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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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Iran Hostage Crisis U.S. Embassy Nov 4, 1979

It is the DNA of our foreign policy apparatus that forces us, perhaps in sync with some kind of diplomatic circadian rhythm, to periodically promote the idea that Iran is secretly building a nuclear bomb, in addition to the fact that they are the greatest satanic threat to world peace since the rise of fascism in Europe. Though we don’t officially use the term anymore, GW Bush’s characterization of Iran as part of the axis-of-evil is still emblematic of how we view and diplomatically treat Iran today. We can’t say enough bad things about the country and we are always looking for ways to tighten the sanctions against them we have already imposed (we are going to strengthen our sanctions since the British closed their embassy in Tehran terminated Iran’s foreign office in London). Yes the Iranian regime is a brutal dictatorship and no we don’t want them to develop a nuclear weapon. In fact, we want to eliminate all nuclear weapons. But ever since radicals overthrew the Shah and took our embassy members as hostages (we installed the Shah by overthrowing their democratically elected leader Mossadegh in 1953, as a favor to British oil interests and what eventually became BP (British Petroleum) and is now bp (beyond petroleum)), we cannot shake the fact that we once had the Middle East oil situation fairly well worked out, with rulers who generally did our bidding, especially in Saudi Arabia, Iran and Kuwait until Ayatollah Ruhollah Khomeini overthrew the Shah and established an Islamic Republic in 1979. We just can’t accept the humiliation we suffered in that episode and we want and need the current regime to topple. It’s obvious that the United States will not be happy until Iran goes through a change in leadership and we would obviously prefer someone more compliant with our own interests compared with the today’s intolerable situation: we demand regime change. But the reactionary posture we unavoidably display towards Iran, and refresh with predictable synchrony, is aided by our partner in sinister delusions, Likudian Israel, who shares in this paranoia and regularly feeds us information reinforcing our satanic interpretation of the country. But a definite pause was recently injected into the conversation about Iran: a recent report by the IAEA (International Atomic Energy Agency), the watchdog of non-weapons nuclear technology transfer, claimed “the possible existence of undeclared nuclear facilities and material in Iran.” This was new because the same agency had reported in 2007 that there was no evidence for a nuclear weapons program in Iran (see below). But, that’s all it took. A lead story in the New York Times the day after the IAEA report came out advanced the idea that “United Nations weapons inspectors [IAEA] have amassed a trove of new evidence that they say makes a “credible” case that “Iran has carried out activities relevant to the development of a nuclear device.” You know that when the New York Times comes out with a forceful article like that, the story has legs and war chants begin, typically originating on Faux News (I didn’t check). Yet, later on the same day, the Times came out with a second, more cautionary report admitting “It is true that the basic allegations in the report are not substantially new, and have been discussed by experts for years. Many of them appear to be those first uncovered in the laptop stolen in 2004, said Muhammad Sahimi, a professor of chemical engineering and materials science at the University of Southern California who has written extensively on Iran’s nuclear program.“

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Lyndon Johnson sworn in as President immediately after Kennedy was shot 1963

Those of us living in 1963 remember where we were and our station in life when Jack Kennedy was assassinated in November of that year. Who can forget the image of Jacqueline Kennedy standing next to Lyndon Johnson as he was sworn in as the new President of the United States, with the oath administered on Air Force One. And nearly thirty-eight years later, all of us remember where we were when the hijacked jets crashed into the World Trade Center buildings on 9/11/2001; we watched in televised horror as the buildings collapsed in such a way that they resembled an induced implosion, similar to those normally set off by explosive devices strategically placed on the building interior. Ten years after the Kennedy assassination, the nation had changed, but its fundamental character, that of a feel-good, do-good nation with a bright future had not altered: things would get better.  By that time, Johnson had been driven out of office into self-imposed exile by his own conduct of the Vietnam war. Hubert Humphrey lost the election of 1968 to Richard Nixon because of Vietnam and the Democratic Party Convention held in Chicago that year. Nixon, was president in 1973, elected with a vague promise of generating peace in Vietnam, but had escalated the bombing in North Vietnam and started secret bombing in Laos and Cambodia. At home,  the country was in a state of anger and confusion over the war, stagflation and oil prices, unable to connect the dots between them  in any meaningful way.  The break-in at the Watergate Hotel took place in June of 1972 and by 1973 the issue was heating up to the point that Nixon would resign as President a year later in August 1974.

