Copyright 2012 by John T. Reed
You gotta be kidding me!
Referring to Mitt Romney’s time as head of Bain Capital, David Axelrod called him a “corporate raider.”
Similarly, Gingrich and Perry called him a “corporate looter.”
Jon Huntsman said, “Governor Romney enjoys firing people. I enjoy creating jobs.”
What is the difference between these comments? There is none. Actually, I think Gingrich and Perry are a little harder on Romney than Axelrod. Which would you rather be, a looter or a raider? There’s a football team named the Raiders but none named the looters.
Romney was very successful as founding head of Bain Capital. He personally made about $200 million. His investors made spectacular yields of 50% to 80% annually, one of the best performances among the various private equity firms.
What Axelrod, Gingrich, Perry, and Huntsman have in common is they are all lying scum. Axelrod was Obama’s campaign manager in 2008 and is now working to re-elect Obama.
Gingrich says, “If someone comes in and takes all the money out of your company and then leaves you bankrupt while they go off with millions, that’s not traditional capitalism.”
Huh?
What business model is that? I guess nonsense like that is to be expected from someone who has never had a private sector job that was not getting paid for past political positions.
When you buy a company, how do you “take all the money out?” If the company has any money, the seller typically takes it with him when he sells and leaves. You do not buy money when you buy a company. You buy real estate, goodwill, personal property, patents, copyrights, and contracts. What would be the point of buying—or selling—money? I’m guessing each dollar would sell for—a dollar. If you wanted to pay less than one dollar for each dollar that was in the company, the seller would decline to sell. And vice versa. So no money is being sold when a company is sold and if there was, it would be a dollar for a dollar. There would be no profit in “taking the money out.”
And how does bankrupting a company you bought make you millions? If you do a chapter 11 reorganization type bankruptcy, using bankruptcy to get out from under onerous long-term contracts like leases or labor contracts can make the company more profitable. Or lose less. But to go bankrupt, your liabilities have to exceed your assets and the company owners at the time of the bankruptcy typically lose everything. When you buy a company, you are paying for the equity in the company. When you declare bankruptcy, you, by definition, must prove that the company has no equity. So you have lost all your money you paid for the company when it goes bankrupt.
Then there is looting. What the hell is looting? I know what it means when demonstrators break store windows and steal property that does not belong to them. But what does it mean when Mitt Romney’s investment fund buys a company then “loots” their own company? In theory, you could do a chapter 7 bankruptcy—total liquidation rather than continuing by coming out of bankruptcy—and sell off all the chairs and paper clips and real estate—and get more from the auction than you paid for the company. But I do not recall ever hearing about such a bankruptcy. Generally, those liquidation auctions produce nothing but fire sale prices for everything. Goodwill goes up in smoke in the event of liquidation. In appraisal, businesses are generally worth more as “going concerns” than when liquidated piecemeal. Gingrich said that’s what Romney did. He should name the particular company or companies where Romney made millions from deliberately bankrupting and liquidating the company.
Perry said “getting rich off failure and sticking someone else with the bill is indefensible.”
Say what?
Tim Tebow just got rich off failure. He played in the game against Pittsburgh and won. There was a clause in his contract that gives him $250,000 every time he wins a playoff game. In order for Tebow to win the game, the opponent has to fail to win it.
In free enterprise, we have competition. When two people compete, one wins and one fails to win. Are you following this, Rick?
Plus, Mitt Romney did not get rich off failure. Bain Capital won some and lost some. Their investors and executives made a lot of money because the profits of the acquisitions that Bain made exceeded the losses on the other acquisitions they made.
They specialized in buying relatively small troubled companies. It did not surprise Bain that most of their troubled companies did not turn around. Hell, it would not surprise Obama now that he has lost taxpayers’ money on Solyndra. Apparently, Gingrich and Perry have been so far out of the free enterprise loop their entire adult lives that they understand the risks of capitalism less than Barack Obama.
Venture capitalists are totally familiar with the high percentage of losers to winners but that the winners make more than the losers lose.
Ever baseball batters understand what Gingrich and Perry do not. Two-thirds of the time you make an out. One-third of the time—if you are really good—you get a hit.
I am a real estate investment expert. I have written 20 books on the subject and thousands of articles. I am the author-publisher of Real Estate Investor’s Monthly and previously was the main author of Real Estate Investing letter. I wrote for those newsletters continuously since May 1976.
