Mitt Romney's Lesson for Cliven Bundy
food stamps for cows." Which is why having your well-armed militia supporters threaten federal officials with violence when they come to collect what you owe doesn't just make you a deadbeat, it makes your mob domestic terrorists. (You don't have to take Harry Reid's word for it; just ask the Bush administration.)
All of which is why Cliven Bundy and his gun-toting backers might want to pick up and head to Mitt Romney's posh Republican retreat in Park City, Utah starting June 12. There, Bundy can learn the lesson of Romney's own riches-to-more riches story:
If you're going to redirect millions of dollars from the United States Treasury to your own, make sure it's legal first.
As I documented two years ago in "How We Built Bain Capital," Mitt Romney's stratospheric earnings as a leveraged-buyout pioneer would not have been possible without his uncle. Uncle Sam, that is. Your United States tax code doesn't merely allow the "carried interest exemption" that enables the likes of Mitt Romney to pay a lower rate than many middle class families. Without the public subsidy that is the corporate debt interest deduction, there might not be a Bain Capital--or a private equity industry as we know it--at all.
In 2012, Matt Taibbi explained how federal tax law made it possible for Mitt Romney to become a $250 million man:
Essentially, Romney got rich in a business that couldn't exist without a perverse tax break, and he got to keep double his earnings because of another loophole - a pair of bureaucratic accidents that have not only teamed up to threaten us with a Mitt Romney presidency but that make future Romneys far more likely. "Those two tax rules distort the economics of private equity investments, making them much more lucrative than they should be," says Rebecca Wilkins, senior counsel at the Center for Tax Justice. "So we get more of that activity than the market would support on its own."
And much more debt than many of the takeover targets of the LBO kings could afford. But by insisting these companies immediately begin paying them dividends and management fees, private equity parasites like Mitt Romney realized they could win big even when the firms they acquired failed.
The Economist explained how the perverse incentives work:
From 2004 to 2011 private-equity firms piled more debt onto their companies so they could take out $188 billion in dividends to pay themselves. The deals got bigger and bigger. The largest ever, in 2007, was the $44 billion purchase of TXU, an electricity company. The market worries the company will go under.
But though the private-equity people may have walked off with the loot, America's tax code was partly to blame, because it encourages this behaviour. The tax deductibility of interest payments on debt gives private-equity executives an incentive to pile extra debt onto the companies they buy, thereby risking the health of these firms for the sake of a tax benefit and the prospect of higher returns.
"In the majority of these deals," Lynn Turner, former chief accountant of the Securities and Exchange Commission explained, "the tax deduction has a big enough impact on the bottom line that the takeover wouldn't work without it." And that interest," Turner said, "just sucks the profit out of the company." As Taibbi rightly noted, "You almost have to start firing people immediately just to get your costs down to a manageable level."
"Traditionally," Josh Kosman noted in 2009, "cash-rich public companies have paid dividends to lure and reward investors." But private equity firms, he explained, stand this process on its head. "Fourteen of the largest American private equity firms had more than 40 percent of the North American companies they bought from 2002 until September 2006 pay them dividends," Kosman pointed out, adding, "In thirty-two of the eighty-three case, 38 percent, they took money out in the first year." And the innovator behind the business model?
Mitt Romney was a pioneer of this strategy. His private equity firm, Bain Capital, was the first large PE firm to make a serious portion of its money not from selling its companies or listing them on the stock exchange, but rather by collecting distributions and dividends, which in this context is the exact opposite of reinvesting in a company. Bain Capital is notorious for failing to plow profits back into its businesses.
So much for candidate Mitt Romney's 2007 claim, "Don't forget that when companies earn profit, that money is supposed to be reinvested in growth."
During his tenure as CEO from 1984 to 1999, Bain invested in 40 companies in the U.S. While seven later went bankrupt, in June the New York Times reported that "In some instances, hundreds of employees lost their jobs. In most of those cases, however, records and interviews suggest that Bain and its executives still found a way to make money." That mirrors a January 2012 analysis by the Wall Street Journal, which revealed:
Bain produced stellar returns for its investors--yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.
Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.
Put another way, Mitt Romney's investing was almost risk-free. He won when his portfolio companies won and often when they lost. Thanks in large part to the dangerous incentives unleashed by the U.S. tax code. With the policy choices of our elected United States government, Mitt Romney simply would not have gotten nearly as rich as he did at Bain Capital. As Matt Taibbi put it, "the way Romney most directly owes his success to the government is through the structure of the tax code."
In other words, the government actually incentivizes the kind of leverage-based takeovers that Romney built his fortune on. Romney the businessman built his career on two things that Romney the candidate decries: massive debt and dumb federal giveaways. "I don't know what Romney would be doing but for debt and its tax-advantaged position in the tax code," says a prominent Wall Street lawyer, "but he wouldn't be fabulously wealthy."
And Cliven Bundy, it's all legal. So, vote. Win elections. Even get the American people to change the Comstitution if need be. Then, like Mitt Romney, you can really start rounding up the cash.