The New Deal, established under FDR,  had started its own form of implosion, in part because no one stood up and explained things like stagflation in any satisfactory way. A replacement philosophy was offered through  neoliberalism and the free market economy, couched in phrases that seemed like personal freedom had been denied by the New Deal philosophy of embedded liberalism; the new arguments were provided by Milton Friedman and the Chicago School of Economics, with Friedrich von Hayek serving as a historical figure and the “Miracle of Chile” under Pinochet as the primary example (people don’t need freedom, they just need a good income). No one seemed to care at the time that the “Miracle of Chile” marched the country towards an increasing disparity in wealth distribution–a Chilean gilded age. Eventually, the neoliberal formulation would come to dominate the global economy and generate our current gilded age disparity in our national wealth distribution. The income disparity in America, coupled with having elected a black President in 2008, has resulted in a division between the two political parties that is so divided  their congressional voting behavior that it threatens our economic future. But even more telling about the nature of our country is that, when Kennedy was alive, the Cold War was raging and an Armageddon of sorts was avoided during the Cuban Missile crisis a year before his death. In between then and now the Cold War ended,  yet the military budget has remained alarmingly high for a country that before 9/11, was at peace.

What about ten years after 9/11, a date fast approaching? As a result of the memory searing 9/11  event, in very short order, we started two wars we cannot finish and have a President that promised to stop the war in Iraq, but there are doubts today whether our military involvement in that country will ever be finished, largely because we are still in conflict with Iran, whose influence in the Middle East was enhanced by our invasion of Iraq. So here is the new American logic of war–we invade a country under false pretenses but in reality do so to gain control of their oil and sell off all their assets–a free market economy from the get-go. Then, when the war and occupation got ugly, we put in a puppet government at a time when George Bush didn’t know the difference between Sunnis and Shiites (he said he thought everyone was an Arab); it was in the election of this puppet government that a Shiite government was formed (not surprisingly because the majority of Iraqis are Shiites), whose natural ally is Iran–the number one enemy of the United States. So, we are occupying a Shiite country to protect them from a neighboring Shiite country with whom they are natural allies and we don’t quite know who the enemies there will really be, except we know that we didn’t quite get control of the oil as we had planned and someone finally told Paul Bremmer that selling off the assets of an invaded country was a crime against humanity and that he could be arrested and tried at the International Court of Justice in The Hague. That could still happen: maybe America could begin a healing process of sorts if it did.

In the meantime, the war in Afghanistan, the right war according to candidate Obama, cannot be won, but our military insists that we are making progress, which cannot be confirmed by journalists other than those embedded within the military. Americans badly need to feel that we should be able to win at least one war, so the press seems willing to try and provide us with a sense of imminent victory if we can stay the course for a few more decades. Along the way, America became a security state, with a security apparatus that no one can comprehend, but it has a completely black budget and will be with us forever. Numerous agencies now constitute our intelligence system. The military tells us that the Afghanistan war will take as many as ten more years at the current rate of progress. Surely, at $ 2 billion a week,  America will not wait that long!

No President will ever authorize a reduction in the budget of our heavily privatized and overly-inflated security system, with buildings distributed in every state (a well-known military strategy for weapons manufacturing). If a terrorist attack should occur after a President cut the budget of our national security system,  the mood of the country would place the President’s political future, as well as that of his party into doubt as the relaxation of security expenditures would be blamed for the attack.  So, on top of the military budget, which is already close to the combined military budgets for the rest of the world, we add an additional layer for a security budget, but that’s an add-on we can’t even sink our teeth into because it is entirely secret. It is a highly privatized security system that has the right to examine any of our emails or phone messages for critical words, so be careful what you say on the phone. Any American can be arrested, detained and exposed to a long period of incarceration. Do we feel more secure because of this new, massive security state? No: our new source of insecurity comes from the threat of this large, secretive , uncontrollable organization. Did securitized America help capture the underwear Christmas bomber? No! Did it help eliminate Osama bin Laden? Not according to Richard Clarke, who appeared on Frontline earlier. In fact, you might want to watch Frontline’s “Top Secret America“ to get a feel for the unwieldy nature of our security system that developed after 9/11. Here are some of the uncomfortable facts: currently, 854,000 people in America have top-security clearance (this is not easy to get: some universities give classes on how to get this top level of security clearance); 1200 government organizations and 2000 private companies contribute to our intelligence apparatus, all of which was created after 9/11.  A slight expansion on this topic has appeared in these postings.