Over the years, my recommended investment strategy evolved. In the 2000s, I started reading stock market books to try to learn more about real estate investment because I had read all the decent real estate investment books. I discovered that private equity, the approach to business investing used by Bain and other companies, pretty much matched the real estate investment strategy I evolved into. It has two categories:
• bargain purchase
• value adding
Bargain purchase means buying a property for at least 20% below its current market value. I wrote a two-volume book on that called How to Buy Real Estate for at Least 20% Below Market Value. You can see the various techniques for doing that by looking at the table of contents of those books: Volume 1 and Volume 2.
Why would anyone sell their business or real estate for 20% less than its current market value?
There are two categories of reasons for that:
• no one knows it’s for sale (like a sheriff’s sale which are very poorly advertised)
• no one wants it but for the wrong reasons, generally they overreact to a problem like toxic contamination or crooked foundation
Value adding means to recognize that a business or property has some significant unrealized potential. You buy the property or business, perhaps paying its current market value, then you make cost-effective, tangible or intangible changes to the property that cause its value to increase significantly. The books I wrote on that strategy are How to Increase the Value of Real Estate and Fixers. Again, you can see the list of the various techniques for achieving the value increase by looking at the tables of contents: HTIV contents and Fixers contents.
To pull this off, the business or property has to have things wrong with it but they have to be the right things. For example, if the location of a property is wrong, you cannot fix it. So you only buy property where the location does not need fixing. You can fix things that most people think are unfixable like title problems, bad foundation, toxic contamination, and so on.
Bargain purchases and value adding are what private equity firms like Bain Capital are about. Real estate is a component of what they do but a minor one.
Bargain purchases and value adding are two ways you can make significant amounts of money in real estate and business. This is state-of-the-art, sophisticated stuff. The discussions about private equity from Gingrich and Perry have been like something out of a Michael Moore movie, an Occupy Wall Street poster, or a Charles Dickens novel. Some sort of caveman belief along the lines of:
Wall Street bad.
Make money bad.
Rich people bad.
Change bad.
And the clowns spouting such nonsense want us to elect them president of the U.S. at the time of maximum financial and economic crisis in our country’s history?!
One of the main tools in a business turn around is right sizing. There is profit in managing poorly run companies better than the prior owners managed them. Some poorly managed companies have too many employees—overall or in some departments. Others have too few employees. By moving the company from wrong size to right size staff, you make the company more profitable. When there are too many employees—probably more common than too few—right sizing means layoffs.
So?
What the hell!? Are Gingrich and Perry saying no one should ever be laid off? In fact, that is precisely what they are implying. Where did they get that idea? From the air heads at Occupy Wall Street, whom Doonesbury depicted as chanting
What do we want?
Nothing!
When do we want it?
Now!
Or maybe from Andy Stern, the radical socialist former head of the SEIU—the guy who got to meet with Obama more than any other human being the first two years of the Obama administration.
Bain bought over 100 companies under Romney. I repeat, bought.
The implication of all this whining about how evil Bain was to the companies implies if those companies had been bought by someone other than Bain, they would have treated their employees better.
So why weren’t they bought by companies other than Bain? Because the other companies were outbid by Bain. The other companies were trying to buy the companies even cheaper so they could make more money than Bain. If Bain had not bid, the employees of all those companies would have been worse off than with Bain buying them.
Some of the complaining runs along the lines that Bain even made money, from management fees, on the companies that went bankrupt.
Sounds like excellent risk management. Would you be happier as a taxpayer if Obama had done something like that with Solyndra?
In my book Best Practices for the Intelligent Real Estate Investor, I explained how hedge funds typically work for a 2%-of-asset-value management fee and 20% of the upside. I further noted that this is excellent risk management because they get the 2% no matter what and they get 20% of the upside but 0% of the downside.
Yale Chief Investment Officer David Swensen does not like that arrangement because it gives Bain 20% of the upside regardless of whether they caused the increase in value—like if the entire stock market went up. I agree with Swensen. I would not be an investor in such a group. Neither would Swensen. But the arrangement was fully disclosed to the investors and they agreed to it. Also, they earned extraordinarily high returns even after Bain took their management fees and % of the upside.
1. Bain would have refused to do the deal for the investors without that compensation arrangement.
2. I repeat again, Bain was the highest bidder for these companies, in part because they structured the risk management to minimze Bain’s downside. You make them take more downside, or try to, and they say, after a thoughtful pause, “No thanks.”
3. Bain is not interested in working for 2% of the asset value. They are not asset managers for hire. They will only work for a combination of 2% plus 20% or whatever of the upside.
