Bain Capital

Italian Automaker Brings about Chrysler Success after GOP Private Equity Failure

I’ve been a bit tardy in responding to Mitt’s latest cynical ploy, to pretend that rather than expanding production and jobs in both OH and MI, Chrysler is outsourcing production to China.

The Detroit News’ David Shepardson has a good fact check on Mitt’s latest ad here. Greg Sargent rounds of OH papers mocking Mitt’s claims here.

But there’s an angle on Mitt’s claims that has been missed. His ad says,

Obama … sold Chrysler to Italians who are going to build Jeeps, in China.

As Shepardson notes, Chrysler used to build Jeeps in China for the Chinese market. Ford builds cars in China for the Chinese market. GM builds cars in China for the Chinese market (GM also exports Chinese-built subcompacts to Latin America). Chrysler’s return to the world’s largest car market is smart business, something any viable global brand needs to do.

If it’s a moral failing for Presidents to preside over private car companies trying to compete in China, then Mitt has a problem with St. Reagan, during whose Administration Jeep first made groundbreaking entries into the Chinese market.

And if Mitt has a problem with Chrysler (or Ford or GM) building cars in China to sell in China, then he had better prepare to get far tougher with China than he has threatened to do so far. China still slaps huge tariffs on cars made outside of the country, so to be viable in the world’s largest automotive market, you have to build in China. That is the crux of the argument American car companies (and Midwestern politicians) have been making for decades: while the US allows imports from all countries, Japan and Korea and now China make it very difficult to export to those countries. This is not fair trade.

But I’m most offended by Mitt’s insinuation that selling Chrysler to an Italian company–he doesn’t mention Fiat by name–was disloyal.

Recall Chrysler’s recent history. Chrysler’s most recent strong point was the early 2000s, when it succeeded in developing nifty (albeit gimmicky) cars with shortened development cycles (think PT Cruiser). But as Daimler took more control over Chrysler, it invested less in the brand. GOP Private Equity firm Cerberus bought its first 80% of the company in 2007 and picked up the rest in 2009.

Cerberus had no intention of bringing Chrysler back to its former strength. Rather, it wanted to strip out the finance side of the company (it was investing in GMAC at the same time) and sell off the rest. But with the impending financial crisis, it never managed to pull off the trick (though it did get a bank bailout in the very last days of the Bush Administration). Meanwhile, it virtually put the Chrysler model development on autopilot while it tried to find a way to cut its losses.

Thus, when it came time for bailouts, there didn’t seem much to bail out at Chrysler. Unlike GM, which really had started making a turnaround, Chrysler had no product in the pipeline to suggest it would be worth bailing out (though it did have a few super efficient factories in the US).

Choosing to bailout Chrysler was the most difficult decision Obama made during the auto bailout. I’m not even sure I would have chosen to bail it out. And it was difficult precisely because a bunch of Republican vulture capitalist types–people like former VP Dan Quayle and former Treasury Secretary John Snow–had stripped the company.

[youtube]SKL254Y_jtc[/youtube]

In came Fiat and its Steve Jobs-like CEO Sergio Marchionne. Continue reading

Winter™ — Property of The Weather Channel®

(photo: Blizzard 2010 by *Low* via Flickr)

With a lot of self-justifying, back-patting hoopla today, The Weather Channel announced it’s decided unilaterally to assign names to winter storms.

During the upcoming 2012-13 winter season The Weather Channel will name noteworthy winter storms. Our goal is to better communicate the threat and the timing of the significant impacts that accompany these events. The fact is, a storm with a name is easier to follow, which will mean fewer surprises and more preparation.

Yes, fewer surprises. Just the one about winter’s natural disasters being branded by The Weather Channel.

There’s no indication that any federal government entity, including NOAA, has sanctioned this scheme let alone the names.

…until now, there has been no organized naming system for these storms before they impact population centers.

