Romney: The Great Deformer

 This article was sent to me by David Stockman, former Reagan Administration head of OMB, capitalist, investor, and writer. As readers know, he has been contributing articles to The Daily Capitalist over the years dealing with what he calls “The Great Deformation”, or the impact of the Fed and crony capitalism on the economy.” His view is “Austrian” and he shatters commonly held myths about what happened before, during, and after the Crash.

In this piece, an excerpt from his forthcoming book, he takes Romney apart about the myth Romney has created about being a great businessman and job creator. It is a detailed examination of Bain Capital’s deals and reveals what Romney really is: a financial manipulator benefiting from the Fed’s money pumping apparatus. Romney has created no jobs yet he scored huge profits from a market crazy on money steroids. This is an extensive article, but it is well worth the read. — JH

BAIN CAPITAL is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise.

Nevertheless, Mitt Romney claims that his essential qualification to be president is grounded in his 15 years as head of Bain Capital, from 1984 through early 1999. According to the campaign’s narrative, it was then that he became immersed in the toils of business enterprise, learning along the way the true secrets of how to grow the economy and create jobs. The fact that Bain’s returns reputedly averaged more than 50 percent annually during this period is purportedly proof of the case—real world validation that Romney not only was a striking business success but also has been uniquely trained and seasoned for the task of restarting the nation’s sputtering engines of capitalism.

Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better. That is the modus operandi of the leveraged buyout business, and in an honest free market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise. I know this from 17 years of experience doing leveraged buyouts at one of the pioneering private equity houses, Blackstone, and then my own firm. I know the pitfalls of private equity. The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest profit exit possible. Occasionally, we did invest in genuine growth companies, but without cheap debt and deep tax subsidies, most deals would not make economic sense.

In truth, LBOs are capitalism’s natural undertakers—vulture investors who feed on failing businesses. Due to bad policy, however, they have now become monsters of the financial midway that strip-mine cash from healthy businesses and recycle it mostly to the top 1 percent.

The waxing and waning of the artificially swollen LBO business has been perfectly correlated with the bubbles and busts emanating from the Fed—so timing is the heart of the business. In that respect, Romney’s tenure says it all: it was almost exactly coterminous with the first great Greenspan bubble, which crested at the turn of the century and ended in the thundering stock market crash of 2000-02. The credentials that Romney proffers as evidence of his business acumen, in fact, mainly show that he hung around the basket during the greatest bull market in recorded history.

Needless to say, having a trader’s facility for knowing when to hold ’em and when to fold ’em has virtually nothing to do with rectifying the massive fiscal hemorrhage and debt burdened private economy that are the real issues before the American electorate. Indeed, the next president’s overriding task is restoring national solvency—an undertaking that will involve immense society wide pain, sacrifice, and denial and that will therefore require “fairness” as a defining principle. And that’s why heralding Romney’s record at Bain is so completely perverse. The record is actually all about the utter unfairness of windfall riches obtained under our antifree market regime of bubble finance.

Rip Van Romney

When Romney opened the doors to Bain Capital in 1984, the S&P 500 stood at 160. By the time he answered the call to duty in Salt Lake City in early 1999, it had gone parabolic and reached 1270. This meant that had a modern Rip Van Winkle bought the S&P 500 index and held it through the 15 years in question, the annual return (with dividends) would have been a spectacular 17 percent. Bain did considerably better, of course, but the reason wasn’t business acumen.

The secret was leverage, luck, inside baseball, and the peculiar asymmetrical dynamics of the leveraged gambling carried on by private equity shops. LBO funds are invested as equity at the bottom of a company’s capital structure, which means that the lenders who provide 80 to 90 percent of the capital have no recourse to the private equity sponsor if deals go bust. Accordingly, LBO funds can lose 1X (one times) their money on failed deals, but make 10X or even 50X on the occasional “home run.” During a period of rising markets, expanding valuation multiples, and abundant credit, the opportunity to “average up” the home runs with the 1X losses is considerable; it can generate a spectacular portfolio outcome.

In a nutshell, that’s the story of Bain Capital during Mitt Romney’s tenure. The Wall Street Journal examined 77 significant deals completed during that period based on fundraising documents from Bain, and the results are a perfect illustration of bull market asymmetry. Overall, Bain generated an impressive $2.5 billion in investor gains on $1.1 billion in investments. But 10 of Bain’s deals accounted for 75 percent of the investor profits. Accordingly, Bain’s returns on the overwhelming bulk of the deals—67 out of 77—were actually lower that what as passive S&P 500 indexer would have earned even without the risk of leverage or paying all the private equity fees. Investor profits amounted to a prosaic 0.7X the original investment on these deals and, based on its average five-year holding period, the annual return would have computed to about 12 percent—well below the 17 percent average return on the S&P in this period. By contrast, the 10 home runs generated profits of $1.8 billion on investments of only $250 million, yielding a spectacular return of 7X investment. Yet it is this handful of home runs that both make the Romney investment legend and also seal the indictment: they show that Bain Capital was a vehicle for leveraged speculation that was gifted immeasurably by the Greenspan bubble. It was a fortunate place where leverage got lucky, not a higher form of capitalist endeavor or training school for presidential aspirants.

