Romney is worse than I thought!

I never thought much of Mitt Romney. He has always come across to me as an opportunist with no principles, and worst, a man who has embraced the worst excesses of the extreme Right.

But I, along with many others, including Cory Booker, the distinguished mayor of Newark, felt the attacks on Bain and Romney’s association with it, were misplaced. Booker said: 

“I’m not about to sit here and indict private equity... If you look at the totality of Bain Capital’s record, they’ve done a lot to support businesses — to grow businesses. And this to me, I’m very uncomfortable.”

I bought into this view when I published my commentary entitled "In Defense of Romney" and said:

But what Mitt Romney did at Bain Capital is quintessentially good, beneficial capitalism. It is the essence of “Creative Destruction” so ably described by Joseph Schumpeter, the conservative Austrian economist. See here. Its essence is that inefficient entities must be made efficient or be eliminated, and in the long run the economy as whole will benefit, and while some jobs may be lost in the process, in the long run more will be created.

Booker and I were right about “private equity“ but we ignored the fact that while private equity does, in many cases, practice, “Creative Destruction“ not all do, and it appears that Bain was and is one that was bent on rapacious behavior, getting profits out of “creative accounting“ and very little creative building.

This was driven home to me when I received an e-mail from a Republican former colleague of mine who became interested when one of the subjects of Bain’s creative plunder turned out to be a former subsidiary of our common former employer Schering-Plough Corporation, Wesley-Jessen. In his e-mail my colleague quoted from a recent Daily Beast article by David Stockman, Ronald Reagan’s Budget Director.

My colleague quoted from the article as follows:

Wesley-Jessen was a small specialist firm that did reasonably well in cosmetic eye-color lenses and toric lenses to correct astigmatism. In mid-1995, when Schering-Plough Corp. put it on the block, Bain Capital invested $6 million and reaped a $300 million profit for itself by 1999—making nearly 50X its investment in the same number of months. On an apples-to-apples basis, however, the company’s operating income rose by only 2X during the same period, by my calculations. The rest of the gain was due to massive leverage, the Greenspan bubble, and accounting moves that can fairly be called myopic. 

Bain employed a hoary old dodge—having its accountants write off every dime of plant, equipment, and intangible know-how, reassigning roughly $40 million to the inventory accounts, and then charging it to income in the immediate two or three quarters. This trick eliminated all future depreciation, thereby magically adding $14 million to the pro forma operating income on Wesley-Jessen’s $100 million of sales. Investors were promptly told to ignore the resulting losses, of course, since these inventory charges were “non-recurring”! In fact, savings from pre-deal “restructuring” actions by the seller, plus the accounting magic, generated $24 million of freshly minted “operating income” before Bain’s turnaround squad even showed up at the company’s headquarters. The alleged “turnaround” of Wesley-Jessen was thus largely an artifact of Bain’s PR machine.

In the fourth quarter of 1996, the company borrowed $70 million to acquire a competitor, Barnes-Hind, from Pilkington plc. Before the ink was dry on the merger contract, Bain filed an IPO prospectus. While Barnes-Hind had an operating loss of $17 million the year before the merger, its results for that period were improved by $23 million owing to Bain’s pro forma adjustments—creating the appearance of another dramatic turnaround. 

During the 12 months ending at the merger date, the combined companies had actually incurred a net loss of $27 million, but it vanished with the help of $50 million in pre-tax adjustments for merger accounting and prospective savings. So its pro forma earnings took on a decisively improved aura; it would have booked a $14 million profit, or about $0.73 per share.  

  

Not surprisingly, the stock market eagerly scooped up $45 million of new shares at $15, or 20X these gussied-up earnings, just in time for the Fed to begin a new round of goosing in March 1997. And that proved propitious for Bain. Almost to the day on which its 180-day IPO lockup expired, it sold its first batch of shares in a secondary offering in a now red-hot stock market at a red-hot price that was up 60 percent from the IPO. 

Wesley-Jessen had not then filed financial statements with even $1 of GAAP (generally accepted accounting principles) net income. But when Bain’s underwriters wired the proceeds in August 1997 the selling price was $23.50 per share. That’s 52X the $0.43 per share it had paid for the stock 25 months earlier. At the end of the day, massive leverage, fancy accounting, and bubble finance, not entrepreneurial prowess, were the source of Bain’s 50-bagger.

I urge the reader to read at least portions of the article because it is replete with other similar rapacious examples. See here.

One comment in the article particularly calls for quoting as follows:

...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.

There is more that no one seems to have focused on. We are constantly told that we must work hard and play by the book. But what about people like Romney? He may have worked hard while he was the head of Bain Capital, but he was there from 1983 to February 1999. For the past thirteen years he has not expended any effort on the firms behalf. He isn’t 65 so he is not entitled to a pension, but without working he received $3,012,775 in salary, $3,649,567 in dividends and another $6,810,176 in Capital Gains, for a total $13,709,606 in income. Not bad for not working.

