Thursday, August 30, 2012

The Bain Bailout? Not Quite



I know nobody will actually bother to read the Rolling Stone article this hit piece in Salon is based on, but they should.  Did Bain Capital and by extension Mitt Romney receive a government bailout?  Did Bain receive any money from taxpayers?

The answer is a simple NO.

First,the company in question is not Bain Capital, but Bain and Company.  Second, Romney was brought in after Bill Bain and other investors drained all the money out of the little company.
The trouble began in 1984, when Bain & Company spun off Bain Capital to engage in leveraged buyouts and put Romney in charge of the new operation. To free up money to invest in the new business, founder Bill Bain and his partners cashed out much of their stock in the consulting firm – leaving it saddled with about $200 million in debt. (Romney, though not a founder, reportedly profited from the deal.) "People will tell you that Bill raped the place clean, was greedy, didn't know when to stop," a former Bain consultant later conceded. "Did they take too much out of the firm? You bet."
The company was left with loans with 4 banks.  Meaning, Bain and Company already received the money.  Bain and Company would have been able to pay them back but Bill Bain took all the money.
Romney moved decisively, and his early efforts appeared promising. He persuaded the founders to return $25 million of the cash they had raided from Bain & Company and forgive $75 million in debt, in return for protection from most future liabilities. Romney then consolidated Bain's massive debts into a single, binding loan agreement with four banks, which received liens on Bain's assets and agreed to delay repayments on the firm's debts for two years. 
So Romney negotiated repayments.  The fact the FDIC came in and took over one of those banks means nothing but that bank was poorly managed otherwise the FDIC wouldn't have had to take control.  The FDIC nor the government gave one red cent to Bain or Romney.  Quite the contrary, the FDIC got all the assets of the bank for free.  One of those assets was the Bain and Company loan.

Yes, they forgave $10 million of that loan, but Bain and Company also paid them $14 million, $14 million the government never gave them.  In other words, the government profited.  They were able to earn money on a loan they never made.

Doesn't sound like such a bad deal.

I also love the bits trying to blame Romney for the portions of the loan that guaranteed competitive bonuses.  The 4 banks negotiated with Romney at any point any one of them could have said no to that provision.  They found it acceptable.  But yes, let's blame Romney.
The federal government also signed off on the deal, since the FDIC had recently taken control of a bank that was owed $30.6 million by Bain.  Romney assured creditors that the restructuring would enable Bain to "operate normally, compensate its professionals competitively" and, ultimately, pay off its debts.
Did Romney have connections within the FDIC?  It's possible if you want to play six degrees of separation and assume Romney knew every person that worked on his father's presidential campaign, but even then how do you explain the other three banks willingness to sign on to the deal?

If anything, this story reinforces how great a problem solver Romney really is.  He saved a company left destitute by its former management.

Let's also not forget the employees at Bain and Company pay taxes, and thanks to Romney continue to pay taxes to this day.  Something tells me, even if you make the leap that forgiving $10 million in debt they never loaned by the FDIC equals a government bailout, the tax revenues that decision has netted far exceeds its cost.

Meanwhile, let's look at Obama public equity record... you know Solyndra and the other dozen companies that received billions of taxpayer dollars and went out of business.

13 comments:

Anonymous said...

I'm no. The FDIC was into Bain & Co. for $20 million not 10. And Mitt stepped in to negotiate either the bankruptcy or restructuring, but in doing so he first threatened to raid the company for senior executives (like himself), then actually carried out that threat (making a bunch of money but endangering the jobs of company workers) forcing the FDIC to make a choice between losing $6 million or $16 million if the company defaulted.
That's how they do on Wall Street.
Mitt and the execs who'd not demonstrated anything worthy of bonuses on their base salary, basically made sure they got those bonuses, even at the FDIC and general investor's expense and left the FDIC to either take the loss those bonuses represented or take a bigger one that would've been Bain's bankruptcy.

theKansasCitian said...

You have very poor reading comprehension, skills my friend. And also apparently a deep lack of understanding of how FDIC bank takeovers work.

FYI, it takes both parties to negotiate, Bain could not dictate terms in the original deal with the 4 banks. The banks could have liquidated Bain then before the bonus clause was ever agreed to. The bonus clause was to ensure Bain did not lose any of their top talent as a result of fear the banks would liquidate it. It wasn't about greed of Romney or Bain, it was about ensuring the viability of the company.