Victory from the Jaws of Defeat

The startling fact is that four of the 10 Bain Capital home runs ended up in bankruptcy, and for an obvious reason:

Bain got its money out at the top of the Greenspan boom in the late 1990s and then these companies hit the wall during the 2000-02 downturn, weighed down by the massive load of debt Bain had bequeathed them. In fact, nearly $600 million, or one third of the profits earned by the home run companies, had been extracted from the hide of these four eventual debt zombies.

The most emblematic among them was a roll-up deal focused on down-in-the mouth department stores and apparel chains that were falling by the wayside in small town America due to the arrival of Wal-Mart and the big box retailers. Bain invested $10 million in 1988 and nine years later took out 18X its money—that is, a $175 million profit.

Fittingly, Stage Stores Inc. was the last deal underwritten by the Drexel Milken junk bond machine before its demise and the $300 million raised for this incipient LBO was exactly the kind of slush fund that Milken’s stable of takeover artists had used to acquire corporate castoffs and other bedraggled pots and pans that got rechristened as “growth” companies.

During the next eight years, Bain slogged it out, accumulating about 300 small Main Street storefronts under such forgettable banners as Royal Palais, Bealls, and Fashion Bar. Yet the company wasn’t making much headway. By 1996, it had paid back none of the Milken debt and was only earning $14 million—exactly what it had generated back in 1992 on half the number of stores. In the spring of 1997, when Chairman Greenspan decided that “irrational exuberance” was not such a worrisome thing, Bain Capital decided to indulge, too. It caused Stage Stores Inc.—which was already publicly traded—to raise $300 million of new junk bonds and used the proceeds to buy a faltering 250-store chain of family clothing stores called C.R. Anthony. These 12,000 square foot cracker box stores sold midmarket shoes, shirts, and dresses right in Wal-Mart’s wheelhouse. In hot pursuit of “synergies,” Bain promptly rebranded these Anthony stores to the purportedly more compelling stage and Bealls banners. While the name change did nothing to ward off the grim reaper from Bentonville, it suddenly gave Stage Stores Inc. the “growth” story that Greenspan’s bull market craved. Within five months of this ostensibly “transformative” deal and long before the result of the ritual “synergies” and “rebranding” could be determined, the company’s stock price had doubled. Bain Capital and its partner, Goldman Sachs, quickly unloaded their shares at the aforementioned 18X gain.

As a matter of plain fact, the “transformative” C.R. Anthony deal was a bull market scam. Almost immediately, results headed south. After growing 4 percent during the year of Bain’s quick 1997 exit, same store sales turned to a negative 3 percent in 1998 and negative 7 percent in 1999, and were still falling when Stage Stores Inc. filed for bankruptcy shortly thereafter. The company hemorrhaged $150 million of negative cash flow during 1998-99—that is, during the two years after Bain and Goldman got out of Dodge City.

Bain Capital subsequently claimed the company was “a growing, successful and consistently profitable company during the nine years we owned it” but then immediately ran into “operating problems.” That was a doozy by any other name but typical of the standard private equity narrative that confuses speculators’ timing with real value creation on the free market. The fact is, the bad inventory and vastly overstated assets that took thecompany down did not suddenly materialize out of the blue during the 24 months after Bain’s exit: they were actually the result of financial engineering games from the very beginning.

Worse still, the Stage Stores deal embodied all of the hidden leverage that had become par for the course in the era of bubble finance. When the crunch came, the company had no assets to fall back on because Bain had hocked virtually everything; it sold all the company’s credit card receivables to a third party, and among its 650 stores it owned exactly three! By my calculation, the capitalized debt embedded in its store leases was nearly $750 million and when added to its disclosed balance sheet debt, the company’s true debt of was $1.3 billion or a devastating 25X its peak year free cash flow.

The bankruptcy forced the closure of about 250—or 40 percent—of the company’s stores and the loss of about 5,000 jobs. Yet the moral of the Stage Stores saga is not simply that in this instance Bain Capital was a jobs destroyer, not a jobs creator. The larger point is that it is actually a tale of Wall Street speculators toying with Main Street properties in defiance of sound finance—an anti-Schumpeterian project that used state-subsidized debt to milk cash from stores that would not have otherwise survived on the free market.

Bain’s acclaimed success with another retailer—Staples—is also not what it is touted to be. Tom Stemberg was a visionary entrepreneur who got $5 million of seed money from Bain in 1986 when it was still in the venture capital business; the Milken-style LBO schemes came later. As it happened, Bain exited the Staples deal after only a few years with a $15 million profit, a rounding error in the scheme of things.

Stemberg made Staples a free market success, a relentless generator of efficiency in the retail distribution of office supplies. Yet this honest capitalist efficiency, which benefited millions of customers, was achieved by a rampage of job destruction among tens of thousands of Main Street stationery and office supplies stores and other traditional distributors. These now defunct operations could not compete with Staples due to their high labor costs per dollar of sales—including upstream labor expense in the traditional, inefficient wholesale and distribution layers that stood behind Main Street retailers. Ironically, the businesses and jobs that Staples eliminated were the office supply counterparts of the cracker box stores selling shoes, shirts, and dresses that Bain kept on artificial life support at Stage Stores Inc. At length, Wal-Mart eliminated these jobs and replaced them with back-of-the-store automation and front-end part-timers, as did Staples, which now has 40,000 part-time employees out of its approximate 90,000 total head count. The pointless exercise of counting jobs won and lost owing to these epochal shifts on the free market is obviously irrelevant to the job of being president, but the fact that Bain made $15 million from the winner and $175 million from the loser is evidence that it did not make a fortune all on its own. It had considerable help from the Easy Button at the Fed.