One of the reasons this may be true is that there is no national center, such as the National Hurricane Center, to coordinate and communicate information on a multi-state scale to cover such big events. The National Centers for Environmental Prediction’s Hydrologic Prediction Center (HPC) does issue discussions and snowfall forecasts on a national scale but it does not fill the same role as the NHC in naming storms. …

At this point The Weather Channel’s management breaks their arms with back-patting, lauding their efforts while calling it a bunch of euphemisms for team-playing:

…it would be a great benefit for a partner in the weather industry to take on the responsibility of developing a new concept.

This is where a world-class organization such as The Weather Channel will play a significant role. We have the meteorological ability, support and technology to provide the same level of reporting for winter storms that we have done for years with tropical weather systems. …

In the absence of any government inputs, the selected storm names for this season appear to be intellectual property of The Weather Channel.

Bet you didn’t think that natural disasters could be co-opted, branded, and marketed!  Continue reading

The Quarter Billionaire’s $9 Jobs

Fairly early in Mitt’s speech last night he said this:

But today, four years from the excitement of the last election, for the first time, the majority of Americans now doubt that our children will have a better future.

It is not what we were promised.

[snip]

It’s not just what we wanted. It’s not just what we expected.

It’s what Americans deserved.

You deserved it because during these years, you worked harder than ever before. You deserved it because when it cost more to fill up your car, you cut out movie nights and put in longer hours. Or when you lost that job that paid $22.50 an hour with benefits, you took two jobs at 9 bucks an hour and fewer benefits. You did it because your family depended on you. You did it because you’re an American and you don’t quit. You did it because it was what you had to do.

But driving home late from that second job, or standing there watching the gas pump hit 50 dollars and still going, when the realtor told you that to sell your house you’d have to take a big loss, in those moments you knew that this just wasn’t right.

But what could you do? Except work harder, do with less, try to stay optimistic. Hug your kids a little longer; maybe spend a little more time praying that tomorrow would be a better day. [my emphasis]

The passage is fundamentally important to the logic of the speech–and indeed, Mitt’s entire campaign–both because it pretends Mitt understands the struggles of average people and because it suggests Obama failed to deliver on Hope and Change.

And at the core of the passage are $9 jobs that don’t pay enough to live on.

Which is funny, because just a few hours earlier, the Founder of Staples, Thomas Stemberg, bragged about Mitt’s role in this:

The truth is Mitt was not a typical investor. He was a true partner. Where some saw an unproven new business, he saw a store that could save people money. He recognized that efficiency creates consumer value. He never looked at Staples as merely a financial investment. He saw the engine of prosperity it could become.

Today Staples employs nearly 90,000 people. It has over 2,000 stores. Over 50 distribution centers.

The average self-reported hourly wage of a Staples EasyTech Associate is $8.89. The average self-reported hourly wage of a Staples Sales Associate is $8.54.

Those jobs Mitt talked about as a symbol of America’s failed promise, the ones that don’t pay a living wage? That’s what Mitt’s campaign boasted about last night as his idea of an “engine of prosperity.”

And it was an engine of prosperity, for Mitt, for Stemberg. Mitt’s worth at least $250 million. Stemberg is reportedly worth $202 million. And they got that money by running an engine of prosperity that relies on workers who are Mitt’s own example of the failure of the American dream. “This just wasn’t right,” Mitt said himself. Continue reading

When One Mormon Gossips about Another Mormon Not Paying His Taxes

For the record, I think Mitt has multiple reasons to hide his tax returns. I think it’s largely about what his returns would say about his business practices, it’s partly about his tax shelters, and, one way or another, it’s about his relative loyalty to his church and his country.

But here’s a thought.

Harry Reid, Mormon, and Senator from Nevada, is the one leading the charge to return attention to Mitt’s tax returns.

He attributes his claim that Mitt paid no taxes for ten years to someone who invested with Bain. Now he may know his purported Bain-related source because he travels the halls of power. But Bain has very close cultural ties to the Mormon Church–according to some, improperly so. Moreover, because Mitt and other Bain execs have given so much to the Mormon Church in the form of Bain stocks, high ranking Mormon insiders may have a better idea of what Bain Capital actually does–and how Mitt valued his holdings before he gave them to the Church–than most others.

So Reid may be calling out Mitt not just as a former boxer, but as someone who shares a very wealth-based and close knit faith with Mitt.

