Washington – Who are the dastardly enemies of free enterprise who decided to make an issue of Mitt Romney’s tenure at the private-equity firm Bain Capital? Er, those would be his fellow Republicans.
Listen to what Newt Gingrich said in January: “The Bain model is to go in at a very low price, borrow an immense amount of money, pay Bain an immense amount of money and leave. I’ll let you decide if that’s really good capitalism. I think that’s exploitation.”
Or what Rick Perry said that same month: “There is something inherently wrong when getting rich off failure and sticking it to someone else is how you do your business. I happen to think that that is indefensible.”
When Democrats say things like that, they’re accused of being Bolsheviks who want to destroy capitalism. But even in the context of the GOP primary battle, where “moderate” was the ultimate epithet, Romney’s actions at Bain were seen as raising a legitimate and important question: Shouldn’t free markets serve the American people, rather than the other way around?
President Obama is right to raise this issue now. I wish he had done so during the debate on financial regulatory reform — only now is he posing the kind of fundamental questions that needed to be asked — but better late than never. In his defense, a tough re-election campaign does tend to concentrate the mind.
There’s nothing inherently wrong with private equity, which plays an important role in the economy. And, of course, there’s nothing wrong with wealth; those who risk their capital in private-equity ventures should be rewarded when those deals pay off. No one begrudges Romney his offshore investment accounts, his mansions or his wife’s Cadillacs.
But as Romney himself acknowledges, free markets need rules and regulations in order to function. Some kinds of dealings are prohibited or even criminalized — insider trading, for example, because of the way it benefits a select few at the expense of other investors.
It is reasonable to ask whether some highly leveraged buyout deals, of the kind that Bain and other private-equity firms often conduct, should fall into the same thumb-on-the-scale category as insider trading.
Suppose a company is failing and appears beyond rescue. Suppose a private-equity firm buys the company with borrowed money, burdens it with more debt, and then spends the next few years firing workers, selling assets, eliminating pension plans — all the while collecting handsome “management fees.” Then the company fails anyway, as it was fated to do.
What higher economic purpose has been served? Why is this not what Perry memorably called “vulture capitalism”?
The discussion we should be having goes far beyond the relatively small world of private equity. Look at the mounting losses as the nation’s largest and supposedly best-run bank, JPMorgan Chase — at least $2 billion and perhaps much more.
The transactions that produced the losses are numbingly complex, but essentially they involved betting both ways on the direction of various economic and business indicators. The idea was to balance the bets so that if the bank’s predictions were right it would make a lot of money; and if the predictions were wrong it would lose money, but not so much.
The bank got on a winning streak, and so it made bigger and bigger bets. Then the bank’s luck turned south, and Chairman Jamie Dimon discovered that the betting positions were unbalanced; instead of losing a little money, the bank was set up to lose a lot. Sharp-eyed traders at hedge funds noticed what was happening and jumped in to take advantage of a big spender on the skids.
That’s a classic Las Vegas story, but why should it be a Wall Street story? Should a bank whose deposits are federally insured — a bank big enough to crash the financial system — be standing at a craps table in the middle of the night yelling, “Baby needs a new pair of shoes”?
This is what Rick Santorum said in March: “I heard Governor Romney here called me an economic lightweight because I wasn’t a Wall Street financier like he was. Do you really believe this country wants to elect a Wall Street financier as the president of the United States? Do you think that’s the kind of experience we need? Someone who’s going to take and look after, as he did, his friends on Wall Street and bail them out at the expense of Main Street America?”
Good question. I’d like to hear Romney’s answer.
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