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American Pad and Paper Company: A Bain Capital Story

Mitt Romney has already made my list for his dangerous, reckless attitudes towards Iran, for which he runs the risk of getting us into another war in the Middle East should he be elected President. But Romney also brings big baggage in his defense of our current casino economic model and that is the subject of this posting. Mitt Romney started and ran Bain Capital from 1984-1999; he still gets profits from the company. It has been estimated that 1/4 of the companies bought or managed by Bain during his tenure were driven into bankruptcy.  One of the companies purchased and managed by Bain Capital, under Romney’s leadership, was American Pad and Paper (AmPad), purchased by Bain in 1992.   The accompanying visual representation of the AmPad’s history under Bain is summarized in the elegant, detailed graphic, put together and available as a pdf by the Boston Globe: you can download it, put it on the wall and distribute as an educational blueprint for how private equity firms operate. The story of AmPad has a beginning, when Bain purchased AmPad in 1992 and it has an ending, when AmPad was forced into bankruptcy and liquidation in 2001. In between those bookends is the story of how private equity firms generate profits for their owners and investors, but fail the company that generated those profits and the workers who ran the business. It tells the story of how a private equity firm ran the company into bankruptcy by forcing it to carry a huge debt load  (measured by the negative numbers and the green line), compared to the company’s sales, indicted by the blue line. The management fees Bain collected are illustrated with bright green circles, while the “other payments” and their amounts are represented by the dark green circles. This graph is not an outlier of the performance of private equity firms and how they manage the companies they buy or control as the major share holder. Rather, this is a graphical template of how private equity firms operate. A decent American, someone who is committed to better equity in America’s income distribution, as well as good management practices for American businesses, should be shocked by this story, but the financial industry of America and the Republican Party as its political representative, celebrate this kind of predatory behavior, because it’s the free market economy at work! If they get their way, the future will be more of the same and then some. A huge failure of our own regulatory agencies, including the SEC,  led to the era of corporate raiding, which forms the basis of our failure to support American manufacturing and the jobs that were slowly created through this process. Private equity firms are a festering wound in America’s manufacturing integrity.

Bain’s initial investment for AmPad was $ 5 million, after which they charged the company “advisory fees” for managerial services. As you can tell from their website describing the private equity branch of the firm, Bain specializes in “leveraged buyouts.” These buyouts are accomplished by putting very little money up front to purchase the company, financing the rest, either by using the companies assets if they have any or saddling the company with a substantial debt load, used to payoff the loan to purchase the company  and provide lucrative profits for the new managers–putting the company in debt is the primary means by which private equity firms generate short-term profit for their investors. Leveraged buyouts should be illegal!

The story of AmPad is hardly unique, but it encapsulates the mechanisms by which private equity firms extract money from the companies they purchase and ostensibly “manage.”  They are not interested in job creation. Their interest is purely in short-term profit-making. For Romney to talk about his work at Bain Capital as one of job creation is absurd–no one else in the private equity industry considers that as one of their motivations (see quote below from the LA Times below). The array of profit-making mechanisms imposed on companies is mind-boggling: no businessman committed to a sensible, strategic growth of their business would ever endanger his company with the kind of debt Bains put on AmPad: debt forms include leveraged buyout loans, management fees and when Bain decided to take the company public, the profits earned from the stock sale, as well as the administrative costs of issuing the IPO (Initial Public Offering) were derived from the stock sales or charged to the company. The purpose of the IPO was to was to generate stock with some value: shortly after AmPad went public Bain sold 40% of their shares, making even more money from their ownership. Private equity firms are also inclined to enhance the growth of the company through the purchase of other companies creating further debt and more job loss through additional downsizing, something usually associated with increased stock value. It should be evident that private equity firms manipulate manufacturing firms without any consideration about the future of the firm–instead they are only interested in short-term profit.

Perhaps the one thing that Texas Governor Rick Perry got right in his political campaign for the Presidency this year, was when he described private equity tactics as “vulture capitalism.” By forcing companies to run up huge debts and charging exorbitant “management fees,” companies lose their ability to make plant investments which would keep them more competitive and modernized. In its eagerness to provide a summary soundbite of private equity firms, the mainstream press is completely incapacitated. I watched on PBS news the other night as someone was trying to explain the value of private equity firms, based on whether they had created jobs or lost jobs. But that is only part of the problem–the major question is what are they doing to companies that secure their future and make them more competitive? What have they done to a company that couldn’t be done better by the ownership of the company and how stable was the company when acquired by the private equity firm?  It’s as if private equity firms and leveraged buyouts are an indication that financial institutions who make money through this sordid mechanism, have given up on American manufacturing and act as though it’s time to sell off the country’s assets and that is  a large part of what happened to the American manufacturing in the Neoliberal era (whose cloud hangs over us today). The first leveraged buyout took place in 1968, but gained momentum in the Reagan era. The practice could have been  stopped by the SEC and financial regulatory agencies, but they progressively proved to be emasculated by the frenzy of the corporate buyouts at the time. In addition, a hidden motivation for this strategy was the benefit of breaking the power of unions, whose presence made it more difficult to downsize companies and reduce wages. Wages, benefits and even whole retirement packages have been swallowed by the mechanisms that private equity firms have used to create wealth for a few investors.