The $100 Million Yellow Pad

American Pad and Paper was a 20-bagger—that is, $5 million was invested in 1992 for a $100 million profit, a miraculous outcome for Bain, but hardly so for the Ampad workers and shareholders left holding the bag when the company went bankrupt in 1999 with massive debt. Ampad has been the focus of competing narratives in the election, but what it truly represents is neither jobs destroyed or saved—just an exercise in LBO cash stripping that would not occur in an honest free market where the central bank was not in the tank for Wall Street.

Ampad, owned by the giant paper conglomerate Mead Corporation, had plants in 14 states in the faintly archaic business of making notebooks, envelopes, file folders, and writing tablets—including the eponymous “yellow pad.” Not surprisingly, at a time when the Internet and paperless office were taking the world by storm, Mead discovered that Ampad was “not a good fit” and that its sale to Bain Capital was “an early step to increase productivity.” So the question recurred as to how spreadsheet-toting suits from Boston could resurrect what deeply experienced executives in Dayton, Ohio, knew to be a value destroying sunset operation.

The answer was leveraged financial engineering—that is, the roll-up of similar pots, pans, and discards for an eventual coming out party on Wall Street. To this end, Mead perfumed the pig on the way out the door. In conjunction with a sweeping corporate “restructuring” program, 13 manufacturing and distribution facilities were consolidated into six and a$90 million “restructuring reserve” was established to cover asset write downs and severance costs for upwards of a thousand terminated employees.

So Bain Capital and the division’s senior management became the proud owner of a slimmed down $100 million business that dominated the market for legal sized yellow pads. Yet even with all of Mead’s predivestiture elimination of plants and jobs, Ampad’s earnings in 1991 (before interest, tax, depreciation, and amortization) amounted to the grand sum of $4.9 million.

Mead also topped up Bain’s tiny $5 million equity investment with short-term financing and generous loans to the divested executives. But despite these Band-Aids from a big company trying to rid itself of a loser, the results showed that the suits from Boston had not moved the needle at all. By 1993, earnings had inched up only to $5.1 million—meaning that after 18 month’s effort, Bain had come up with only $1 million of value gain at prevailing cashflow multiples. Accordingly, it determined that yellow pads were not enough, and in the summer of 1994 it launched a spree of acquisitions hoping that accordion file folders and business envelopes were the way of the future! The market was held to be large—amounting to some 169 billion envelopes per year—but the snag was they sold for only 1.6 cents each. To make a difference to its profits, therefore, Ampad needed to sell 10 billion to 15 billion envelopes a year.

This turned out to not be a problem. Another group of leveraged operators had been at work for nine years consolidating the business envelope sector under the Williamhouse umbrella and had accumulated numerous plants and properties. By 1995, the Williamhouse roll-up of envelope makers and distributors had accumulated $150 million of debt, about $250 million of sales, and a modest operating cash flow of about $16 million.

So in October 1995, Bain again rolled the dice on a “transformative” acquisition. It spent $300 million acquiring Williamhouse, assuming all its heavy debt. The purchase price at 18X operating free cash flow was on the far edge of risky, but once again the putative “synergies” proved compelling to Bain’s bankers at the Bankers Trust Company. They refinanced all of the huge Williamhouse debts and provided an additional loan of $245 million. As it happened, Bain only needed $150 million to buy Williamhouse’s stock and pay the deal fees. So it sent its bankers a case of champagne and helped itself to a $60 million dividend in compensation for prospective “synergies” from a day-old merger. By year-end 1995, Ampad had added envelopes and accordion files to its yellow pad portfolio, but in the process of its frenetic acquisitions, Bain had trashed the company’s balance sheet. Compared to $45 million of debt at year-end 1994, Ampad by June 2006 had 10X as much debt to service—$460 million!

It therefore desperately needed the promised giant synergies, but, alas, they were not arriving as scheduled. Ampad generated barely enough operating income during the first six months of 1996 to cover its swollen interest payments, causing it to report a negligible 5 cents per share of net income. Yet since Bain Capital had now harvested a dividend that was 12X its original investment, it was basically home free—with a call option on either operational miracles or clever marketing and accounting. Not surprisingly, Bain opted for marketing and accounting razzmatazz. In June 1996,it launched an IPO at $15 per share—or about 150X its actual annualized rate of earnings during the first half of the year. The road show had an altogether different spin, however. The IPO boasted “proforma” financials—that is, not actual sales and profits but “would have been” results. Thus, 1995 pro forma sales of $620 million reflected the full year impact of its acquisitions—implying that Ampad was a born again “growth” company. Compared to its actual sales of only $100 million in 1991, it had purportedly been growing at 53 percent annually. The fact that 90 percent of this growth was due to debt funded acquisitions was presumably to be overlooked.

The magic wand, however, came in the pro forma “adjustments” to earnings. The company had actually reported 1995 operating earnings of a scant $1.5 million and a net loss after interest and taxes, but in a five page bridge table that was a wonder to behold, the offering prospectus detailed several dozen pro forma adjustments that envisaged the newly minted amalgamation of companies—Ampad-Williamhouse-Globe-We-is-Niagara—as a gusher of profits. Its interest costs had tripled, but thanks to “synergies,” cost savings, and future operating improvements, the $1.5 million of actual 1995 earnings were to be viewed—through the lens of pro forma magic—as $57 million of operating income.

