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Blaming Bain

Posted By Jacob Laksin On December 15, 2011 @ 12:30 am In Daily Mailer,FrontPage | 23 Comments

The race for the Republican nomination has defied handicapping, but one thing seems certain: If Mitt Romney becomes the nominee, Democrats will seek to exploit his background in Bain Capital, the private equity firm Romney headed from 1984 to 1999, to depict him as a soulless capitalist who put profits over people.

That smear campaign is already underway. Americans United for Change, a labor-union funded left-wing group, has launched a campaign to brand Romney as Gordon Gekko, after Michael Douglas’s villainous character from the movie “Wall Street.”  A companion website, RomneyGekko.com, describes Bain Capital’s modus operandi as taking over companies and “sucking profit out of them by any means possible that often resulted in a stack of pink slips for everyday Americans.”

Demonizing capitalism and its successful practitioners as enemies of working Americans is standard procedure for the left. But Romney’s Republican rivals have also gotten in on the blame-Bain act. John Huntsman’s campaign has tried to capitalize on the image of Romney as an out-of-touch rich guy by touting a much-circulated photo of the young Romney and his Bain Capital colleagues posing flush with cash. (Never mind that Huntsman, the son of a billionaire businessman, is not exactly a model everyman.)

That was mild stuff however next to Newt Gingrich’s stunning attack on Romney this week. After being challenged by Romney to return his $1.6 million payout from government-backed mortgage giant Freddie Mac, Gingrich shot back: “If Governor Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years, then I would be glad to then listen to him.”

As commentators were quick to note, Gingrich’s charge was not only a standard piece of anti-capitalist cant but it reprised the line of attack that Ted Kennedy successfully deployed when he defeated Romney in the 1994 Massachusetts Senate race. The cheap shot was all the more notable because Gingrich had just promised to run a “relentlessly positive” campaign.

Democrats have been understandably delighted to see Gingrich make Romney’s record at Bain Capital a campaign issue. Liberal blogs have been abuzz with the prospect of using Gingrich’s remarks in attack ads against Romney. Even Republican operatives have begun to fret that Bain could become a political liability in economically depressed swing states should Romney top the GOP ticket. But it may be that both the Democrats’ giddiness and Republicans’ grumbling are misplaced. A closer look at Romney’s time at Bain Capital reveals that the company’s work was far more defensible than the left, and some opportunistic Republicans, seem to think.

As a private equity firm, Bain Capital specialized in taking over troubled startups and companies, streamlining them, and making them profitable. Not every takeover was a success, but the record shows that Bain was more successful than not. A Los Angeles Times  report points out that during the 15 years Romney led Bain, the company acquired more than 115 companies and posted annual returns more than five times the Dow Jones Industrial average over the same period. Contrary to the charge that it simply slashed jobs and forced bankruptcies, Bain Capital’s acquisitions often revitalized moribund and struggling companies.

One of Bain’s more impressive successes was taking over a little-known startup called Staples. In 1986, Staples consisted of a single store and was facing growing competition from emerging office-supply sellers like Office Depot. But it received crucial backing from Bain, which stepped in with a $2 million investment. The investment proved profitable for Bain, which eventually earned a $13 million return. But it was even more lucrative for Staples. Now an office supply empire, Staples’ 2,000-plus stores in America and Europe bring in $24.5 billion in annual sales and employ some 90,000 people. Not surprisingly, the company views Romney warmly. When Gingrich disparaged Romney’s work at Bain, the Romney campaign turned to Staples founder Tom Stenberg to mount a defense of the candidate.

Not all of Bain’s investments were such a clear success, of course. One Bain venture that has been the subject of media scrutiny in the New York Times and likely will be again if Romney is the nominee is Bain’s investment in a medical company called Dade International. The short version of the story, and one that Democrats will dwell on, is that Bain took over the company and embarked on a painful cost-cutting program. After laying off 1,700 people, Bain drove Dade into bankruptcy, all while squeezing the company for $242 million in fees. The full story, however, is more complex.

For starters, Dade already was going bankrupt when Bain took over the company in 1994. And while Bain did make job cuts – cuts that would have been inevitable given the company’s flagging financial fortunes – it also invested in it to the tune of nearly $27 million. It does appear that there were those at Bain who preferred to flip Dade for a quick profit rather than putting it on sound financial footing, but that course was vetoed by none other than Romney, who wanted to see the company genuinely turned around.

Which it was. Between 1995 and 1998, according to the Times, Dade’s annual sales surged from $614 million to $1.3 billion, while its assets grew from $551 million to $1.5 billion. To be sure, by taking out millions in profits, Bain also saddled the company with long-term debt that ultimately drove it into bankruptcy. Many of those fired during the bankruptcy process complained about Bain’s profiteering. But there is still more to the story. Bankruptcy turned out to be beneficial for Dade. It allowed the company to restructure its finances and emerge a more efficient enterprise. In 2007, the German conglomerate Siemens bought Dade for $7 billion. The name was changed but the company endured.

This is not to say that Bain’s business decisions benefited everyone. The goal of most businesses, including private equity, is to maximize its profits. That means cutting costs and, sometimes, jobs. Though Romney contends that Bain Capital created more jobs than it eliminated, that would have been little consolation to those who lost their jobs through no fault of their own. But as Democrats gear up to demagogue the reality of the private sector, where businesses rise and fall, it is worth remembering that many of the layoffs for which Romney is being blamed would have happened regardless, and that, without Bain’s intervention, many struggling companies never would have recovered.  At a time of lagging economic growth, the kind of market-driven wealth and job creation that Bain Capital oversaw should be commended, not condemned.

Whatever one’s view of Bain Capital’s individual acquisitions, the fact remains that private investors are far better suited than government bureaucrats to assess the risk of a business venture (see: failed solar panel manufacturer Solyndra). What’s more, their investments are typically made with private capital rather than taxpayer dollars. Taxpayers were not forced to shoulder the cost of Bain’s failed investments. The same cannot be said of failed government job creation schemes like the $787 billion stimulus package.

Democrats – and, apparently, Newt Gingrich – believe that they’ve found a winning issue in Romney’s involvement with Bain Capital. But as voters search for a candidate to lift the country from its economic malaise, they may well take a more charitable view of Romney’s role in a company that has managed what the current occupant of the White House has not: bolster businesses and create jobs.

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