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Alberta Canada tar sand region before and after mining

This afternoon (Wednesday, January 18th, 2012), the Obama Administration announced that they are denying the permit for construction of the Keystone XL pipeline. This news represents a great victory for the environment and our planetary future. In the last Congressional budget action, approval for a two month extension of payroll tax reductions and unemployment insurance was adopted, with a provision tacked onto the bill which forced the President to decide within 60 days whether he would approve the Keystone XL pipeline, presumably feeling confident that putting him in such a box during an election year would increase the likelihood that the project would move forward. The Keystone XL pipeline proposal was designed to carry tar sand oil from Alberta Canada to the Gulf of Mexico, where it was to be refined.  Since big oil supports construction of this pipeline and is used to getting their way through lobbying and campaign donations, it would not have been surprising to anyone if Obama had yielded and approved the 1700 mile pipeline for construction.  But massive demonstrations, largely orchestrated by Bill McKibben’s 350.org, encircling at one point the White House with demonstrators linking arms (attended by arrests),  the environmental opposition beat out the oil lobby and encouraged Obama to deny the permit, an act for which he will face stiff opposition in a re-election year. It is worth noting that our most prominent climate scientist, James Hansen, has termed the Albert Sands project “game over” meaning that with the excessive carbon introduced by burning the dirty tar sands, we will reach a point of no-return on future climate change and very likely see large increases in sea levels as the polar and Greenland ice melts. Although we won the battle, the war isn’t over and it won’t be over until the environment and greenhouse gas emissions are finally recognized as the serious threat they pose to our future climate safety. You can bet that by tomorrow if not sooner, Mitt Romney will jump on this as a major job killer and announce he will reverse the decision once he’s elected to the Presidency. But let’s pause for a few minutes to express our gratitude to Obama for showing the courage necessary to reject the pipeline. It’s a major victory for environmentalists who worked hard to prevent the pipeline from becoming a reality. You can thank him by signing a petition at the NRDC site.

RFM

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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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Mitt Romney (from Massimo Prandi)

Perhaps nothing can stop Mitt Romney’s destiny as the Republican nominee to face Barack Obama in this year’s run for the Presidency of the United States. After his victory in New Hampshire, it seems unlikely that anyone can put up a competitive race against him and by now the Republican aficionados  are meeting and making phone calls to smooth the pathway for a less confrontational nomination process to keep their powder dry for the general election.  In other words the message will go out to Newt Gingrich: stop bringing up Bain Capital and we will go out and buy several hundred thousand copies of your books–isn’t that why you were running in the first place, as a book salesman? But, no matter who the Republicans nominate, this will be a tense election year in which we have to recognize the possibility that the Republican Party could gain control of all three bodies of our national government and further push the agenda of right-wing fanatics, a step that I believe, could put us on the road to an American version of Nazism, through the invention of new enemies galore: think of global climate change theorists and scientists as terrorists. These people are scary, not because they are innately violent (though they certainly approve of violence against people they don’t like and very few disapproved of Sarah Palin putting gun-sight images on electoral maps of Democratic opponents such as Gabrielle Giffords of Arizona in the 2010 election), but because they are extremely naive ideologues, which means they are susceptible to being co-opted and exploited  by the corporate elites–those forces that more directly control Congress and the Presidency than the voters do–people like the Koch Brothers.  This year, the SuperPacs seem to be in charge of primaries and were apparently responsible for shooting down Newt Gingrich’s brief political resurgence in Iowa.  While Obama has often displayed corporatist leanings in many of his decisions and initiatives, including his healthcare bill (which offers a huge subsidy to the for-profit health care industry), his continuation of the Patriot Act and more recently his willingness, through signing the National Defense Authorization Act, to expose American citizens to the possibility that they can be arrested and detained without access to our Constitutionally guaranteed protections (Obama did issue a “signing statement,” but it’s unclear what that really means because the clause about indefinite suspension of citizen’s rights is now written into law; it is one more step along the pathway of confusing war and terrorism, which are two different things and should always be handled in two different ways–to fuse them is to place us on a path of further erosion of our civilization).

You only have to look what happened to the Tea Party movement, which was initially hostile to corporate complicity in our fiscal meltdown, to see how easily that mistrust of corporate greed got re-channeled into a new cause in which Tea Party members now favor gutting the limited oversight of financial institutions provided by the Dodd-Frank bill. The Tea Party members should be supporters of the Occupy Wall Street Movement, but they can’t find the right door to open. The Millennials need to open it for them and perhaps in time they will.

While virtually any Republican candidate can be competitive with Obama for the Presidency (now that Michelle Bachman is out of the race, with Rick Perry soon to follow), it is Mitt Romney that bothers me the most. I believe that if elected,  Romney is capable of promptly sending our country into war against Iran, because he faces the world as a Mormon  ideologue. In my experience (having been a Mormon myself), Mormon ideologues belong to a special class of believers, so inundated with an ideological interpretation of the world, combined with deep suspicions about government, that they coalesce around a belief system that verges on religious hysteria, a mental state that, quite uncharacteristic of the human species in general,  readily accepts the complete absence of any concept of verifiable truth, particularly in their construct of the outside world–they capitulate too easily to their leaders.  I have long accepted the insights of many historical judgements on how naive Presidents have taken us into wars that we had no chance of winning, but, like a child first getting hold of the steering wheel of a super sports car and stepping on the gas pedal, America went zooming into wars that still divide us as a nation and have made an indelible contribution to the polarization of our society. As an indication of the perpetuity of Vietnam into the fabric of American culture, who can forget how John Kerry’s Presidential candidacy was destroyed by the Swift Boat ad campaign that resulted in a majority of voters on election day believing that Kerry did not deserve his Vietnam Medals.