This $57 million result included a lot of chickens that had not yet hatched. For example, $8.5 million of higher operating income was to be from the Niagara Envelope acquisition that had not actually finalized as of the IPO prospectus. Likewise, a savings of $4.5 million was cited from closing Williamhouse’s New York City headquarters, even though rent and severance costs several times greater were buried in purchase accounting and would be paid for years to come.

Yet by July 1996, the Greenspan stock market bubble had a good head of steam. This meant that Ampad had no trouble selling nearly $250 million of stock based on a prospectus riddled with pro forma adjustments to the point of incomprehensibility, and a growth story that strained credulity. Bain Capital was able to sell to credulous IPO punters another $50 million of its stock, bringing its return to over $100 million and the fabled 20-bagger. Meanwhile, the hedge fund speculators pumped the company’s stock to a peak of $26 per share by late summer of 1996, making all the more evident that the Ampad deal was really about speculative mania on Wall Street, not a revival of “Old Yeller” from the bits and pieces of a dying industry.

The company’s combined debt and equity was then being valued at $1.1 billion— or a fantastic 35X the $30 million of operating free cash flow (EBITDA less capital expenditure) that Ampad actually posted during 1997. However, within weeks of the IPO and a profits warning, the fast money smelled the rat and followed Bain in scampering off the listing ship. Margins were being squeezed by the superstores faster than the promised synergies could be realized. By early 1999, the stock was delisted and when the company was finally liquidated in bankruptcy shortly thereafter, secured lenders recovered about $100 million and other creditors got zero—that is, the company was worth about 10 percent of its peak valuation. Once again, the moral of the story is about the ill effects of bad public policy, not just that smarter speculators like Bain bagged the slower witted. To be sure, private equity sponsors usually don’t make huge profits on busted deals. I lost a bundle when my auto supplier investment went bankrupt, and was prosecuted for fraud to boot. But the government eventually dropped the charges entirely because in the end it was a case of way too much leverage and bad timing in the midst of an auto industry collapse that took down GM, Chrysler, and nearly every major supplier too.

The lesson is that LBOs are just another legal (and risky) way for speculators to make money, but they are dangerous because when they fail, they leave needless economic disruption and job losses in their wake. That’s why LBOs would be rare in an honest free market—it’s only cheap debt, interest deductions, and ludicrously low capital gains taxes that artificially fuel them.

The larger point is that Romney’s personal experience in the nation’s financial casinos is no mark against his character or competence. I’ve made money and lost it and know what it is like to be judged. But that experience doesn’t translate into answers on the great public issues before the nation, either. The Romney campaign’s feckless narrative that private equity generates real economic efficiency and societal wealth is dead wrong.

A $165 Million Score on Experian

In September 1996, Bain Capital and some partners bought Experian, the consumer credit reporting division of TRW Inc., for $1.1 billion. But Bain ponied uponly $88 million in equity along with a similar amount from partners; all the rest of the funding came from junk bonds and bank loans. Seven weeks later, they sold it to a British conglomerate for $1.7 billion, producing a $600 million profit for all the investors on their slim layer of equity capital and after not even enduring the inconvenience of unpacking their briefcases. Quite obviously Bain generated zero value before it flipped the property. So the fact that it scalped a sudden and spectacular $165 million windfall has nothing to do with investment skill or even trading prowess. Instead, the Experian Corp.’s $600 million valuation gain in just 50 days was an inside job. That explains how a division put on the auction block by one of the nation’s most prominent dealmakers, CEO Joseph Gorman, could have been so badly mispriced in the initial sale to Bain Capital and its partners—that is, how they got it for just 65 percent of what the property fetched only months later. In fact, the original auction had been run by Bear Stearns—and it became evident in March 2008 that Bear Stearns had never been in the client service business; it had been in the brass knuckled trading business, where it used its balance sheet to underwrite and trade immensely profitable “risk assets.” Not surprisingly, the private equity houses were the premier source of profits for its trading and capital markets desks—so its “investment bankers” needed little encouragement about where to steer corporate divestiture deals.

In that endeavor, they got plenty of help from the inside management of spun-off divisions, which were usually marketed as a “key asset” of the business and eager to participate in the prospective LBO. Thus, Experian’s CEO, D. Van Skilling, and his lieutenants reaped millions from this Wall Street orchestrated windfall before they had even been issued new business cards. Oblivious to the irony, however, Skilling defended Bain’s instant $165 million profit by insisting to Business Insider “there was never a hint of financial chicanery at all.” He had that upside down. The deal was pure chicanery, but not because the private equity investors were underhanded. It was because they were artificially enabled by the central banking and taxing branches of the state—the true source of this kind of rent-a-company speculation.

The Wesley-Jessen Home Run

Wesley-Jessen was a small specialist firm that did reasonably well in cosmetic eye color lenses and toric lenses to correct astigmatism. In mid-1995, when Schering-Plough Corp. put it on the block, Bain Capital invested $6 million and reaped a $300 million profit for itself by 1999— making nearly 50X its investment in the same number of months. On an apples-to-apples basis, however, the company’s operating income rose by only 2X during the same period, by my calculations. The rest of the gain was due to massive leverage, the Greenspan bubble, and accounting moves that can fairly be called myopic. Bain employed a hoary old dodge—having its accountants write off every dime of plant, equipment, and intangible knowhow, reassigning roughly $40 million to the inventory accounts, and then charging it to income in the immediate two or three quarters. This trick eliminated all future depreciation, thereby magically adding $14 million to the pro forma operating income on Wesley-Jessen’s $100 million of sales. Investors were promptly told to ignore the resulting losses, of course, since these inventory charges were “non-recurring”! In fact, savings from pre-deal “restructuring” actions by the seller, plus the accounting magic, generated $24 million of freshly minted “operating income” before Bain’s turnaround squad even showed up at the company’s headquarters. The alleged “turnaround” of Wesley-Jessen was thus largely an artifact of Bain’s PR machine.

