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The content of what follows is based on the works and experience of David Stockman as reported by Newsweek, 22 Oct 2012 issue; THINK PROGRESS website [], and The Daily Beast. Stockman’s book will be published in Mar 2013 and will bear the title: How Capitalism Corrupts Free Markets and Democracy. It could also be called The Romney modus operandi. It is all about Bain Capital. Stockman was Reagan’s director of the Office of Management and Budget and as such was the prime mover of Reagan’s fiscal policy. Stockman also comes with experience in private equity, the niche also occupied by Bain Capital. If there is an inside/outside expert around on how capitalism really works, Stockman is that person. As a Republican renegade, he could have an ax to grind, but in searching for what it might be, we cannot fault his historical accuracy, and that is what counts.

From Newsweek: “Romney’s record is actually all about the utter unfairness of windfall riches obtained under our anti-free-market regime of bubble finance.”

Quoting from ThinkProgress

“Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.” [Emphasis Stockman]

“After 1985, the Republican Party adopted the idea that tax cuts can solve the whole problem, and that therefore in the future, deficits didn’t matter and tax cuts would be the solution of first, second, and third resort,”

Tax cuts became the Republican mantra after its 1985 convention. 27 years later, the only people tax cuts have benefited are the one percent. Never mind that the rest of us could well end up in bankruptcy. By 1985, America was the greatest of nations whose future was beyond doubt. Tax cuts and the bubble economies, dot com and housing gave the rich their greatest-ever of windfalls. Boosting that mentality, relaxation of regulations brought on big time corruption and the concept of Too Big to Fail which is certainly true enough. But by privatizing profit and socializing failure, it was grossly unfair by punishing the innocent doers to the benefit of the takers. In nature, such creatures are known as blood suckers—the lamprey being just one example of thousands. Stockman broke away from Republican doctrine. George Bush’s financially extravagant tax-cutting behavior in office alienated Stockman. It was the wrong thing to do and now, we all are, soon will be, paying for it.

From Thinkprogress again:

– We need ”a higher tax burden on the upper income.”

– “After 1985, the Republican Party adopted the idea that tax cuts can solve the whole problem, and that therefore in the future, deficits didn’t matter and tax cuts would be the solution of first, second, and third resort.”

– The 2001 Bush tax cut “was totally not needed.”

– On claims that Reagan proved tax cuts lead to higher government revenues: “Reagan proved nothing of the kind and yet that became the mantra and it just led the Republican Party away from its traditional sound money, fiscal restraint.”

– Former Vice President Cheney “should have known better” than claim the Bush tax cuts would pay for themselves.

I’ll never forgive the Bush administration and Paulson for basically destroying the last vestige of fiscal responsibility that we had in the Republican Party. After that, I don’t know how we ever make the tough choices.”

The Daily Beast lists some of Stockman’s questions for Mitt Romney.

One example is American Pad and Paper. Bain Capital invested a mere $5 million in 1992, then loaded it with debt at the purchase and through acquisitions. Four years later, Bain pulled out of the company without making it viable. In fact, it was so in debt that it went bankrupt in 1999. But Bain had made $100 million on the financial dealing.

Wasn’t American Pad [A Bain capital “roll over”] and others just an exercise in cash stripping that could not occur in an honest free market where the central bank was not in the tank for Wall Street?

Bain invested $10 million in 1988 then borrowed $300 million to buy about 300 small Main Street stores. The year before, it had borrowed $300 million to buy a 250-store chain of family-clothing stores. The acquisitions formed a combined operation dubbed Stage Store. When Bain unloaded its shares in the parent company for a profit of $100 million. Stage Stores was so loaded with debt it had to file for bankruptcy

QUESTION: Bain Capital says the company “grew for years” under your stewardship. But isn’t it true that the growth came from inflated inventory and vastly overstated assets? Wasn’t the growth—as with Stage Stores—actually the result of financial engineering games you played from the very beginning?

In September 1996, Bain Capital invested $88 million in equity in a consumer credit company called Experian and sold it to a British conglomerate seven weeks later for $1.7 billion, producing $600 million profit for investors, and a spectacular $165 million windfall for Bain.

QUESTION: How does that kind of quick-flip gambling represent building a business and creating jobs?

ITALIAN YELLOW PAGES In late 1997, Bain invested $17 million for less than 10 percent of the stock of the Italian yellow pages company. About 30 months later, Bain took out a profit of $375 million—or 22 times its investment. This was Bain’s largest profit during your tenure.