In any case, the government nor the FDIC ever paid out one dime to Bain. And on all those bonuses and future bonuses the federal government received income tax revenue... infact, they still are taxing that original revenue through capital gains taxes on Romney's investments from those original paychecks and bonuses.

Anonymous said...

First, nice ad hominem opening, the standard first response of those who are outgunned or wrong. Second, your response is pure fatuous BS, just rhetorical smoke and mirrors: you claim greater knowledge without having it or without it actually being significant to the argument.
Also, my bad, the FDIC was into Bain for $30.6 million.
Anyone who wants to know more can read the RS piece.

theKansasCitian said...

Ad hominem? Seriously you need to do a better job of verifying what you read. You basic lack of understanding about how contract negotiations and FDIC insurance works is alarming.

NPR has a really nice piece on the process. You really should read it.
http://www.npr.org/templates/story/story.php?storyId=102384657

The FDIC never gave one penny to Bain and Company or Mitt Romney. They acquired a note payable for the company when they seized one of the four bank's assets that had previously loaned money to Bain, while it was owned and operated by Bill Bain.

As Rolling Stone clearly states, Bill Bain and other original investors drained the company of all its cash when they left, leaving it impossible for them to pay the debt owed through four separate loans to four separate banks.

I can't say this enough, the FDIC never paid Bain a penny. Instead, they, like the other three banks, new Bain was going to go bankrupt if they didn't restructure their loans. So they negotiated a restructure. They NEGOTIATED the terms. At any point the FDIC or anyone of the three banks could have rejected the portion about bonuses to Bain's employees. They didn't, not because Romney has six degrees of separation to the FDIC chairman, but because those three banks knew that for Bain to be successful and to be able to continue to pay back the loan they needed their top employees to bring in new business and retain old.

Quite clearly Rolling Stone defines the number at $10 million in forgiven debt. If you can't read, that is your problem.

Anyone else is free to click through the link provided and see for themselves instead of relying on your uninformed propaganda propagation.

theKansasCitian said...

"The FDIC agreed to accept nearly $5 million in cash to retire $15 million in Bain's debt – an immediate government bailout of $10 million."

I've already told you the fallacy of that being a bailout, debt for which no money was ever given by the FDIC is not really debt. So, in essence the original bank was forced out of business losing all its assets, the FDIC gained a bunch of the bank's assets for free, and received an additional $5 million from Bain in order to forgive $15 million in debt that was owed to the original bank. A benefit to Bain of $10 million and a benefit to the FDIC of $5 million.

It's what those with a brain would call a win-win, not a bailout. In addition to both entities benefiting, Bain remained in business, now employees over 1000 people and continues to pay federal income taxes along with their 1000+ employees.

So, please tell me again how the government lost taxpayer money?

Read more: http://www.rollingstone.com/politics/news/the-federal-bailout-that-saved-mitt-romney-20120829#ixzz258vBEfvS"

theKansasCitian said...

Here's more for you to get educated on the FDIC receivership process:

http://www.fdic.gov/bank/historical/reshandbook/ch7recvr.pdf

Dx said...

Sure, the FDIC didn't pay out one dime to FDIC, that's because Bain got the cash earlier on a $30M loan.

The FDIC got all the assets of the bank for "free", but also got all the liabilities for "free" as well. The FDIC can take over a bank when it gets down to cash assets of 6% of its liabilities.

Maybe the FDIC got 14M on the asset, but it wrote down Bain's 30M IOU to get it. Who the FDIC paid its money out to were the other depositors who didn't get paid back by Bain.

The FDIC covered the difference between what Bain promised to pay the bank and what the bank owed its depositors.

Bain won, but the FDIC-insured bank lost, and the FDIC lost in that it had to cover 30M worth banks depositors using 15M from Bain and 15M from its own resources.

If you don't know how we pay for the FDIC, it is that the FDIC charges the banks for its insurance, and the banks pass that cost it on to the customers. Why do CDs pay 2.5% than mortgages? Partially to pay for 15M$ writedowns on bad debt.

Anonymous said...

Kansas,

The issue here is that Romney has touted his "management skills" as a chief qualification for his presidency. After his first "rescue plan" failed, he then put the squeeze on his creditors by threatening to bleed the company of it's cash assets by paying out executive bonuses to any VP level or higher making over $200k per year. When the banks balked--they were contemplating forcing liquidation through court action--he began doing so. Creditors had no choice...unless they accepted his demand that Bain and Cos debt be slashed to 0.35 on the dollar, they would have nothing left to collect. This was the position that the FDIC made clear in the documents. They were screwed.