In the fourth quarter of 1996, the company borrowed $70 million to acquire a competitor, Barnes-Hind, from Pilkington plc. Before the ink was dry on the merger contract, Bain filed an IPO prospectus. While Barnes-Hind had an operating loss of $17 million the year before the merger, its results for that period were improved by $23 million owing to Bain’s pro forma adjustments—creating the appearance of another dramatic turnaround.

During the 12 months ending at the merger date, the combined companies had actually incurred a net loss of $27 million, but it vanished with the help of $50 million in pre-tax adjustments for merger accounting and prospective savings. So its pro forma earnings took on a decisively improved aura; it would have booked a $14 million profit, or about $0.73 per share.

Not surprisingly, the stock market eagerly scooped up $45 million of new shares at $15, or 20X these gussied-up earnings, just in time for the Fed to begin a new round of goosing in March 1997. And that proved propitious for Bain. Almost to the day on which its 180-day IPO lockup expired, it sold its first batch of shares in a secondary offering in a now red hot stock market at a red hot price that was up 60 percent from the IPO. Wesley-Jessen had not then filed financial statements with even $1 of GAAP (generally accepted accounting principles) net income. But when Bain’s underwriters wired the proceeds in August 1997 the selling price was $23.50 per share. That’s 52X the $0.43 per share it had paid for the stock 25 months earlier. At the end of the day, massive leverage, fancy accounting, and bubble finance, not entrepreneurial prowess, were the source of Bain’s 50-bagger.

The Italian Job

In November 1997, Bain Capital pulled off a veritable capitalist heist in the socialist redoubts of the Italian Yellow Pages. On a $17 million investment in the Italian phone book, it took out a profit of $375 million. This was not only a 22-bagger; for Mitt Romney, it was the ultimate in no sweat riches. According to the company’s CEO, Romney’s sole involvement was a cameo appearance during a due diligence session: “He came into the room, asked a couple of very sharp questions immediately, shook hands and left.” Twenty-eight months later, in February 2000, Romney’s former colleagues at Bain located him during his tour of duty in Salt Lake City, where they wired his share of the winnings: a reputed $50 million.

Bain and a syndicate of private equity houses were originally brought in as a stalking horse to validate the government’s “privatization” machinations. At the time, the key Italian Treasury official was one Mario Draghi (now president of the European Central Bank). His assignment was to get the nation’s huge deficit down to a Maastricht Treaty–compliant 3 percent, and he elected to do so by means of a rent-a-balance-sheet ploy of the type then in favor. The short story is that Bain and the other investors paid 5X the company’s operating income for their shares, and were paid 100X operating income to leave when local circumstances obviated the need for the rental deal. That preposterous multiple expansion accounted for virtually all of Bain’s 22-bagger.

In the interim, the dotcom bubble reached it fevered peak—so Italy’s lumbering phonebook publisher had puffed itself up as a fleet-footed Internet company, claiming to be the next AOL. In the fog of 1999’s worldwide financial bubbles, a group of corporate raiders who did not have two nickels to rub together then got control of Italy’s storied typewriter maker, Olivetti, and parleyed massive borrowings through that vehicle into control of the Italian phone company. Now hoist atop a stupendous house of cards, the raiders next went after Italy’s gussied-up Yellow Pages, paying $24 billion—or 180X net income—for a business that was slithering into the sunset. In fact, it is currently worth perhaps 1 percent of Bain’s exit price through a deal that top-ticked Greenspan’s NASDAQ bubble in February 2000. Never have a group of private equity men laughed more heartily on the way to the bank.

The Bain Capital investments here reviewed accounted for $1.4 billion or 60 percent of the fund’s profits over 15 years, by my calculations. Four of them ended in bankruptcy; one was an inside job and fast flip; one was essentially a massive M&A brokerage fee; and the seventh and largest gain—the Italian Job—amounted to a veritable freak of financial nature.

In short, this is a record about a dangerous form of leveraged gambling that has been enabled by the failed central banking and taxing policies of the state. That it should be offered as evidence that Mitt Romney is a deeply experienced capitalist entrepreneur and job creator is surely a testament to the financial deformations of our times.

From the forthcoming The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy by David Stockman. Copyright © 2012 by David Stockman. Adapted by permission of PublicAffairs, a member of the Perseus Books Group. Stockman’s book will be published in March 2013.



41 comments to Romney: The Great Deformer

  • David Stockman is mentioned in Thomas Sowell’s article about “Stupidity Trickling Down”. The Daily Capitalist can do much, much better than David Stockman. Sorry.

    “Some of those who denounced me for saying that there was no trickle-down theory cited an article by David Stockman years ago — as if David Stockman was the last word, and I should forget everything I learned in years of research because David Stockman said otherwise.”

