In a lucid piece this morning, one of our favorite, more colorful political writers, Matt Taibbi, excoriated the GOP presidential candidate. While Romney is running on the idea he and Ryan will stave off our country’s titanic debt, Taibbi points out that Romney, when at Bain, made a living off of saddling the companies he was ‘advising’ with huge debts, for which they alone would be responsible. In the mean time, Romney and his Bain comrades would cash in on management fees and whatever stake in the sinking company they were able to profit from.
Taibbi breaks down the Goodfellas-esque scheme:
Here’s how Romney would go about “liberating” a company: 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.
Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company’s management with lucrative bonuses. Once management is on board, the rest is just math. So if the target company is worth $500 million, Bain might put down $20 million of its own cash, then borrow $350 million from an investment bank to take over a controlling stake.
The kicker? Though it was Bain that borrowed all of that money from, say Goldman Sachs or Citigroup, the “target company” was the one on the hook for the debt.
So how do these ailing companies pay it back? By slashing benefits and the payroll of the hourly workforce. If that’s ineffective, working-class heads will start rolling. Or the company can declare bankruptcy. Either way, Bain wins. No wonder Taibbi calls Rommey a “hard-charging, chameleonic champion of a disgraced-yet-defiant Wall Street.”