Historian Geoffrey Perret’s book “Commander in Chief: How Truman, Johnson and Bush Turned Presidential Power into a Threat to America’s Future” was the subject of two previous postings here and here. In Perret’s excellent book, he describes how Truman, Johnson and Bush shared a completely naive view of the world and, as a result, failed to understand the nature of the conflicts in which they got us involved (without following our Constitution, which says that only Congress can declare war) and under-estimated the deep cultural divide that controversial wars would create within our society. This was especially true of the Vietnam War, when we had a draft and most young males were vulnerable. But our invasion of Iraq, which was perpetrated purely by propaganda for oil and profit, was equally divided along the American political chasm, whose dimensions now deepen and widen because of more fundamental issues, such as the survival of our species on the planet. America seems a binary country on that single dimension–divided into climate change proponents who accept the science and climate change deniers who support the corporatist interpretation of the world: few seem to be on the fence.

Before GWBush was elected President, we didn’t hear from him on the campaign trail about how he wanted to go to war. It was after his election that we learned about his proclivity for making war and his plans  for invading Iraq. But Romney has consistently beaten the drums of war as he promises a more confrontational policy towards Iran; keep in mind that our own government’s best assessment from the National Intelligence Estimate (a summary of all our intelligence information) is that Iran is not making a bomb. But Romney’s advisers are hawks that want to push this issue and Romney promises to raise the military budget over the projections of Obama’s budget. Never mind that Obama’s military budget will still be larger than that of GW Bush. Romney has no experience with war–he never served in the military (neither did Obama, but we know Obama hates war).  So Romney will be more inclined to listen to his advisers, among whom are hawks who promote this more confrontational stance towards Iran and do not want to see America become a shrinking power.  Any war with Iran would lead to an immediate closure of the Strait of Hormuz and very likely would lead to a much wider war, to say nothing about running the risk of collapse in the global economy. Every day 20% of the world’s oil supply, or 17 million barrels of oil moves through the Strait of Hormuz, making it, economically, one of the most important passageways on the planet. As Michael Klare points out, we are entering the Geo-Energy-Era in which energy demands are escalating and easy access to oil is diminishing, with fever-pitch efforts by countries and companies to secure more oil contracts. Some analysts claim that blocking the Strait of Hormuz for any significant length of time could dramatically increase the cost of oil by 50% and trigger a global recession or depression.  It probably no longer matters whether there is a glut of oil on the market as the futures trading in oil seems permanently hyped into the perception that, as a planet, we are running out of oil at a time of skyrocketing demands needed to serve the exploding economies of China, India and other parts of Asia. Can we afford to elect a President who is so naive that he  is willing to go to war based on false premises about Iran’s nuclear weapons program? This is what I mean about a President that has no clue about the principle of verifiable truth. Of course it doesn’t help that the Obama administration seems to be hyping the Iran/nuclear bomb threat as well: is that for election purposes, like Kennedy’s famous “missile-gap” charge when running for the Presidency against Nixon in 1960?

If there is any advantage in having Mitt Romney run for President, it will be that finally, the American electorate, will get to know what a private equity firm is and how Mitt Romney, as the head of Bain Capital, managed to destroy many companies for the sake of profit.  Private equity firms, while bringing huge profits to the investors, destroy companies by saddling them with debt used to pay off the buyout of the company or give resources back to the investors and managers of the firm. If a company needs to buy plant equipment to improve their productivity, they cannot do it if saddled with debt, forced on them by their new owners. If you believe that Bain Capital has been good for our economy and jobs, then you should read the Think Progress article on Mitt Romney Job Killer. When Romney ran against Ted Kennedy for his Senate seat in 1994, just as in today’s campaign, he advocated his record of job creation and his business experience to challenge Kennedy. But Kennedy won that race by illustrating one of Romney’s “success stories” using the example of American Pad and Paper or AMPAD, a company that under Bain’s ownership, cut jobs and reduced wages. Kennedy played television ads featuring interviews with laid-off AMPAD employees and won the race at a time when Romney might have more easily unseated Kennedy.The AMPAD story continued after the election and according to the data presented in Think Progress, Bain invested $ 10 million in  AMPAD, but pulled $100 million out of the company. AMPAD had to cut 385 jobs and with $392 million in debt in 1999, filed for bankruptcy in 2000.  In our current depressed economy, with millions out of work, shedding light on predatory, private equity firms will not enhance Romney’s chances of unseating Obama, but it may help educate voters on whether it’s more important to have good-paying jobs or highly profitable investment firms that form one of the mechanisms by which the middle class shrinks as the wealthy get richer. Today more than ever before in our consumer-based economy, it is important to have good paying jobs in order for people to maintain consumption, create demand and grow the economy. Right now the imbalance of income distribution is slanted in such a way that consumer demand cannot get off the ground and Mitt Romney has no clue on how to fix the problem, unless of course he takes us into war.

RFM

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