbole.

The real reason is that the Republican establishment knows Gingrich and Perry have struck a nerve.  In attacking a great, predatory fortune like Romney’s, they are striking at the very essence of the Republican Party itself, which remains what it has always been:  a cat’s paw for the wealthiest American individuals and corporations.   The Republican establishment cannot allow ordinary citizens to question, even for a moment, the behavior of market capitalism, because that would bring their entire house of cards tumbling down.  For Republicans, it’s all or nothing.  Either you worship at the altar of the market or you’re a godless communist.

This dichotomy, of course, is utter nonsense.  No  economic or social system, including market capitalism, is flawless, and to criticize its imperfections or abuses is an exercise in common sense, not communism.  Because private equity firms like Bain Capital operate in the shadows at the very edge of the market, it is not only appropriate to examine and question their behavior, it is absolutely necessary.

Bain is one of the largest private equity investors in the country.  The key word is “private,” which means that Bain is owned by its partners, not by outside shareholders.  Going all the way back to the House of Morgan, private equity firms have had a long history of complex deal-making that has amassed great fortunes for insiders.  Because they are not required to disclose their financial results, it is often difficult to determine how their deals actually work, who really benefits, and whether outside investors are getting their fair share of the proceeds.

Private equity companies do four things.  (1) They provide venture capital for new companies that might have a tough time raising funds from traditional lenders or markets.  (2) They create and manage investment funds targeting specific industries, countries or regions.  (3) They acquire entire companies and continue to operate them.  (4) They buy up and then “restructure” companies, either selling or dismembering them for a profit.   The first two of these activities are uncontroversial.  In particular, providing seed money for new businesses is one of the most productive functions of private equity investing.  It involves risk, and its success deserves reward.

Venture capitalism, however, is a tiny part of Bain’s overall business.  The firm’s web site lists more than a hundred start-ups, but these constitute a mere fraction of Bain’s total investments.  Thus, true venture capitalism can have contributed very little—if anything—to the fortune amassed by Mitt Romney when he was Bain’s ceo.

Romney’s money appears to have come from murkier transactions—leveraged buy-outs, which produce immense returns at little personal risk.  The dynamic of leveraged buy-outs is simple:  a firm like Bain borrows money to acquire a company, using that company’s assets as collateral; it then squeezes profit margins to pay down the debt, pocketing the difference and collecting hefty management fees along the way.  When all the profit has been extracted, what’s left of the the acquired company is often broken up and sold off before the business collapses and its stock becomes altogether worthless.  We won’t know for sure how much of Romney’s money came from this sort of chicanery until he discloses his financial statements and tax returns—something he is obviously reluctant to do.

Apologists for companies like Bain Capital routinely invoke the famous phrase of Joseph Schumpeter, “creative destruction,” to rationalize what they do.  But there is no moral or practical calculus that can possibly justify their activities.   Companies like Bain, and men like Romney, contribute little of value to society as a whole.  Their business strategy—buy it, rape it, dump it—produces plenty of destruction, but the only thing it creates is unearned wealth for their partners.   Republicans claim that our country would be better off with a ‘businessman” like Romney in the White House.  If so, they’re going to have to come up with somebody better.  They’re going to have to find somebody who knows how to create businesses instead of destroying them.