Add in the practice–which even an outsider like me saw when I lived in UT and worked for a predominantly Mormon company in the 1990s–of gossip about tithing, notably whether Mormon colleagues tithed pre- or post-tax. That’s another reason why Reid may have a better sense of what Mitt’s tax practices look like than DC pundits might guess on face value.

Finally, though, there’s this. If one of the reasons Mitt is hiding his tax returns does have to do with under-tithing (as the returns Mitt released may suggest), and not just his business practices and tax shelters, remember that both CO (2.15%) and especially NV (over 5%) have larger Mormon populations than average. Nate Silver considers NV the state with the biggest return on investment per voter (CO is 6th). These are lean Democratic states that Mitt might need to win if Obama’s attacks on Bain outsourcing continue to turn the race in the manufacturing swing states (though if Mitt doesn’t win FL and VA, it may be moot anyway). Driving down the Mormon enthusiasm for Mitt might be one way to boost Obama’s chances.

This is obviously all speculation, as all discussions about Mitt’s taxes are. But this comment, stated by one Mormon about another, could have different connotations among Mormon listeners than non-Mormon ones.

A month or so ago, [Harry Reid] said, a person who had invested with Bain Capital called his office.

“Harry, he didn’t pay any taxes for 10 years,” Reid recounted the person as saying.

“He didn’t pay taxes for 10 years! Now, do I know that that’s true? Well, I’m not certain,” said Reid. “But obviously he can’t release those tax returns. How would it look?

This sounds like the kind of gossip even I would hear in UT. Was Mitt’s source talking taxes? Or tithes?

Glenn Kessler Didn’t USED to Treat SEC Filings as Boilerplate

As gobsmacked as I am that no one can seem to find the people running Bain Capital from 1999 to 2002, when Mitt Romney was officially listed as its CEO, Chairman, and President, I’m equally shocked by Glenn Kessler’s claims that SEC documents are not to be trusted.

Kessler’s scarequoted SEC documents

On Thursday, Kessler suggested SEC filings don’t mean what they say.

There appears to be some confusion about how partnerships are structured and managed, or what SEC documents mean. (Just because you are listed as an owner of shares does not mean you have a managerial role.)

Then on Friday, he mocked the journalistic convention that treated “SEC documents” (his scarequotes) as factual.

There is a journalistic convention that appears to place great weight on “SEC documents.” But these are public filings by companies, which usually means there are not great secrets hidden in them. The Fact Checker, in an earlier life covering Wall Street, spent many hours looking for jewels in SEC filings.

[snip]

We had examined many SEC documents related to Romney and Bain in January, and concluded that much of the language saying Romney was “sole stockholder, chairman of the board, chief executive officer, and president” was boilerplate that did not reveal whether he was actually managing Bain at the time. (For instance, there is no standard definition of a “chief executive,” securities law experts say, and there is no requirement for anyone to have any responsibilities even if they have that title.)

Trillions of dollars are traded based on what these documents say, but a purportedly respectable journalist who used to cover Wall Street says they’re just boilerplate.

Only, he didn’t used to say that.

As Kessler reminds his readers, he used to cover finance. So to see how he, as a finance reporter, treated SEC documents, I thought I’d review what he wrote during precisely the period Mitt’s corporate whereabouts are in such dispute, 1999 to 2002. Kessler covered finance at the WaPo from the time he moved there in 1998 until about May 2, 2002, when he started covering foreign affairs. Thus, Kessler stopped covering finance just weeks after the time Mitt resigned from the boards of Marriott and Staples (presumably Mitt’s severance deal with Bain was around the same time).

SEC filings, more SEC filings, and no boilerplate

It was an interesting time to cover finance, too. In addition to a slew of articles engaged in one-side, other-side journalism citing experts warning that Bush’s tax cuts might bring back deficit spending but Pete Domenici and Ari Flesicher saying they wouldn’t so he couldn’t really be sure, Kessler covered growing awareness about tax havens, the end of the Dot-Com bubble, the AOL Time-Warner merger, and Enron. And in a number of those stories he treated earnings reports and other SEC documents as transparent truth.