    • Stockman’s history is what it is. I believe he was a proponent of the Laffer Curve during Reagan’s Administration. I believe he was considered to be a “Conservative.” So what. Now he has demonstrated his Austrian credentials and while I do have some differences with him, he is one of the best writers and analysts of the current scene as well as taking a shot at the history of crony capitalism. He looks as things through Austrian eyes. I like Sowell a lot as a free market economist and he was right about “trickle down” economics, whatever that is. But he is mostly wrong on the Laffer curver. Mostly Laffer’s ideas are a coincidence of data that ignore what really causes our economic booms and busts. There is no doubt that lower taxes can help an economy, but, as they say, it depends. If the the bust was preceded by a boom brought about by the Fed’s money steroids, then malinvestment must be cleared away first and lower taxes won’t do much to aid a recovery because of a dearth of capital. In the present case the malinvestment was the greatest the world has ever seen and lower taxes, as we have found in this go around, has not brought about recovery. It would be true that higher taxes would harm an economic recovery, but the corollary that lower taxes would revive an economy is simply not true. I believe Laffers ideas are mostly post hoc ergo propter hoc (Result B followed event A, therefore A caused B). So, if you are a free market adherent, NYDivide, rather than just a Conservative, you should reevaluate your ideas. I think Stockman has something valuable to say here. Those Conservatives expecting a Romney economic miracle should he be elected are going to be very disappointed.

      • Thanks for the reply Jeff. I am a free market adherent and I have never identified as a Conservative. I have very little confidence that Mitt will embrace markets (and repeal ObamaTax) if he is elected; however I have zero confidence that Obama will embrace free markets. Art Laffer is not my favorite either, however I agree with anyone that advocates lower taxes (even if their reasoning and or rationale is flawed. Not only do I believe lower taxes are better for society as a whole, I also believe that giving the government more power and/or money will ensure that the government will make most aspects of our lives worse…regardless of where we are in the business cycle). As you stated: Stockman’s history is what it is. Thanks again.

  • D

    Stockman may well be right, but after making his riches NOW he has become a ‘reformer’. What’s that about glass houses and casting stones again?

  • Anonymous

    I bet this is a popular story at the old pharmacy breakfasts

  • David Pristash

    Stockmans’ writing sounds to me more like someone belittling someone that did better then they did with the same information and resources. We want a leader that has proved the can accomplish things other than a dreamer whose only accomplishment is having written two books about himself.

  • David Eppelsheimer, Sr.

    David Stockman has reached the same conclusion I reached in 1971 after reading the seminal work on “trickle down”. I was attending MIZZOU on the GI Bill after 4 years in the US NAVY in the Atlantic Fleet. Keynes’s The Economic Consequences of the Peace has a lot to say about our situation and the solutions. Harry Truman understood and acted with the Marshall Plan. With a Congress that does something , rather than being a pigeon for K Street, we will overcome. BREWERS all the way in 2013 and 2014!!!! Thank you for the venue.

    • frank

      Truman and Keynes? With “a congress that actually does something?” Everything Congress does leads to disaster. Maybe you were lookingfor the Daily Kos and somehow ended up here…….

      • Hans

        Anyone who recognized how badly CONgree, has failed as an institution deserves our salute…

        Hats off to, Mr Frank!

  • Norman

    Interesting read, as well as the comments too. In all the back & forth, has anyone given thought as to who helped implement the present course the governing body and the lack of real enforcement of the laws? Crony or corrupted capitalism, but who implemented it?

    • frank

      Stockman helped as a former member of Congress and now as someone on CNBC that changes his views whenever the the wind changes direction.

  • mak

    I wouldn’t vote for him or the pretender….but, at least romney actually did something and made his own money….the pretender, nada….

    • frank

      Yes but David Stockman points out that because Romney’s business benefited from the Fed’s easy money policy (because noooo one else did) that Romney is a “crony capitalist”. David Stockman is the judge now as what a true capitalist is now……

  • I am surprised at the negative comments. I hope all of you actually read the article. I would guess most of you are offended that someone who is free market oriented would take a crack at Romney. Please see my reply to NY Divide above. I doubt Stockman is envious of Romney but, I’m not his psychiatrist and don’t care. What I do care about is the corrupt state of current politics and the economic ideas they promote. I have been writing about Obama and Romney as political liars who lie Big Lies. Nothing they say can be believed and most of what they say is untrue. Oh sure, “But Jeff, that’s what you’ve got to do to get elected. Just wait until Romney is in office. He’ll be fine then.” Yeah, right. If you think I am naive, then if you believe that statement then I’ve got a perpetual motion machine to sell you. Romney is not a free market guy, and doesn’t have much of a clue on how to “fix” things. Most of his public personna is a fiction. He doesn’t have any core beliefs, at least based on his actions and statements. He flip flops more than an Ihop pancake. The guy wants power. Obama is worse but I know what I’m getting with him. My vote is against Obama, not for Romney, because, as I said before, he is the lesser of two weasels.

  • Jim

    If I vote for Mitt Romney, it would be for the sole reason that he might push through a repeal of Obamacare. I have serious doubts that he will do that. Mr. Stockman’s piece only confirms what I suspected.

    • frank

      That is the only reason many people are voting Romney, including myself. If he and Congress do not repeal Obamacare, then we are seriously screwed and people will start to hope that the federal govt spends itself into collapse. Would I bet all my gold that Romney will repeal? No, but it is our only chance, so I will certainly bet my vote on it.

      • Frank,

        I fear you and many others will vote for Romney believing that he idealogically “Must” repeal ObamaCare.