Mitt Romney was hugely successful in running Bain Capital; during the time he ran the company, the investment return averaged 88 percent each year–phenomenal profit levels. These years were the fabulous growth years of our financial industry, which in the 1990s became the largest single sector of our economy and began to outpace manufacturing. In fact, the rise of financial America was created by buying, selling and destroying American manufacturing–that is how the financial sector grew–not by growing something new, but by tearing down what we already had built as a manufacturing economy. At one time America was the envy of the world for its manufacturing base. Where did it all go? And where is it written that a private equity company like Bain has people in their management structure that know how to run AmPad, better than the people running the firm in the first place? It is true that AmPad sales had a period of boom, accompanied by plant acquisitions and closures, but those kinds of performances are typically unsustainable: when a slowdown occurs or if good plant management doesn’t exist to make the appropriate investment decisions for maintaining productivity (and keeping the best people around that know what they’re doing), a company loaded with huge debts will show a drop in profits followed by a decline in the value of the stock, at which time it becomes more challenging for the company to stay afloat, something that AmPad couldn’t achieve. Many of the companies infected with the Bain virus were not new and had been around for a very long time. Take for example, Worldwide Grinding Systems (WGS), established in 1888; the went belly-up less than a decade after Bain became its majority stakeholder. Furthermore, WGS had to turn to a federal insurance agency to bailout its pension system, in large part because Bain  forced the company into a very heavy debt load.

A recent article in the Los Angeles Times describes Bain Capital as follows:

• Romney and his team also maximized returns by firing workers, seeking government subsidies, and flipping companies quickly for large profits. Sometimes Bain investors gained even when companies slid into bankruptcy.
• Romney himself became wealthy at Bain. He is now worth between $190 million and $250 million, much of it derived from his time running the investment firm, his campaign staffers have said.
• Bain managers said their mission was clear. “I never thought of what I do for a living as job creation,” said Marc B. Walpow, a former managing partner at Bain who worked closely with Romney for nine years before forming his own firm. “The primary goal of private equity is to create wealth for your investors.”

Private equity firms are predatory capitalists, willing to force the companies they buy or control to take long-term risks for short-term profits. In the process, part of the short-term profit involves down-sizing the companies they own, eliminating jobs, reducing wages and creating conditions that jeopardize the long-term future of the company. The financial interests who run companies into the ground have absolutely no interest in long-term outcomes, whether it’s related to profits way down the road or our planetary future. They are hooked on short-term profits like junkies in search of a new high. We live in a country turned upside down. Too many economists, those with whom we placed a certain level of confidence that they would be our watchdogs and make certain that the country had a healthy economy, vitalized by a concern for important issues like social stability, equitable income distribution, education opportunities and retirement pensions and programs, have abandoned the ship: our faith in them turned out to be completely misplaced. Most economists are completely supportive of the role that private equity firms play in improving the “efficiency” of companies. This word “efficiency” as derived from their vernacular equates to “downsizing” and increased corporate profitability. Few economists of today have a sufficiently broad enough view of their subject to clearly see the destructive social damage that financial investment organizations like private equity firms have created, not only in terms of our economic future,  but also for the future of our species on this planet. We are badly in need of a new discipline, one that fuses our economic future with the environmental crisis that we are in today. We are deeply in need of new kinds of experts for our badly needed new economy–a new compass that takes into account the needs of a shrinking planet. Where will these new experts come from? Not from economics departments–they had their chance and blew it. We need to build a new economy and put in the kinds of safeguards needed to prevent predatory capitalism from destroying these businesses, while at the same time investing appropriately in the infrastructure improvements needed to place the globe on a better trajectory for the future.

Perhaps we will eventually thank Mitt Romney for the social service he is about to perform as a candidate for the Presidency of the United States. By forcing the public as a whole to get better educated on the sinister motivations of greed that characterize companies like Bain Capital and how private equity firms create so much wealth for their investors, while actually diminishing the wealth of the Middle Class, Americans might finally wake up to the nature of the country we have become. Americans will also need to come to grip with their own naive trust of financial leaders and see the destructive swath that unfettered capitalism has reaped upon the stability of our society and the uncertain future we face as practicing humans trying to make it on this planet. We do not know how much of our manufacturing base was destroyed by the crazy leverage buyouts over the past thirty years and we can only imagine what kind of country we would have today if our government had intelligently stepped in and prevented these corporate disasters from ever taking place–they helped bring on the casino economy we have today.