Kessler pointed to corporate earnings reports for a January 29,1999 story predicting the economy would begin to slow.

Corporate earnings are closely watched on Wall Street because, in a world of dreams, deals and wild bets, earnings are real; they are the equivalent of batting averages for baseball addicts. Corporate earnings also provide hints on the general direction of the economy, which is why some analysts remain downbeat about the economy in the coming year despite the string of positive earnings reports. [my emphasis]

And he looked at them in very close detail.

Individual corporate earnings reports also turn up nuggets of how companies have boosted their profits. Compaq Computer Corp., the world’s number two computer maker, said Wednesday that fourth-quarter earnings rose a better-than-expected 2.2 percent. Profits rose to 43 cents a share, compared with 42 cents in the same period of 1997. But tax credits from Compaq’s purchase of Digital Equipment Corp. last year significantly cut the company’s tax rate, boosting net income about 5 cents a share.

In a January 13, 2000 story explaining different estimates for the value of the AOL Time-Warner deal, Kessler reveals the WaPo was the only paper to look beyond stock price in its calculations; it included Time-Warner’s debt, presumably gleaned from SEC documents.

Continue reading

Mitt’s Welfare-Driven Vulture Capitalism

When I hosted Steve Rattner at FDL Book Salon, I noted how blind he was to problems of other private equity firms–in the context of the auto bailout, Cerberus. So I was interested in Rattner’s attempt to defend Mitt’s tenure at Bain.

Bain Capital is not now, nor has it ever been, some kind of Gordon Gekko-like, fire-breathing corporate raider that slashed and burned companies, immolating jobs wherever they appear in its path.

[snip]

Instead, with modest exceptions (keep reading to learn more about these), Bain Capital was a thoroughly respectable — nay, eminent — investment manager that successfully discharged its responsibility of earning high returns for its investors by deploying capital in companies privately rather than by buying shares in the public market. (Hence the name, private equity.)

The point Rattner of course doesn’t delve into is this one: how taxpayers effectively subsidize this process because of tax law.

So what are the question marks (promised above) around the story of Romney and Bain Capital? First, it’s fair game to question the amounts of debt that are sometimes used in leveraged buyouts. While higher debt usually means higher returns — because debt is cheaper than equity, thanks in part to its tax deductibility — it also means higher risk of bankruptcy.

The problem, as private equity guy and public monies-scamming Steve Rattner sees it, is all this debt leads to more bankruptcies.

But what does it mean that all this debt incurs tax advantages?

Thankfully, Rortybomb posted this interview with Josh Kosman, who wrote a book on the topic, to explain it.

Your research has found that, far from being natural, private equity exists largely due to issues with the tax code. Can you explain?

The whole industry started in the mid-to-late 1970s. The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that.

Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half. Banks, also realizing this tax effect, were willing to finance these deals. At the time, you could also depreciate the assets of the company you were buying — that’s not true today.

They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.

So the business model is based on a capital structure and tax arbitrage?

Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt.

[snip]

A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?

That sounds about right. If you took away this deduction, you’d still have takeovers, but you’d have a lot less leverage and the buyer would be forced to really improve the company in order to make profits. I think that would be a great thing.

The whole interview very accessibly lays out precisely what I was trying to get at the other day: there are aspects of private equity that have bad consequences baked in. And they’re all baked in, in part, precisely because taxpayers are subsidizing the takeovers in the form of tax benefits.

Or welfare, as the creative destructionists ought to call it.

Update: Per prostratedragon, see this Dean Baker diary putting some numbers to this rich person welfare.

“Creative Destruction” as Catchall

Matt Yglesias has responded to my post on the destruction wrought by some capitalism with a fairly narrow complaint about my sarcastic comment about what I still maintain his original post entailed: an apology for the kind of destruction that Bain Capital engages in because (he argued) all successful capitalism creates such destruction.

I don’t really want to get into the weeds of things with Marcy Wheeler on private equity, so let me just say that this view she sarcastically attributes to me is the reverse of the view I hold:

Capitalism is all about creative destruction, you see, so we must celebrate that creative destruction.