But the tax code allows him to pay a tax of 15%. Poor Romney, he thinks it is too high.

But there is more that comes from Romney’s released tax return. G-d knows what may be in the hidden ones. The assumption is that he gave most of his charitable contribution to the Mormon Church. But in fact he gave substantial contributions to family trusts. $89,000 to one family trust. One of his charities was The Tyler Charitable Foundation, an anti-gay group. 

The following is a quote from a website whose URL I have lost. I state this to avoid being accused of plagiarism.

He donated Appreciated Low-Basis Stock to a Private Charitable Foundation. Mitt and Ann donated about $1.5 million appreciated low-basis stock (mostly stock in Domino’s Pizza Inc.) to their private charitable foundation (The Tyler Charitable Foundation). This donation provided Mitt and Ann with five interrelated tax benefits:

Legally Excluded 2010 Capital Gains. Mitt and Ann legally excluded from their 2010 capital gains income the appreciation in the value of their donated stock. This legally excluded capital gain must be added back to Mitt’s and Ann’s 2010 reported income to arrive at their total 2010 income. I note that this exclusion saved Mitt and Ann as much as $225,000 in income taxes, assuming that the donated stock was worth $1.5 million and had close to a zero tax basis (tax cost). I used the 15 percent long-term capital gains rate to compute the tax savings on $1.5 million of gain since that is the long-term capital gains rate for both the regular tax and the alternative minimum tax.

Deductions in Excess of Tax Basis. Mitt and Ann deducted the full value of the stock – even though it is likely that their tax basis in the stock was far LESS than the value of the stock at the time they donated it to their private charitable foundation.

Donation Offsets Highly Taxed Income/Computation of Tax Benefit. The $1.5 million charitable donation offsets income that otherwise would been taxed at the 28 percent maximum alternative minimum tax rate. The tax savings associated with the charitable contribution deduction is approximately $420,000, or 28 percent of $1.5 million. This tax savings is in addition to the approximately $225,000 in tax savings arising from legally excluding the $1.5 million gain from income. Thus, the total tax savings is $645,000, as follows:

Exclusion of Gain on Disposition of Stock    $225,000

Charitable Contribution Deduction            $420,000

Total Estimated Tax Savings                  $645,000

Delayed Contribution to Final Recipients. Mitt’s and Ann’s private charitable foundation contributed $648,500 to various charities, including $145,000 to the Church of Jesus Christ, Latter Day Saints. The foundation held the balance of the $1.5 cash contribution – over $800,000 – at the end of calendar year 2010. Thus, although Mitt and Ann received a charitable contribution deduction of $1.5 million, less than half of that money was contributed to final recipients by the end of calendar year 2010. In contrast, Americans who cannot afford to set up private foundations must complete their contributions to final recipients by the end of the calendar year to take their charitable contribution deductions.

Contributions to Final Recipients Equals Approximate Tax Savings. I note that the $648,500 in total grants made by Mitt’s private charitable foundation in 2010 approximately equals the estimated tax savings of $645,000.12

Foreign Tax Credit. About 8 percent (about $1.5 million) of Mitt’s and Ann’s income came from sources outside the United States. To avoid double taxation, Mitt and Ann received dollar-for-dollar reductions in their United States tax liability for income taxes paid to foreign countries. In 2010, Mitt and Ann used the foreign tax credit to reduce their income taxes on foreign income by $129,000. They did this (1) by paying $67,000 in income taxes to foreign countries in 2010 and (2) by utilizing $62,000 of unused foreign tax credit carryforwards from prior years.

END OF QUOTE

It appears to all be legal. But that is the disgrace. WHY IS IT LEGAL!!! WHY DOESN’T ROMNEY TALK ABOUT ELIMINATING THESE EXEMPTIONS! All we hear about is lowering tax rates. DOES ANYONE REALLY BELIEVE THAT HE WILL ADVOCATE ELIMINATING THESE WONDERFUL MEANS FOR ESCAPING TAXES? BUT HE HAS ALREADY MADE CLEAR THAT HE DOESN’T PROPOSE TO INCREASE CAPITAL GAINS TAXES AND DIVIDENDS, EXCEPT FOR LOW INCOME PEOPLE WHO RARELY HAVE THEM.

YES, WE HAVE PEOPLE WHO ESSENTIALLY DON’T PAY TAXES. BUT IT IS NOT THE POOR OR THE ELDERLY!!!

And worse of all, these ill-gotten-gains then start an aristocratic dynasty through inheritance tax laws, which not only allow most of the ill gotten gains to be passed on to their heirs for generation after generation, but even forgive the few capital gains taxes incurred by the decedent.