In closing, I want to quote from a book by Walter Adams and James W. Brock, “Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street” published in 1989, reflecting on the impact of leveraged buyout and the absurdity of the practice:

• “In 1983, Esmark, marketer of Swift meats, Butterball turkeys, Playtex products, and STP oil treatments, spent $1 billion to acquire Norton Simon, producer of Hunt’s tomato products, Wesson oil, Reddi-wip, Orville Redenbacher’s popcorn, Johnny Walker Scotch, the Avis car retinal service, and Max Factor cosmetics. The next year, Esmark-Noton Simon was acquired by Beatrice Foods, maker of La Choy, Rosarita, Tropicana fruits drinks, Jolly Rancher candies, Milk Duds, Air Stream motor homes, Samsonite luggage, Stiffel lamps and Culligan water softeners. Two years later, in 1986, Beatrice-Norton Simon-Esmark (which now ranked as the nations’s 26th largest industrial concern) was bought out by Kohlberg Kravis Roberts in a $6.2 billion deal. And for what purpose? To sell off the various Beatrice-Norton Simon-Esmark divisions that had just been consolidated.”

Leveraged buyouts and corporate merger mania made no rational sense for building continuity in manufacturing experience and expertise. The government under Ronald Reagan helped to issue a new gaming license for a new kind of sport: corporate raiding. The new sport was aided by Reagan’s abandonment of antitrust enforcement, his corporate tax cuts and his relaxation of securities regulation. Reagan followed through with his political slogan that “government was the problem, not the solution.” These forces accelerated a reduced motivation to invest in America for fear of corporate takeover. The financial industry of America  had no problem adapting to this new gaming license and showed no concern for jobs lost, companies shattered or assets sold off for profit. The original corporate raiders and arbitrageurs had names like Ivan Boesky, T. Boone Pickens and Carl Icahn, who became the new robber barons preying on companies whose stock had been devalued by economic hard times and foreign competition, some of which was induced by the actions of these robber barons themselves. Bain capital is simply another version of the corporate raiders from an earlier era. We can’t afford to allow the continuation of this silly, but destructive behavior. Too much of our future depends on eliminating this disastrous “free-market” childish behavior and getting serious about human survival and our own economic well-being.

If you want to see how private equity funds have endangered the Danish Economy see my article “Borrowing From Denmark”

RFM

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Power Generation in Liberty (Zucotti) Park

William Blum has a lot to say about the conduct of American foreign policy and the deceit with which we communicate our international behavior to our citizens. To say we are duplicitous does not quite explain the true situation. We describe how we are doing God’s work abroad and then hide the numbers and details of those who have died and suffered as a consequence of carrying out His wishes–but it’s all in the best interests of “spreading democracy.”  Blum has an excellent bullshit detector and that’s why I read his blog with some regularity. Ordinarily, you don’t go to his website if you are searching for an uplifting message about America, but in his most recent blog, he actually has one! It’s all about the Occupy Wall Street (OWS) movement and, as explained therein, Blum is pleasantly surprised and uplifted by their message and their persistence in delivering it.  My son and I had a similar experience when we visited Zucotti Park   a few weeks ago (now renamed by the OWS movement as Liberty Park–its original name) and absorbed the culture of those promoting these ideas.

When you think about the major protest activities we have historically engaged in, against the wars we have entered, beginning with the Vietnam war, they have all been time-limited by the event that initiated them. When the war ended, protests stopped and everybody went home–issue over, if not forgotten, though that event in particular left a deep national scar. Sometimes, as in the case of the war in Iraq, we don’t even wait for it to end before putting it out of our mind–we simply don’t have a way of dealing with wars we start without a good reason. Bury it in a file but in which file cabinet does it belong? The OWS movement is different; it addresses another kind of issue, something that is more inter-generational, more longitudinal in scope and more fundamental, like the backbone to our culture. Yet it began with too much subtlety for us to detect and it remains an insidious force waiting to be full fleshed out. Yes, it’s neoliberalism that we are against,  and while it may have started as an economic change of course, it has become far more than an economic blueprint for a more divisive future–it has crept into every pore of our cultural being and has overtaken the central values of our society. And the politics of neoliberalism are draining to our culture–we get exhausted too easily imagining what the country was like before. Multinational corporations now effectively run governments, in fact they own them.