Now, you could call this shrewd negotiating. Of course it also suggests that Romney was willing to screw Bains creditors and it's employees in an attempt to avery a managed bankruptcy, which would have hurt Bains reputation and killed his future political aspirations. And this from the man who wanted Detroit to go bankrupt.

If you're okay with those kind of business ethics, fine. But please stop moralizing on every social issue that comes along. Remember, you can't serve God and mammon.


So, in other words, whe

Anonymous said...

Great job, thank you for bringing light to this hit piece. America needs more factual journalists like you. Once again the left wing media has no shame, distortion and lies are thier norm.

theKansasCitian said...

Dx, as you noted the bank that was eventually taken over paid premiums to the FDIC for insurance. Healthy banks do the same. This money is pooled and meant to cover any failed banks, so no tax payer money is every used. Second, you have zero proof the FDIC had any negative cash flow from the takeover. Yes, they had to cover deposits, but those deposits likely were significantly less than debts owed the bank. As you admitted, the original private bank lost, they also lost everything else thanks to the government seizure, which only compounded the loss of the stakeholders.

Anon, how do you not see this negotiation as a great example of management prowess? He saved the company, saved a 1,000 jobs, and made the company more solvent by reducing its liabilities. In addition, he kept tax revenues from Bain and its employees flowing to the federal government. Please, tell me you wouldn't be thrilled if Romney got China to forgive the $6 trillion in debt Obama has wrung up during his tenure?

Dx said...

The FDIC is a federal government program. Bain borrowed 30M from the bank, and, due to the largess of the FDIC government program, only had to pay back 15M on that loan. If the FDIC wanted, it could have forced the insolvent Bain into bankruptcy. Numerically, writing off a 30M$ loan for 15M$ it is the same as giving Bain a 15M$ bailout check to put with its 15M$ so it could buy back the note that would bankrupt it.

Sure, I admit that the original private bank lost: It made bad deals like loaning 30M to folks who would/could only pay back 15M. If it made many deals like that, it would explain its takeover by FDIC.

Banks count debts owed to the bank as assets, and deposits into the bank as liabilities they need to cover. If their liabilities were significantly less than their assets, they wouldn't have been taken over. The bank was bankrupt, so the bank's equity was near enough to negative that its stakeholders/stockholders should count it as a big loss. Bad management decisions earn losses.

I'm not sure who you think is claiming that federal income tax or whatever bailed out Bain, but from the articles cited, it is clear that the FDIC did bail out Bain. The government FDIC program double-plus-un-profited by the difference between the 15M writedown and the stinky 30M asset that was Bain's promise to pay.

theKansasCitian said...

Dx,

Do you not understand what a government bailout is?

The bank bailout was when the government gave $800b of taxpayer money to the big investment banks. The auto bailout was when they did the same for GM and Chrysler. The solyndra and green energy bailouts was when they did the same.

With the FDIC issue there was not one dime of tax payer money given to Bain. If anyone received a bailout it was the bank that was seized. However, since they paid insurance for that protection it isn't a bailout either, it was payout on an insurance policy no different than if you file a claim with your health or auto or home owners after you suffer damage to your property.

The federal government did not layout one penny for Bain, instead they collected $5m and insured the company remained in business and continued paying its income taxes to the government and its employees paying theirs. The government came out the winner and Bain came out the winner. The FDIC and 3 private banks negotiated with Bain the terms of the right down. This is no different then consumers who can do the same with their credit card or mortgage companies, it just happened to be on a larger scale. As you said, Bain could have just declared bankruptcy chapter 11, wrote off the debt, and kept on operating. Instead they chose to operate in good faith and pay back what they could afford after the original owner took all the cash out of the business.

That's a damn good job of management by Romney. He took a company on the brink and saved it and the jobs of its 1000 employees and tens of thousands of jobs the company helped save through helping other businesses remain solvent.

Anonymous said...

The author of this article is a hack. If I take over your business, I take over your debts and they are owed to me!!

Bain profited on the renegotiated deals in the 1st place with the original banks. When the FDIC took over, they got $10 mil less than was due as a way to at least get something.

It was Mitt's rear on the line whether he "inherited it" or not. He didn't say let them go bankrupt like he did with GM. Instead he begged to renegotiate and the banks agreed so they would get something instead of nothing and so did the FDIC. Mitt was paid well and his partners left with millions as well.

Are we going to not give him credit for inheriting a mess like Obama did from Bush??? Plus Mitt was already an exec at the company and was part of the problem.