Contrast all this with babe-in-the-woods Obama lending Solyndra $500 million of taxpayers’ money then agreeing, against U.S. law, to let new equity investors to obtain a position ahead of U.S. taxpayers in case of bankruptcy, not long before the company went bankrupt. Or contrast it to Obama keeping the bolated, overpaid union workforces when he took over GM and Chrysler beause he had no qualms about risking or using taxpayers’ money to buy union votes.
Bain took care of Bain. The first responsibility of all companies is to make an ethical profit. That is a sine qua non. No profit, no company. Their second responsibility is to earn a good rate of return for their investors. No investors, no investment company. Mission accomplished by Romney when he headed Bain Capital.
Eaning a good return requires recruiting, training, and retaining good employees and evaluating, counseling, and firing bad employees. That is the day-to-day job description of all managers everywhere. So is right sizing where you have to fire employees who are not bad but excess or who do not fit the job. Layoffs are a standard routine part of managing a business, so is recruting, training, and retaining good people. Bain did both, as all competent managers must.
When I applied to Harvard Business School, one of my essay questions was about learning that you sometimes have to fire good people because you have too many or the prior owner let their pay and benefits get too high or because the person, while good in general, is not suited to the particular job. I had to fire a salaried leasing agent once. Nice lady. She was really pissed. But she never rented a single apartment and her sole function in life was to rent apartments. She thought her sole function was to sit in the office every day—as if she was a government employee like Obama, Gingrich, and Perry.
At my college, West Point, we were trained to be generals in combat commanding tens of thousands of soldiers. At Harvard Business School, we were trained to be CEOs. The first couple of weeks at Harvard, we tended to analyze cases and the professor would demand, “So what are you going to do as the CEO of the company we are studying?” “Well, someone would have to make a decision on that.” “Not someone,” the professor would bark, “You!”
Thus did we stop looking at the world from the perspective of a worker on the assembly line and start looking at it as the person in charge of thousands of workers, customers, and investor/owners.
Some airhead wrote to me about this article that Romney does not appear sufficienly sensitive to the pain of being fired. People sometimes say generals are callous about their men being wounded or killed.
Airheads, listen up! The general commanding the division has 15,000 men to worry about. He also has the enemy to worry about and the American people who are depending on the general to defend them. Does the general grieve the dead and visit the wounded? Yeah. It is one of the many things on his to-do list. But his main focus is big picture: win the war for the living soldiers and citizens. Occasionally, some bleeding heart who can’t stand the sight of blood or dead men becomes a general, and has to be relieved because his lack of aggressiveness, due to fear of men getting hurt, causes even more American casualties. Arguably, all the Union generals in the first years of the Civil War had that problem. They were replaced by guys like Grant and Sherman who recognized that winning the war required that some men die or get wounded.
The same is true of CEOs. Their to-do list is very long. Outplacement of fired employees is important and on the list, but it is not and cannot be the main job of the CEOs. He has to maintain multiple focus on customers, employees who remain, recruiting new good employees, competing with other companies, and keeping investors happy. In many cases, the original founder/owner of a company sells to some company like Bain because they know their company needs layoffs, but they cannot bring temselves to do it because they have become too close to the employees for a CEO. That was a big lesson at West Point. You can be friendly with your subordinates, but not friends. Many CEOs tend to become friends with their subordinates, which is okay on the way up. But when times get tough, you have to be able to cut employees. They cannot bring themselves to do it, so they fire themselves, even though they founded the company, by selling to Bain or someone like Bain.
Romney is seeking to be CEO of a country with 310 million citizens. During his administration if he is elected, he will get people killed and laid off. Can’t be avoided. It is the nature of the job, especially in hard times like now. Gingrich, Perry, and Obama reveal themselves to be fatally unqualified for the job when they let the laid off tail wag the United States dog.
Gingrich and Perry may be to the left of George Soros on their criticism of Romney. Soros is the billionaire head of a hedge fund. His claim to fame is he bet against the British pound. And when the pound failed, he made a billion dollars. He has famously used that money and other made he made since to fund all sorts of leftist causes like MoveOn.org and liberal radio Air America.
My God! Have we arrived at a world where a Republican cannot “profit from failure,” but it’s okay for a hyperleftist to do so?
What segment of the Republican party voters are Gingrich and Perry trying to win over by saying that Romney’s company laid people off? Members of the American Communist Party? ACORN? Anarchists?
And the two morons who said this—Gingrich and Perry—are supposed to be more conservative than Romney and understand job creation better than Romney? This kind of talk is more liberal than Barack Obama, not more conservative than Mitt Romney. This is 1800s Marxist class warfare rhetoric and manifests the notion that all businessmen are evil and that all layoffs are evil.