        Mit Romney is not now and never has been strongly attached to a political ideology. As you will find out after he has hoodwinked you and run America all the way into Bankruptcy and Foreclosure which is really what he does best.

        • frank

          As bad as Romney is, Obama is much worse. As I stated above, Romneybis our only chance to repeal ObamaCare. A vote for Gary Johnson is a vote for Obama. Bankruptcy and foreclosure? Your comments indicate that you do not understand what is being discussed here……

    • Hans

      Jim, if he fails in a sincere attempt, then his lie and contempt will undo him…

      I hope we will not have to call him Obamney..

  • David Pristash


    I would be the first to admit that Romney is not the perfect candidate but to say that he has created no jobs is to say the Venture and Investment capital firms serve no valid purpose (I used that form in the 80′s to start a tech company) Do they use leverage and make money, of course, they do but in many if not most of Bain’s as well as others in that industries’ deals the companies in question would have gone out of business or been acquired by someone who would liquidated them anyway. For the most part we are not talking about well run companies.

    As to not telling the truth, my God, they are politicians and the rhetoric Romney and Ryan use is nothing compared to what Obama uses. The man is at best a hard core socialist if not a down right Communist (look at the background of “all” his advisers). I have actually read some of the passed legislation from the first two years when he had control of congress and I did a “detailed” read and study of the Cap N Trade bill that was not passed. All that legislation was written to give the federal government controlling power over everything. That was his only interest — period. Not one of those bills needed to be as long as it was to achieve the “purposes” we were told.

    From the time the recession ended in first quarter of 2009 until last month the government ran up $4.96 trillion of additional debt and created by BLS Table A-1 only 2.2 million jobs that is $2.3 million dollars per job not a good return on investment; and GDP has increased only $916.8 billion (in 2005 dollars) for the same period so the $4.96 trillion of additional debt gave us for each $1.00 of GDP growth a debt of $5.41 again not a good return. No one could do this bad unless they wanted it bad.

    Romney may not be laissez-faire free market but he is not going to continue the policies of this administration which is a totally controlled market. Will he do as much as he should to straighten out the mess — probably not, but I do not think he will add to it either. I do have concerns that he will not do everything that is needed but I do think he does not hate America as does Obama (he has apologized for all the bad things we have done remember).

    I have analyzed the Ryan budget and the Obama budget in “detail.” The Ryan budget doesn’t go far enough but it at least addresses the issues. The Obama 2013 budget was a joke and not one Democrat voted for it in the Senate. Romney maybe distorting the truth but Obama is at best a tin man (derogatory term for a aluminum siding salesman from the 60′s).

    David J. Pristash, BBA economics, EMBA CASE technology marketing
    Self taught mechanical and electrical engineer
    Graduate GE management program
    Captain US ARMY (WIA and Retired), Served in Vietnam as a Greet Beret with 5th SF group (abn)
    Seven issued patents all very technical
    Member Beta Gamma Sigma
    Brecksville Ohio 44141

  • D

    When we fix the system, we will also get better candidates.

  • [...] budget guy, fellow LBO auteur and avowed capitalist on #Mitt. How does he fare? Link excerpt:  This article was sent to me by David Stockman, former Reagan Administration head of [...]

  • Paul from the Cape

    I have live in Massachusetts as a conservative for sixty years. Mitt’s a nice guy, hard working and honest. He didn’t make the world, but he made his way through it. I don’t blame him giving dying companies a fluff job and sending them out again. No one forced others to buy them. Lots of people make money buffing up used cars, remodeling old houses, finding uses for old industrial buildings. I’m told in France the same business are the leaders decade after decade. In the US, we kill off the weak. I’d love him to kill of entire cabinet offices.

    Even if I had my perfect candidate, the country is too large. Always. Everything. Maybe, like a captain of a leaking ship, in stormy seas, Mitt can just keep us afloat and buy time. I’d take that.

    Well, lets hope President Obama is out, and the Tea Party continues.

  • Sam from Maine

    Davids’s arguments ring true but really don’t matter. I have/had reservations about Romey. But Daffy Duck could be the nominee and I would vote against Obama.

  • Hans

    Now Das Capitalist has joined the ranks of the likes of DailyKos; Mother Jones; Puffington Post; Daily Beast; with this last minute political attempt to injury MR M.R….

    Herr Stockton, is a spoiler, a RINO, a vindictive person; confused and loose with the facts…

    This hypocrite who blames M.R. for engaging in LBOs, himself joins the Blackstone Group, which has conducted its own LBOs!

    This hypocrite, who turned on Raygun after he was cashiered, writing his book – The Fail Raygun Revolution…Blaming Repubcos for massive tax cuts but not spending reductions as well..

    What he does not tell you, is that CONgress was split from 1982 to 1987 and then controlled by the Demcos, from 88 to 89..

    He states that SS and MC can be saved by means testing – all the hallmark of a leftest..He wants the Bushneck tax reductions to expiry – all the hallmark of a socialist…

    “Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses.” Much the same as your previous employer, Herr Stockman ?

    “But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.”

    “In truth, LBOs are capitalism’s natural undertakers—vulture investors who feed on failing businesses. Due to bad policy, however, they have now become monsters of the financial midway that strip-mine cash from healthy businesses and recycle it mostly to the top 1 percent.”

    ” The record is actually all about the utter unfairness of windfall riches obtained under our antifree market regime of bubble finance.”

