Bain Capital did NOT create wealth. It moved it. (x-post)

[polly7]

34. Romney’s Success at Bain Capital: The Business as Scam Model

Romney’s Success at Bain Capital: The Business as Scam Model

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/romneys-success-at-bain-capital-the-business-as-scam-model

It’s not just the tax code that PE companies game. By loading the companies they acquire up with debt, PE firms like Bain make them much more vulnerable to bankruptcy. While the creditors who lent the acquired company money presumably understood the risk, there are often many inadvertent creditors such as suppliers, landlords, and even workers through their pension. (The debt is always held by the acquired company not by Bain, which carries no risk beyond its limited investment.) If a Bain-owned company goes under, these inadvertent creditors can take big losses. In the case of pensions, part of the loss will come back to the taxpayer through the Pension Benefit Guarantee Corporation.

PE companies like Bain also profit by breaking implicit promises made by the companies they acquire. There are numerous cases around the country where state and local governments have made concessions to local businesses in the form of tax breaks, land sales, infrastructure improvements and sometimes even industry specific training in public schools in order to keep a firm located in the area. Many small businesses would be reluctant to renege on their side of the bargain and shut down a factory. PE firms like Bain, don’t feel bound in the same way.

Similarly, there is often a sense of reciprocity between workers and employers where workers understand that if they work hard in their younger years and acquire firm-specific skills, their employer will keep them on the payroll in their older years when they may not be as productive. This can be a profitable long-term strategy. However, a PE company like Bain, that doesn’t care about the long-term, can break the second half of this deal for sizable short-term profits. (My colleague Eileen Appelbaum has a fuller discussion of the ways in which private equity firms earn above normal profits.)

In short, Bain Capital is not about producing wealth but rather about siphoning off wealth that was produced elsewhere in the economy. There is no doubt that one individual or one company can get enormously wealthy if they are able to do this successfully. However you cannot have an entire economy that is premised on the idea that it will siphon off wealth produced elsewhere. It is not clear that Mitt Romney understands that fact, but certainly the general public should when it goes to vote this fall.

I just happened on this and thought it was interesting, but what are the odds Romney doesn't completely understand how Bain profited. He doesn't seem all that naive, to me.