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Mitt Romney, private equity, Bain Capital and the 2012 election

Adam Newman | Monday, September 17, 2012

One of the attacks that the Obama campaign has used against Mitt Romney are the dealings of the private-equity firm Bain Capital, of which Romney was CEO. This is perhaps the first time that such an intense examination of private equity has occurred at a national level. Amidst the plentiful talking points and sound bites in any presidential campaign, both private equity’s supporters and its critics have misled the public.

In 1983, Romney was chosen to start a new private-equity firm named Bain Capital. To put it simply, a private-equity firm manages funds provided by investors to purchase underperforming or undervalued companies, improve them and eventually sell the companies for a profit. Many of the changes that firms like Bain took were selling unproductive segments of businesses while expanding productive ones and slashing jobs and wages for workers, while creating performance incentives for managers. This led to major turnover at companies that exemplified the complacent business environment and paternalistic bond that management shared with employees after World War II. Many question how private-equity firms could justify such seemingly immoral actions, but ultimately private-equity firms are loyal to their investor’s interests, even if that means slashing jobs and wages for middle class workers.

Mitt Romney, however, understands that he cannot say this on the campaign trail, and has made the claim that he created 100,000 jobs while CEO of Bain. There is evidence that this is roughly the amount of jobs created, but since Bain will not publish statistics for all their ventures, it is impossible to know how many jobs were simultaneously destroyed. The authoritative study conducted by Steven Davis of the University of Chicago suggests that on average, private-equity firms are marginal net job destroyers (roughly one percent of employment).

Supporters of private equity often equate the vilification of private equity as an attack on free-market capitalism. What these supporters fail to realize (or admit) is that private equity immensely benefits from government subsidies through the U.S tax code. The tax code makes debt tax deductible with no cap, giving private-equity firms an incentive to load up acquisitions with unusually high amounts of debt. Many times these firms use the debt to take cash out of the business in the form of dividends for the private-equity firm, creating an indirect transfer of cash from the government to the private-equity firms. As James Surowiecki recently wrote in the New Yorker, “If private-equity firms are as good at remaking companies as they claim, they don’t need tax loopholes to make money.”

Many believe these leveraged buyouts cause companies to go bankrupt. A Wall Street Journal analysis of Bain investments from 1984 to 1999 found that 22 percent of Bain’s investments filed for bankruptcy or went bust within eight years of Bain’s acquisition. However, it is hard to tell how many of these bankruptcies would not have happened if Bain did not invest in them. Bain was more likely to invest in risky, underperforming firms, so many of these firms would have failed anyway.

Even with private equity’s flaws, Romney’s career was successful. During Romney’s tenure, the fund increased from $37 million in 1984 to $500 million by 1994 and posted the highest returns of any other competitor. Romney also gained a reputation as a very hard worker and an extremely talented CEO. While it is impossible to examine every deal over his 15-year career at Bain Capital, overall, Romney was an extremely ethical businessman.

With this being said, the Obama campaign’s attacks against private equity serve little value in the 2012 presidential campaign. Romney’s career ended 13 years ago, and the decisions that he made as an executive to create value for investors are not at all similar to the decisions he would make as the president to help the American people. Instead, Obama should focus on what Romney would do as president. He should spend time explaining the Paul Ryan budget endorsed by Romney, while labeling him as another President Bush – a man with few political convictions, who is out of touch with everyday Americans and whose policies would largely benefit the rich and hurt the middle class.

Obama won in 2008 because he promised to stay above the petty politics we have come to expect as the norm. But now he is engaging in petty politics as his campaign focuses on Bain Capital’s dealings and ignores the major issues. When people place their hope in a candidate for high office, they expect that the candidate can change our country’s political culture, but too often it is the other way around. Perhaps Barack Obama is another causality.

Adam Newman is a senior political science major. He can be reached at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.