What I think is that in a market economy creative destruction happens, and that has terrible consequences for the lives of people who are adversely effected by circumstances beyond their control.

[snip]

The message of creative destruction, when you understand it, is that the idea that “a rising tide lifts all boats” is a cruel lie. Growth is broadly beneficial over the long-term but individual human beings live out their lives on finite time scales and many individual people suffer from even generally positive economic trends.

He goes on to describe several things as creative destruction:

  • The rise of desktop publishing software and the damage it does to established graphic artists*
  • The hypothetical legalization of gambling in CA and the damage it would do to Las Vegas’ casino industry
  • The decline of Kodak (which in his earlier post he attributed to the rise of digital cameras) and the decline it brought to Rochester, NY, generally

I won’t get too deep in this, but I think it useful to, first of all, point out that these are not all like things. Indeed, the legalization of gambling is only partly about market forces at all, it’s about legislative forces (and usually, in this day and age, is brought about by the purchasing of influence, precisely the opposite of real capitalism), and it often doesn’t lead to real growth at all. And both desktop publishing and digital cameras combine two things: the introduction of new technologies and their successful marketing. The example of Kodak also involves globalization. All of which are distinct from the financialization of capitalism represented by Bain, which is where this all started.

I’d like to suggest that we do ourselves a big disservice by lumping them all in together under the term “creative destruction.” The very term is one rolled out to excuse the ravages of capitalism. And used as Yglesias does, it doesn’t make fairly clear distinctions we can make between different practices of capitalism or even forces–like technology–that interact powerfully with capitalism but are distinct from it. Nor does it permit analysis of whether any useful “creation” is going on at all. That is, the term closes off precisely the kind of discussion we ought to be having–and Mitt’s Bain critics were engaging in, before Yglesias accused them of simplifying the issue–about the choices we make in our society and economy.

Yglesias and I absolutely agree we need to help those who suffer as a result of change brought about by capitalism, technology or (in the case of casinos) money-driven policy decisions. But there is, at the same time, plenty of space for distinguishing between capitalist practices that are considered noble or useful, and those which should be treated with shame and moral outrage, if not regulatory prohibition.

And I believe that those practices that serve no useful purpose for the society as a whole, like Bain’s vulture capitalism, falls into the latter category.


* In the interest of full disclosure, I should note that my father was one of those people at the intersection of technology and career success. As such, he had a significant hand in changes–particularly the roll out of the PC–that brought about the introduction of software that changed the value attributed to skills of graphic designers and secretaries. Which of course means all the advantages I’ve had in my life derive in part from the pain that computers have caused people. Not that it changes that fact, but I will say that many of my adolescent drag-down fights with my father consisted of me calling him a stupid asshole for rolling out technology before society was ready and the software was appropriate.

The Greatness of America: “Ashes of Doomed Factories, Pink-Slipped Workers, and Towns Laid to Waste”

I’m utterly delighted with this paragraph:

But as is so often the case, the reality is more complicated. Almost every successful business career is built on the ashes of doomed factories, pink-slipped workers, and towns laid to waste.

Not because it’s true–it’s not! But because I’m so amused that someone (in this case, Matt Yglesias, presumably drawing on his long career as a business tycoon) claiming to complicate a purportedly simplified issue–whether Mitt Romney and other corporate raiders are the same as “the good kind of businessman, the one who launches and grows firms, creating new products and jobs and opportunities”–would make such a claim.

“Almost every successful business career.” Wow. Almost every one, huh? That’s a lot of towns laid to waste. I wonder … is this a one-to-one relationship? One successful business career for every town laid to waste? Does each “successful business career” entail doomed factories, pink-slipped workers, and towns laid to waste–all three–as the “and” logically suggests? Or is, um, “the reality … more complicated”?

And what counts as a “successful business career,” according to Yglesias, anyway? Just those titan-driven technology companies and industries he invokes–Apple, Google, broadcast, cable, Internet–or also the local business owner who succeeds at business by providing goods her customers want with excellent service? It seems laying to waste entire towns implies a scale that doesn’t include many–perhaps most–successful business careers.

Even more telling, though, is the causality. Continue reading

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