One of the reasons for chronically high unemployment in Europe is it is considered immoral to lay people off and it is generally illegal. The harder you make it to get rid of excess workers, the more reluctant you make prospective employers to hire anyone. Gingrich and Perry seem to be saying there must never be any layoffs for any reason.
I thought we were going to layoff a million government employees. Sounds like Romney would be more likely to do it that Gingrich or Perry, two life-long, non-profit government guys.
Perry keeps saying he created a million jobs as governor of Texas. I thought the Republican party line was that government does not create jobs. Only the private sector does.
The president of the Club for Growth, a conservative free market organization called Gingrich’s comments about Romney and Bain “disgusting” and “beyond the pale.” At least. Who the hell are Gingrich and Perry going to support in the 2008 presidential election if Romney gets the nomination? They sound like they’ll be calling on Ralph Nader to run because Obama is too far right for them.
Then there is Huntsman. Romney said,
I like being able to fire people who provide services to me.
The context shows he was referring to preferring consumer choice to having to put up with bad service from a monopoly.
Jon Huntsman knows that. But he went ahead and recorded that commercial saying,
Governor Romney enjoys firing people. I enjoy creating jobs.
Like I said above, lying scum.
Perry is done. All he accomplished as a candidate was to reveal himself as not ready for national prime time.
Gingrich has stopped running for the Republican nomination and is now just trying to hurt Romney’s chances against Obama as much as possible out of spite. His attempt to ally with Santorum was a manifestation of that. He acts like he never experienced politics before! No one swears he will only do positive campaigning more than Gingrich, and no one does more mean-spirited negative campaigning that Gingrich.
Huntsman is the only candidate who never even made it to flavor of the month. And he is not going to. Santorum is a question mark. To his credit, he has not moved to the left of Obama on Bain Capital and agreed with Romney on the anti-Bain accusations of Gingrich and Perry. Santorum seems like a nice guy, but his resume does not match Romney’s. He might be a VP or Cabinet officer.
If you step back and just look at the basic facts, Romney is a decent, very smart, highly educated, and successful guy. He has a Harvard MBA and a Harvard JD. (full disclosure: my wife and I are also Harvard MBAs) He has one, long, successful marriage and successful children. He succeeded in business making hundreds of millions in a relatively brief career and managed to get experience with over 100 companies, not just the usual one or two. He succeeded at turning the Salt Lake City winter Olympics around after being brought in on an emergency basis. He was governor of Massachusetts and probably had about as much success as possible in that position given the power of the Democrat party in the MA legislature. There is no scandal in his life.
His weaknesses are that he has no military or foreign policy experience. He is probably the second most well-qualified person ever to run for president. The first being George H.W. Bush (Bush the first) who was a Navy pilot combat veteran who got shot down by the Japanese, CIA director, Congressman, successful in the oil business, U.N. ambassador, first U.S envoy to Communist China (predecessor to Hunstman’s last job). George H.W. Bush was arguably the most successful president since at least 1900. He is not known for that, but look up his record and tell me where he failed. His approval rating was over 90% for a while.
The alleged other weaknesses of Romney are a bunch of nit-picking, spin, and political hack stuff.
I am not a Romney Supporter. If the 2012 presidential election looks close in CA where I live, I will probably vote for the Republican nominee. But most likely, I will vote Libertarian as usual. To those who say that will elect Obama, I say bullshit. I voted Libertarian in 2008. Obama won my state by a vote of 8,274,473 to 5,011,781. So exactly how did my one vote elect Obama? I submit my vote was more like to be noticed as one of the 67,582 Libertarian votes cast in CA. Actually, I might as well have stayed home.
The only time I ever voted Republican was in 1980. That year, Reagan won my state of CA by 4,524,858 to 3,083,661. I thought Jimmy Carter was a total disaster. I feel the same about Obama, although as I said above, he is not as far left as Gingrich and Perry.
Will Romney fix the national debt crisis? Nah. The American people insist on experiencing federal bankruptcy before they will believe it is really a problem. Romney just wants to add “President of the United States” to his resume, not fix anything. Actually, in that, he is the same as Obama, who only wanted the title and the honor, not to do the damned job. But at least Romney is competent and experienced and leans away from more government control of everything. He will try to move government in the right direction, but probably will have little success at it because he won’t do really unpopular stuff like cut entitlements and the Senate Democrats will filibuster everything.
Romney is the most qualified of the Republicans, but unless he belatedly gets courage to actually cut rather than balance the budget 20 years from now, like the lion in the Wizard of Oz, he is simply going to preside over the federal government going bankrupt or getting far closer to it.
John T. Reed