The Pain in Bain
1. Obama is more eager to make his case about Bain than Romney is. The president is comfortable attacking the negative consequences, if not the fundamental concept of free-market capitalism: outsourcing and offshoring, shuttered factories, cheap Asian imports, declining middle-class wages. These have been familiar resonant notes for Democratic candidates for the past 25 years. Romney, on the other hand, doesnt much want to defend creative destruction. He boasts about building Bain, but wont discuss it in detail because it opens up a conversation about those same unattractive consequences: lost jobs, bankruptcies, private pensions dumped onto the federal government. In the case of China, Romney has tried to outhawk Obama, promising to launch what would amount to a trade war beginning his first day in office. When it comes to Detroit, Romney has backed away from his principled position that failed businesses should be allowed to fail. Hes in a corner, because he thinks its politically unsound to say what he really believes.
2. Its not clear that private equitylike other forms of financial innovationis good for America. Youd think that if private equity made businesses more efficient and valuable overall, thered be clear evidence to support it, but there isnt. Private equity firms earn most of their money through financial engineering. A big share of their returns comes from tax arbitragefiguring out how to exploit loopholes to pay less to the government. Because interest is a deductible business expense, debt financing means they often pay little or no corporate tax. Private equitys reliance on leverage can also magnify short-term earnings without leaving the companies they manage more valuable overall. One legal but dubious practice that private equity firms engage in is paying large special dividends out of borrowed money. As Jim Surowiecki of the New Yorker has written, These dividends created no economic valuethey just redistributed money from the company to the private-equity investors. Theres some anecdotal evidence that the well-regarded Bain has been a better owner than most. But theres no real way to evaluate that either.
3. Bain shows how Wall Street is rigged in favor of the rich. Private equity firms, like hedge funds, earn their money through a 2-and-20 structure, which means investors pay a 2 percent annual management fee, and give away one-fifth of their profits. According to one study, firms like Bain get two-thirds of of their earnings from fees charged to investors, rather than from the share of profits. According to another study, private equity firms managed to keep 70 percent of all investment profits for themselves, rather than paying them out. Theyve figured out how to be hugely profitable even if they arent successful, and even where firms they own go bankrupt. And because their gains come in the form of carried interest, private equity owners are taxed at 15 percent, rather than the top corporate rate of 35 percent.
4. Romneys Bain career is a story about rising inequality. Its a telling that George Romney, Mitts father, made around $200,000 through most of the years he ran American Motors Corporation. Doing work that clearly created jobs, the elder Romney paid an effective tax rate that averaged 37 percent. His son made vastly more running a corporate chop shop in an industry that does not appear to create jobs overall. In 2010, Mitt Romney paid an effective tax rate of 13.9 percent on $21.7 million in investment incomearound 14 times as his father much in inflation-adjusted terms. This difference encapsulates the change from corporate titans who lived in the same world as the people who worked for them, in an America with real social mobility, to a financial overclass that makes its own separate rules and has choked off social mobility. The elder Romney wasnt embarrassed to explain what hed done as a businessman or to release his tax returns.
5. Bain reminds everybody how rich Romney is, how different that makes him from ordinary people, and how this kind of advantage perpetuates itself. Five years ago, according to disclosure statements, he was already worth between $190 and $250 million, not counting another $70-100 million in trusts for his children and grandchildren, and not counting real estate worth tens of millions more. Its not clear how he turned a maximum contribution of $450,000 over 15 years at Bain into an IRA worth between $21 and $102 million (where it grows tax free). Heres some informed speculation. Once again, the details are mysterious even if his massive exploitation of a tax break meant to encourage middle class people to save more is not.
1. Obama is more eager to make his case about Bain than Romney is. The president is comfortable attacking the negative consequences, if not the fundamental concept of free-market capitalism: outsourcing and offshoring, shuttered factories, cheap Asian imports, declining middle-class wages. These have been familiar resonant notes for Democratic candidates for the past 25 years. Romney, on the other hand, doesnt much want to defend creative destruction. He boasts about building Bain, but wont discuss it in detail because it opens up a conversation about those same unattractive consequences: lost jobs, bankruptcies, private pensions dumped onto the federal government. In the case of China, Romney has tried to outhawk Obama, promising to launch what would amount to a trade war beginning his first day in office. When it comes to Detroit, Romney has backed away from his principled position that failed businesses should be allowed to fail. Hes in a corner, because he thinks its politically unsound to say what he really believes.
2. Its not clear that private equitylike other forms of financial innovationis good for America. Youd think that if private equity made businesses more efficient and valuable overall, thered be clear evidence to support it, but there isnt. Private equity firms earn most of their money through financial engineering. A big share of their returns comes from tax arbitragefiguring out how to exploit loopholes to pay less to the government. Because interest is a deductible business expense, debt financing means they often pay little or no corporate tax. Private equitys reliance on leverage can also magnify short-term earnings without leaving the companies they manage more valuable overall. One legal but dubious practice that private equity firms engage in is paying large special dividends out of borrowed money. As Jim Surowiecki of the New Yorker has written, These dividends created no economic valuethey just redistributed money from the company to the private-equity investors. Theres some anecdotal evidence that the well-regarded Bain has been a better owner than most. But theres no real way to evaluate that either.
3. Bain shows how Wall Street is rigged in favor of the rich. Private equity firms, like hedge funds, earn their money through a 2-and-20 structure, which means investors pay a 2 percent annual management fee, and give away one-fifth of their profits. According to one study, firms like Bain get two-thirds of of their earnings from fees charged to investors, rather than from the share of profits. According to another study, private equity firms managed to keep 70 percent of all investment profits for themselves, rather than paying them out. Theyve figured out how to be hugely profitable even if they arent successful, and even where firms they own go bankrupt. And because their gains come in the form of carried interest, private equity owners are taxed at 15 percent, rather than the top corporate rate of 35 percent.
4. Romneys Bain career is a story about rising inequality. Its a telling that George Romney, Mitts father, made around $200,000 through most of the years he ran American Motors Corporation. Doing work that clearly created jobs, the elder Romney paid an effective tax rate that averaged 37 percent. His son made vastly more running a corporate chop shop in an industry that does not appear to create jobs overall. In 2010, Mitt Romney paid an effective tax rate of 13.9 percent on $21.7 million in investment incomearound 14 times as his father much in inflation-adjusted terms. This difference encapsulates the change from corporate titans who lived in the same world as the people who worked for them, in an America with real social mobility, to a financial overclass that makes its own separate rules and has choked off social mobility. The elder Romney wasnt embarrassed to explain what hed done as a businessman or to release his tax returns.
5. Bain reminds everybody how rich Romney is, how different that makes him from ordinary people, and how this kind of advantage perpetuates itself. Five years ago, according to disclosure statements, he was already worth between $190 and $250 million, not counting another $70-100 million in trusts for his children and grandchildren, and not counting real estate worth tens of millions more. Its not clear how he turned a maximum contribution of $450,000 over 15 years at Bain into an IRA worth between $21 and $102 million (where it grows tax free). Heres some informed speculation. Once again, the details are mysterious even if his massive exploitation of a tax break meant to encourage middle class people to save more is not.