    It seems to me, that he is akin to a Ministry of Economic Justice..He blames “policy” for this..He thinks investor are too stupid to realize that a LBO has been striped mined…Conspiracy; rigged markets; again the hallmarks of the left..

    And for good measure a little sprinkle of class envy…

    The rest of this piece, are example of private money and private enterprises conducting business – but not according to Chairman Stockman and his Ministry of Economic Justice.

    “In short, this is a record about a dangerous form of leveraged gambling that has been enabled by the failed central banking and taxing policies of the state. That it should be offered as evidence that Mitt Romney is a deeply experienced capitalist entrepreneur and job creator is surely a testament to the financial deformations of our times.”

    Why, Mr Stockman, does not take CONgress to task, for these failures and rigged markets, rather than blaming someone who merely operated under conditions beyond their control, raises the question of their motive..

    Why are Mr Stockman and Das Capitalist discussing the minor faults of M.R., when this Republic faces the GREATEST threats to its economic and liberty, since its foundation..Why?

    REALLY, which is more important that this grave juncture, your petty concerns about M.R. LBOs or the object failure of Team BOCO…?

    Is elevating politics more important or saving our beloved Republic ?

    This article, at this time, is so out of place, that it stands out like a sore thumb…

    THIS – Romney: The Great Deformer or THAT Obama: The Great Deformer ?

    Where does the red peril lye – LBOs or BHO ?

    David Stockman is just another Sandra Fluke…

  • Hans,

    Please, take your medication and calm down.


  • One last try

    1. Romney did what a lot of guys were doing, but he can’t claim he’s a businessman and created jobs. He reminds me of the Bushes: give the man a mission and he’ll probably get it done.

    2. We have no clue what his ideolgy is.

    3. He lies about his accomplishments, and, David P., while that makes him a politician, we have set the bar too low for our leaders.

    4. I doubt he has a clue about the real causes and cures of our boom and bust depression.

    5. We can expect a continuation of most of the economic policies that have been the mainstream during the Bush and Obama years.

    6. Stockman is not the issue, Romney is. Don’t shoot the messenger.

    7. One could argue that vulture capitalism of the type reputedly practiced by Romney (not meant to be a pejorative term) has some economic benefit for maximizing the value of inefficient companies and thus freeing up valuable capital for new investment. But the point of the article is that wan’t what Bain really did. They created no new value; they pulled out cash by financial legerdemain and left the companies and the lenders holding the bag. What good did that accomplish other than to enrich Bain? Companies like Bain are the byproduct of boom-bust monetary policy.

    8. Romney isn’t going to save us. Same ole, same ole.

    9. I will vote for Romney only because he says he is dedicated to getting rid of Obamacare. Assume that he does, will he replace it with something that is slightly less bad? We don’t know this but his history points to “yes.” No real reform of health care can be expected. Also, he says he will nominate “conservative” Supreme Court justices. If so, great; we need to stop the Court’s left turn.

    10. Breath into a paper bag for a while.

  • Hans

    1) M.R., is more of a businessman than either than Bushorama..
    2) You have not been watching the debates ?
    3) He has not lied..
    4) Please, he has stated the cause and effects in the debates.
    5) No, I do not think that it will be the case.
    6) Sockman, is a back stabber; you will hear nothing about him after the elections.
    7) Then why does Bain Capital still flourish? More suckers on the hook?
    8) You may be right about this one. We shall known in 12 months, which is all I am giving him…
    9) Many voters will do like wise and hope for the same.
    10) I will now be taking meds, as prescribe by Dr Jim and Dr Phil..

  • Hans, Hans, Hans … Such a Republican.

    • Hans

      Mr Harding, the Repubco are part and parcel of these problems, to a large degree; it is why I agreed with you on #8…

      I am a convulsive Constitution Conservative; what matters is the US Constitution, The Bill of Rights, Our Founding Fathers and the glories stars and stripes…

      Parties come and go; the above never!

  • kdog

    I agree with Hans. Stockman’s main gripe against Romney seems to be that Romney was successful at private equity whereas Stockman was a miserable failure, and dishonest to boot. See Alan Reynolds takedown of Stockman at NRO. Stockman is trying to sell books here and figures this is a great time to take a shot at Mittens.

    I don’t see any evidence that Romney lied about his accomplishments at Bain. He was obviously very successful and considered as such by Bain management. I don’t really care what his true ROI % was. He has a much better understanding of the marketplace than Obama. All I know is that he is the much better choice right now.

  • Hans

    Thank you Kdog! I love the word “Mittens”…
    I will look up, Mr Reynolds, as well…

    Mr Harding, I have NEVER attended a Repubco function to date.

    However, I am attending a Tea Party meeting tonight, at the Eden Prairie High School, (Minnesota) featuring Ms Star Parker.

    I support the Tea Party and identify myself as a Teabagger..

    M.R., has embedded himself with Bushneck advisers and that is of grave concern to me…

    I also would be opposed to an invasion of Iran with American ground forces, unless the lead column was the Demco Party…

  • frank

    Lets keep attacking our only chance to prevent our hospitals turnig into DMV’s….Mitt isn’t Ron Paul so re-elect Obama…..makes a lot of sense…..two word for you unrealistic AnCaps (and fakes like David Stockman): Rand Paul.

    • Hans

      Well said, Frank! Yes, Rand Paul, will be a leading voice in the Conservative movement and a better one than his father…