I just finished reading an interesting article and I think you owe it to yourself to read it too. It’s titled: “Greed and Debt: The True Story of Mitt Romney and Bain Capital” by Matt Taibbai, and appears in the latest issue of Rolling Stone Magazine. Here’s the link if you would like to read it online:
http://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829#ixzz26Go2IfOK
I’ve often mentioned my love for our cultural history, as well as the importance of understanding the past so that we may improve upon the results for our collective benefit in the future. One period of American history that has always fascinated me was the time in the mid to late-19th and early-20th century known as “The Gilded Age.” It was a time when industrialization took over the nation’s economy. Railroads, factories, and businesses flourished during this time and a new ruling class emerged: we named them “Robber Barons.” Like royalty of old, these men accumulated huge personal fortunes and built palatial mansions for themselves. Many of their homes are now tourist destinations, owned by historic trust organizations, because for years after the end of the Gilded Age, no one could afford to maintain such homes on their own. My own community has such as place, known as Stan Hywet Hall and located in Akron, Ohio. Built late in the age (1916), it was for years the home of the Seiberling Family, founders of Goodyear Tire & Rubber Company as well as the Seiberling Rubber Company. A member of the family still lived in the gatehouse on the property when I first visited the property on a school field trip in the 1960’s. Originally built on about 3,000 acres, the 65 room main Manor House was quite impressive, and much more than one family really needed.
Of course the Robber Barons got a much earlier start. In the mid-1800’s, Cornelius Vanderbilt started out in the new field of steamships and eventually moved into railroads to amass what was at the time the world’s greatest private fortune. Men like Jay Gould and James Fisk made money in railroads and stock speculation, John Rockefeller cornered the market in oil, Andrew Carnegie built the world’s largest steel works. These men were both revered and reviled in our history. The accumulation of such wealth usually does bring out detractors, since it usually requires some ruthless acts on the part of the mogul in order to become tops in a chosen endeavor. In the case of the Gilded Age Robber Barons workers were exploited, worked to destruction or death and cast aside without aid. Financial markets were manipulated, often crushing smaller investors along the way. In the end, facing the cold eye of history, guilt caused many of these men to establish philanthropical foundations to give away their tainted money to the less fortunate of the world.
It has been said that we are in the midst of a New Gilded Age with a new class of Robber Barons, and it’s probably true. However, one thing can be said for the Robber Barons of old that isn’t true of the modern version: for the most part, those guys actually built something. We have infrastructure like roads and railroads, oil refineries and factories, enterprises that actually employed people and added to the general wealth of all, even if it enriched the founder more than anyone. Now I am not opposed in theory to the rich reaping the rewards of their efforts. People like Steve Jobs and Bill Gates built massive companies based on their ideas and efforts, and leave behind useful items that make the world a more productive and enjoyable place. Such people are entitled to the fruits of their labors. However, many of today’s wealthy have taken a different route.
If you don’t understand the basic mechanics of the process known as a “leveraged buyout” there are many excellent reference sources on the subject, including the article mentioned above and videos on YouTube.com. In essence, an investor group buys a company using a little bit of its own money and lots of borrowed money. Then, several things can happen, like the investor group can actually make improvements to company’s management and operations, making it a more profitable enterprise then sell it based on the value added. Most such companies, like Mitt Romney’s Bain Capital, would like you to believe that’s what always happens. Truth is, that scenario is the exception rather than the rule, but it has happened.
Typically, after buying control of a company with largely borrowed funds, saddling the firm with a huge amount of excess debt, the LBO firm guts the company. Key employees are fired, assets are sold-off, and new, unwarranted management fees are charged to the company for the advice that will eventually destroy the company. Most of these firms are bankrupted, but not before the LBO company has recouped all of its investment plus a huge profit through the use of management fees. One such recent example that I witnessed up-close and personal is what happened to the company known as Hostess Brands.
Hostess Brands is the company that makes Wonder Bread and Hostess Twinkies, among many other products. It has gone bankrupt twice in recent history. How could a company that makes such ubiquitously popular products as white bread and cream-filled goodies possibly go bankrupt in our increasing obese American society you may ask? Give yourself an “A” if you answered Leveraged Buy Out. I listened to the tales of woe told by drivers that delivered these products to grocery stores over the past few years. Stories were told of benefits stripped from or denied to longtime, loyal employees. Mismanagement of pension funds took place. However, the top managers of the firm were handsomely rewarded all along for allowing the company to fail. Something is very wrong here. Shouldn’t this be a crime? Let’s make it one.
Our current tax laws allow LBOs to write-off interest on debt payments as a normal course of doing business, just as the interest on your home mortgage is tax-deductible. Unlike you, who own a home where you and your family can live when your mortgage is finally paid, the new Robber Barons of the LBOs are long gone. They’ve bankrupted and liquidated the company, destroying lives in the process, and weakening our economy too.
When I was studying real estate in college during the mid-70's, we used to judge any proposed project on both a before and after-tax basis. The analysis included the effects of the marginal tax rate of around 70% on proposed real estate investments. Because mortgage interest was tax deductible, and non-cash expenses like depreciation also lowered the income tax burden (real estate typically increased in value, although you were allowed to assume for tax purposes that it decreased in value-which the buildings do, but the land doesn't-really confusing if you haven't studied it.). Anyway, the result was that many projects that weren't feasible on a before tax basis became must do projects when income taxes were included in the equation. What resulted were some famous cases like the "see-through" office buildings in Texas and other places. They got their name because the buildings had no tenants, and therefore no interior office walls-you could see right through them. In one memorable case, the developer/owner of an empty skyscraper in Texas moved his home to the top floor of his empty high-rise office building, and then declared bankruptcy. Under Texas bankruptcy law, he was allowed to keep his personal residence (without paying his creditors), which in this case was a giant office building! Real estate tax laws changed significantly in 1986. I remember being very busy at the end of the year in '86 as a commercial appraiser. Tax laws for real estate were changed at that time for the benefit of the economy. We need to do the same thing with regard to Leveraged Buy Outs. They wreck the economy and shouldn't be allowed to happen.
Romney and his ilk like to talk about how they understand business, and their economic model will work for America. Do you really think so? While screaming about the evils of our nation’s increasing debt, they have used debt to enrich themselves. I believe the proper term is “hypocrisy.” There are those who argue for necessity of unharnessing American capitalism from the yolk of excessive regulations for the good of the country. History has shown us the results during the first Gilded Age, but I doubt if it can survive the results from the second one.
Most likely we need a Constitutional Amendment to stop this practice, and those are hard to get. Simple changes to the tax laws are possible, but unlikely in the current corporate controlled legislative bodies of our country. Actually, nothing is likely to happen unless we stop living in a dream world where everything will be OK if we just work hard and persevere as best we can, like our parents told us to do. They wouldn’t recognize the new business model as having anything to do with making the world a better place to live. You shouldn’t either. People who commit such acts of brutality should be labeled as financial terrorists and incarcerated for the overall good of society and our economy. Sure as hell they shouldn’t be asking us for our vote to allow one of them to become the leader of the free world.
“The seemingly religious flavor of Bain's culture smacks of the generally cultish ethos on Wall Street, in which all sorts of ethically questionable behaviors are justified as being necessary in service of the church of making money. Romney belongs to a true-believer subset within that cult, with a revolutionary's faith in the wisdom of the pure free market, in which destroying companies and sucking the value out of them for personal gain is part of the greater good, and governments should 'stand aside and allow the creative destruction inherent in the free economy.' "
- Matt Taibbai, from “Greed and Debt: The True Story of Mitt Romney and Bain Capital”
Cornelius Vanderbilt
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