With the current economic meltdown, we’re beginning to perceive the real core of the problem as an encompassing social, spiritual and economic disaster–a long national nightmare of sorts.  The financial disaster that led to the “Great Recession” (let’s face it, for young people the unemployment picture is at depression levels) was initially viewed as something we could do nothing about–we were too “financialized” to confront the political and social power that controlled our government and made the rules. But the OWS movement has been courageous enough to put up the first STOP sign and begin the process of inoculating the country against this festering contagion of corruption and economic despair.  We can all hope that the movement will continue to grow until its mass reaches a critical threshold such that the  majority of Americans will recognize  we cannot continue with a system that dehumanizes us with too much poverty and too few opportunities to develop and grow as humans–there must be a better way. And so there is! But as the long struggle begins to right our ship, it is only beginning to take shape in our brains and not through identifiable objects around us.

It may have started off as a lack of good paying jobs and high unemployment, but, like the Populist movement of the 1870s, it will hopefully grow until we create a more democratic country, something like the one we quit on in the 1970s. We must radically change our system of government to make it more responsive to our social needs. Then too, we have the additional urgency of saving the planet we live on. We will not do away with our financial system, but one hopes to tame it and make it subservient to the needs of society, rather than the other way around. The neoliberal experiment is over. It didn’t work. It produced too much poverty, destroyed our national creativity, hollowed out our economy  and is completely indifferent if not hostile to the environment–that is just one more arena for corporate exploitation. Those for whom the country does work seem to be the least deserving and least imaginative members of our culture–they must become the new workers in a revised  economy that works better for all of us, including them, though they don’t see it that way right now. It’s more than just hitting the restart button. We can no longer tolerate a system in which our national assets are sold off at fire-sale prices, as employees are stripped of their retirement–that is robbery–we are now confronted with the new robber barons, who are far more sinister than the predecessors for whom they are named. They are on automatic pilot and will not cease until we stop them. One of the best things we can do to tame Wall Street is impose a small tax on every stock market exchange which will not only raise money but also inhibit the rapid, electronic stock exchanges that continue to pose a risk to our economy. America is not broke. In fact the Institute for Policy Studies has outlined several changes in our tax and subsidy policy that could create seven times the amount of money that the failed Super Committee was trying to achieve. And most of us wouldn’t know the difference. The idea that we are broke is simply another example of how the neoliberals have fashioned a corrupt tax code with advantages to the super rich and subsidies to industries that are generating huge profits, for providing energy that does not reflect the true cost of doing business. A sensible Congress could solve these issues simply and effectively.

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OWS Transition?

For an update on the status of the Occupy Wall Street (OWS) movement and perhaps learn something about where it is going, you can visit last Friday’s  Democracy Now with Amy Goodman, where excerpts from a panel discussion can be viewed. The panel discussion was sponsored by The Nation and held in the New School University in New York City, with the title “”Occupy Everywhere: On the New Politics and Possibilities of the Movement Against Corporate Power.” The participants include film maker Michael Moore, author Rinki Sen, Patrick Bruner (“veteran” OWS organizer), economic journalist William Greider and author Naomi Klein, with moderator Richard Kim. The video consists of excerpts from the discussion of what the movement has accomplished, where it is headed, what it needs to do for future growth and what needs it must fulfill if the bright promise they have aroused, that of changing the world, can gain any more traction. To begin with of course, the latter issue is not trivial and no one comes close to seriously expressing the magnitude of the problem. But so far, the incremental  steps that have been taken, such as the “99 percent” deeply resonate with all ages, and have created thirst for action that is more than just “occupy.”   Historians often express the view that the historical record of public arousal and activism against social injustice are not directly related to hard times per se, but emerge when the narrative that kept people down runs out of explanatory power. When hard times first come, people think they have to double down and work harder to get by (or maybe in the case of many Americans, they align themselves more clearly with God and religion–it’s their fault for not being a better provider–their faith hasn’t been strong enough to be rewarded by God) and finally, when multiple iterations of this strategy have failed, groups are formed that begin to articulate a better vision of tomorrow and coalesce into a more nationally identifiable  movement. That is what the OWS movement has brought to our door–they articulate the long-standing grievances we have with how our civil society has been structured and run in the last several decades.  And, they emphasize that the richest country in the world can afford to do better, can afford to do the things that they are talking about. The most boring among us have become the most rich and powerful and they have their boot on our neck. They want to establish an aristocracy so they can pass on their wealth to their offspring (no more inheritance taxes for one thing). The OWS movement is addressing issues that, economically, began in the 1970s, if not earlier. Let’s face it, at the moment, OWS is the only game in town;  after a little more than two months, the movement seems safely launched: it will surely oscillate a bit with the seasons, but one expects to see a process of growth and continued renewal and the “99 percent” is already a permanent member of our national lexicon. It’s a beautiful cutoff. The movement has already had detectable success in the November elections, particularly in Ohio. Patrick Bruner emphasized that by following Google Trends, the words used by the OWS movement have been sharply on the rise.

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