QUESTION: How do you explain such gigantic profits from a phone book in so little time, and what does that have to do with your alleged experience as a builder of businesses and creator of jobs?

Daily Beast [During the second Presidential debate] Romney ducked equal pay and told an elaborate, off-point story about appointing women to his Massachusetts Cabinet. It was, of course, inaccurate. He pointed proudly to his “binder” containing women’s resumes. It wasn’t compiled by him or his staff; it was apparently a nonpartisan document handed to him in the days after the election. The reference—and the evasion—spoke volumes about his condescending attitude toward women. [For the lowdown on his governorship, see Wikipedia.

NEWSWEEK makes crystal clear how Bain did what it did. The details amount to corruption of the highest order at the highest levels of society. There are also wider issues that affect us all that Newsweek makes apparent.

THE GREAT DEFORMER [Title of Stockman’s book, due out in March 2013.]


Direct and contextual quotes:

1992: Bain invests $5 million in American Pad and paper (AMPAD).

1994: Bain launches a spree of acquisitions of other office-supply companies for Ampad. Ampad acquires Williamshouse, an envelope manufacturer, for $300 million, assuming its $150 million debt.

1996: With Ampad’s IPO launch, Bain’s control of the company ends, though it continues to hold a large share in the company. Bain's profit is $100 million.

1999-2000: Loaded with debt from its acquisitions, Ampad goes bankrupt.

What Bain said: “Our control of Ampad ended in 1996, fully four years before it encountered financial difficulties due to overwhelming pressures from ‘big box’ retailers, declines in paper demand and intense foreign pressures.

Bain’s acquisition of Wesley-Jessen was similar and Bain reaped a $300 million profit. As late as …”2012, the company has not yet earned back its capital costs.” Stage Stores was a third example. Bain made a profit of $175 million when it unloaded its shares. Two years later with plummeting sales, it went bankrupt.

Romney headed Bain Capital from 1984 through early 1999. During his tenure, “…Bain could purchase the pots and pans and castoffs of Corporate America, leverage them to the hilt, gussy then up as reborn ‘roll-ups’ and then deliver then back to Wall Street for resale—the faster the better.”

“This was the modus operandi of the leveraged buyout [LBO] business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central banks purposefully enables rampant speculation by propping up the price of financial assets, and battering down the cost of leveraged finance.”

Thus it is that mere politicians pave the way for outright corruption. It is not about job creation. Neither do LBOs create capital, as the true entrepreneurs know it, through their own blood, sweat and tears along with risk. Growth through acquisition is not growth for the economy; it is corralling capital already out there. On the jobs front it is, if anything, a net negative. Stockman would agree. Newsweek goes on:

“The lesson is that LBOs are just another legal (and risky) way for speculators to make money, but they are dangerous because when they fail, they leave needless economic disruption and job losses in their wake.”

Continuing, Newsweek concludes: “The Romney campaign’s feckless narrative that private equity generates real economic efficiency and social wealth is dead wrong.”

This may not be surprising in a psychological way—projection. Projection is a hang-up most of us have. We can only view the world via our own experience with it. If one has only seen corruption, corruption becomes his/her own view of the world. Saints and sinners alike share this hang-up. In this case, Romney sees the world as just one vast LBO where laws are written to favor the rich. His view of the President’s job can only be similar. Romney must be salivating at the possibility that he could inherit a growing economy. As a past master at manipulating LBOs, Romney surely believes he could do likewise with the US in competition with the world! With all the downsides, do we really want to be part of such a venture? Lord Acton wrote: “Absolute power corrupts absolutely.” Is corruption what we want in the White House? There is more:

Blackstone [a Bain competitor] accused of siphoning $2.1 billion in LBO.

* Lawsuit alleges value stripped in sale of Extended Stay
* $6.3 billion in punitive damages sought

The private equity giants Blackstone Group and Kohlberg Kravis Roberts are longtime rivals that compete for multibillion-dollar deals. But during the last decade’s buyout boom, according to newly released e-mails in a civil lawsuit accusing them of collusion, the two firms appeared to be on much cozier terms.

Excerpts from NY Times 1 Sept 2012

Inquiry on Tax Strategy Adds to Scrutiny of Finance Firms


The New York attorney general is investigating whether some of the nation’s biggest private equity firms have abused a tax strategy in order to slice hundreds of millions of dollars from their tax bills, according to executives with direct knowledge of the inquiry.