Though the intelligence system we created after 9/11 is largely unknown to us, lurking in the dark recesses of our national fabric, we can articulate what is more obvious about the changes we have made in our national character–we ourselves have became terrorists after 9/11! No one gets their head around this aspect of our cultural transition better than Noam Chomsky. I recommend that you read his article, which appeared in the Tomgram, just this past week. Kidnapping, torture and assassination are now part of our new national culture and people like Dick Cheney are publishing to reinforce this character change and, in the process, help him elude criminal charges that might someday come to rest on his doorstep. Polls show that many Americans accept this new form of behavior as necessary for our national safety, despite the fact that torture experts tell us that applying things such as waterboarding get people to say whatever you want from them to in order to get you to stop. But, waterboarding and torture are only part of the story. To assess the scope of this change in our  national character, we have to go all the way back to the close of WW II and the Nuremberg trials of the Nazi war machine leaders. From Chomsky’s article, part of which describes how we treated Osama bin Laden in comparison with how we handled Nazi trials after WW II:

• “When the time came to consider the fate of men much more steeped in wickedness than Osama bin Laden — the Nazi leadership — the British government wanted them hanged within six hours of capture. President Truman demurred, citing the conclusion of Justice Robert Jackson’s summary execution ‘would not sit easily on the American conscience or be remembered by our children with pride… the only course is to determine the innocence or guilt of the accused after a hearing as dispassionate as the times will permit and upon a record that will leave our reasons and motives clear.’”
  

  World Trade Centers on 9/11

then, comparing Bush’s invasion of Iraq and his overall behavior in conducting war policies, Chomsky says,

• “Similarly, it is uncontroversial that Bush and associates did commit the “supreme international crime” — the crime of aggression. That crime was defined clearly enough by Justice Robert Jackson, Chief of Counsel for the United States at Nuremberg.  An “aggressor,” Jackson proposed to the Tribunal in his opening statement, is a state that is the first to commit such actions as “[i]nvasion of its armed forces, with or without a declaration of war, of the territory of another State ….” No one, even the most extreme supporter of the aggression, denies that Bush and associates did just that.” Problem stated problem solved for it doesn’t matter if Bush and company deny it, that it happened and was an unprovoked act of aggression is an undisputed fact. Bush, Cheney, Rumsfeld and Rice are international criminals.

Quoting again from Justice Robert Jackson, Chief Counsel for the United States at Nuremberg,

• “We might also do well to recall Jackson’s eloquent words at Nuremberg on the principle of universality: “If certain acts in violation of treaties are crimes, they are crimes whether the United States does them or whether Germany does them, and we are not prepared to lay down a rule of criminal conduct against others which we would not be willing to have invoked against us.””

America was deeply, pathologically changed by 9/11. The inflexibility of Tea Party members reflects this new pathological state. We were unprepared by our leadership for what happened to us, largely because our leadership wanted to keep our foreign policy actions a secret from the American public, who they knew would never approve of our foreign policy actions, once exposed as being so foreign to the international image we like to project about ourselves. When you look at the polls that show a majority of Americans believe that their children will not have the same opportunities for success that they did, that the country is headed in the wrong direction, combined with the general pessimism about our economy and the global state of affairs, perhaps turning to Michele Bachmann or Rick Perry for the answers doesn’t seem as outrageous as it would have ten years after Kennedy’s assassination. After all, we tried everything else, didn’t we? When your own country abandons  your ideals and sense of responsibility, a bewildering emotion of abandonment makes us all confused about what it was we had in the first place–in the form of a country. As one outcome of this betrayal, one has to assume that we have not seen the end of terrorist attacks against the United States, but we are unable to see that if we restored justice to the Middle East and helped create a workable Palestinian state, a major motivation for these terrorist attacks would be mitigated. Imagine that we have been led by international criminals, who should be tried in a World Court for their crimes against humanity and then imagine where our standing would be in the world of public opinion, if we followed through with that obligation. In time, we might reduce the securitized state of America.

RFM

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