There are a lot of reasons to dislike Romney, not the least of which is his hair.  My personal favorite, however, is the fact that he ran Bain Capital.  It bothers me for two reasons; What they do and the fact that most people don’t understand what they do.  Private equity (PE) is basically leveraged buyouts renamed to something that people don’t associate with borderline criminal financial activity.  It is not about turning companies around as Romney has stated, it’s about unlocking cash and taking it from the company.  What makes it worse is that provisions in the tax code giving special rates to dividends and capital gains are a large part of making this profitable.

What typically happens is the PE firm approaches the company’s management and explains to them that if they go along with the PE proposal they will make a ton of money because of increased salaries, bonuses and stock when the company is made public again.  PE firms essentially bribe management to go along with it because while the managers know that the company will be gutted, they just don’t care because they are more wealthy than they would have been had the company continued on as it was.

The PE firm and its investors secure a loan (secured by company assets) to buy out share from the public at a premium.  Now the targeted company has a huge loan to pay interest on, with a little bit of equity proved by the PE firm.  The company is now swimming in debt, bad.  The next step is to “uncover hidden value.”  This is essentially where layoffs take place.  It’s very common to totally gut R&D also.  This hurts the company down the road a ways but the PE firm will be out before it matters.  The PE firm is also paid very large consulting fees (paid usually as dividends) for the services of pointing out what cuts would increase short-term profit the most.  That is where the “skill” in PE comes from.

There are typically two outcomes to all of this.  The first is the company does an IPO and the PE firm is paid back with some for investors, the rest goes to pay off the loan and management who were promised stock when the company went public.  The losers are the company itself who is now paying its managers way too much, has laid off huge chunks of its staff and has been made unviable as a company in the long run because of the gutting it took.  The other thing that could happen is a bankruptcy.  The company may go under but the management got paid well, the PE firm made its consulting fees and the losers list expands to include the bank who funded the loan and the PE investors who don’t get to share in the consulting fees charged by the firm.

That is a pretty simplified version of what PE is all about and why it’s bad.  Romney was the head of Bain and made this flip frequently.  When Gingrich says “If somebody comes in, takes all the money out of your company and then leaves you bankrupt while they go off with millions, that’s not traditional capitalism” he is dead right.  PE takes advantage of special capital gains and dividend rates in the tax system and the greed of the management at the target company in order to gut an often serviceable company, another reason special tax treatments are actually anti-free market.  It doesn’t take skill to run a company into the ground and file for bankruptcy, but it does take some skill to be POTUS.  No one who knows how PE works can really argue that Romney is a skilled businessman based on his work at Bain.  Also anyone who has seen his picture should be angry at his hair.