Thanks to reader Henry, I learned about this article by James Surowiecki in the New Yorker that explains how private equity firms like Bain Capital (where Romney made his fortune) make their money. It is not pretty.
Private equity firms use a small amount of their own money and the rest from private investors and loans to purchase troubled companies. It used to be the case that whether the private equity firm made money depended on whether the troubled companies they purchased could be made successful. But within the last decade or so, the use of tax loopholes resulted in that becoming less material, at least as far as companies like Bain were concerned. By borrowing huge amounts of money and paying themselves exorbitant ‘management fees’ and ‘special dividends’, private equity companies like Bain made a bundle even as the companies they took over struggled and sometimes sank under the mountainous debt.
We have to thank Romney’s candidacy for bringing the workings of private equity companies into the spotlight. As Surowiecki says:
At this point, the people who run America’s private-equity funds must be ruing the day Mitt Romney decided to run for President. His fellow Republican candidates, of all people, have painted a vivid picture of private-equity firms—including Bain Capital, where he worked for fifteen years—as job-destroying vultures, who scavenge the meat from American companies and leave their carcasses by the side of the road. Not since the days of “Wall Street” and “Barbarians at the Gate” have the masters of leveraged buyouts looked quite so bad.
Rick Perry’s characterization of Romney as a ‘vulture capitalist’ may be the one contribution his ill-fated candidacy made to politics.
So thanks Mitt and Rick, for enabling the excellent phrase ‘vulture capitalist’ to enter into the political discourse.