The attorney general, Eric T. Schneiderman, has in recent weeks subpoenaed more than a dozen firms seeking documents that would reveal whether they converted certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.

Among the firms to receive subpoenas are Kohlberg Kravis Roberts & Company, TPG Capital,

Sun Capital Partners, Apollo Global Management, Silver Lake Partners and Bain Capital, which was founded by Mitt Romney, the Republican nominee for president. Representatives for the firms declined to comment on the inquiry.

Mr. Schneiderman’s investigation will intensify scrutiny of an industry already bruised by the campaign season, as President Obama and the Democrats have sought to depict Mr. Romney through his long career in private equity as a businessman who dismantled companies and laid off workers while amassing a personal fortune estimated at $250 million.

Some executives at the firms said they feared that Mr. Schneiderman, a first-term Democrat with ties to the Obama administration, was seeking to embarrass the industry because of Mr. Romney’s roots at Bain. Others suggested that the subpoenas, which were issued by the attorney general’s Taxpayer Protection Bureau, might be part of an effort to recover more revenue for New York under state tax law. The attorney general’s office does not have the power to enforce federal tax laws.


The subpoenas, which executives said were issued in July, predated the leak of the Bain documents by several weeks and do not appear to be connected with them. Mr. Schneiderman, who is also co-chairman of a mortgage fraud task force appointed by Mr. Obama, has made cracking down on large-scale tax evasion a priority of his first term.

As a retired partner, Mr. Romney continues to receive profits from Bain Capital and has had investments in some of the funds that documents show used the tax strategy.

The campaign issued a statement saying that Mr. Romney did not, however, benefit from the practice. “Investing fee income is a common, accepted and totally legal practice,” said R. Bradford Malt, a lawyer for Mr. Romney who manages his family’s investments and trusts. “However, Governor Romney’s retirement agreement did not give the blind trust or him the right to do this, and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital.”


The tax strategy used by Bain and other firms to convert management fees — the compensation normally taxed as ordinary income — into capital gains is known as a “management fee waiver.” The strategy is widely used within the industry: 40 percent of the 35 buyout firms based in the United States surveyed in 2009 by Dow Jones said their partners used at least some of the firm’s fees to make investments in their funds.

Apollo Global Management, the buyout firm co-founded by Leon Black and now publicly traded, is among those that use the conversion strategy. Between 2007 and 2011, Apollo converted more than $131 million in fees into investments in its funds, according to S.E.C. filings. A spokesman for the firm declined to comment.

Likewise, K.K.R. converted more than $180 million in fees between 2007 and 2009, according to its filings. Kristi Huller, a spokeswoman for the firm, declined to comment about any regulatory matter, but said in an e-mail that K.K.R. had not used the tax strategy “for the past few years.”

Other firms that received subpoenas include Clayton, Dubilier & Rice; Crestview Partners; H.I.G. Capital; Vestar Capital Partners; and Providence Equity Partners. Representatives for all these firms declined to comment.


In 2007, the agency [IRS] began taking a closer look at suspected tax abuses at hedge funds and private equity firms. In a statement at the time, an I.R.S. spokesman said that management fee conversions were among several “areas of possible noncompliance.” But no formal ruling appears to have emerged.

Mr. Schneiderman is also looking at whether private equity executives treated management fees as a return of invested capital — potentially escaping taxation entirely — or deferred payouts of the converted fees in ways that improperly reduced their tax liabilities.

The leaked documents show that Bain has in recent years waived management fees in at least eight private equity and other funds, including one formed as early as January 2002. The documents stated that Bain executives had the right to decide either annually or each quarter whether to waive some or all of their management fees; they also had the ability to convert the waived fees into investments in particular companies held by the funds.

Victor Fleischer, a law professor and finance expert at the University of Colorado who has been critical of the tax rules for private equity firms, said he believed Bain had waived management fees into investments with so little risk that the arrangement would not qualify for the capital gains rate if challenged by the I.R.S.

“There is a tension between economic risk and tax risk that is supposed to be inversely proportional,” Mr. Fleischer said. “The way Bain set it up there’s not much risk at all, so it’s hard to see how this income should receive capital gains treatment.”

Michael Luo contributed reporting.

There is so much more to all that we encourage everyone who cares about their future to read the Newsweek article and visit links listed above.


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