Curiouser and curiouser: The strange case of Mitt Romney’s finances

Every presidential election something occurs that dominates the news over an extended period that has nothing to do with any substantive issue that affects any of us directly but consumes so much media attention that people seem to talk of little else. This year that issue is turning out to be Mitt Romney’s tenure at Bain Capital and his objection to releasing his tax returns except for 2010, and for 2011 when they are completed. (It beats me why someone who must be paying an army of accountants to do his returns still needs an extension to file.)

The issue with Bain Capital, the company that Romney founded and ran, is easier to understand. Many of the controversial off-shoring measures that it took that laid off many workers occurred in the years 1999-2002. Although the SEC filings for those years state that he was the sole owner and CEO for that period, Romney claims that he had nothing to do with the running of the company during that period because he was so busy preparing for the 2002 Salt Lake City Winter Olympics. But does that mean the SEC filings he filed were false and that he thus committed a felony?

Apart from the legal issue, I find it hard to believe that he had nothing to do with the company’s major decisions, however busy he was with the Olympics. These high-powered corporate types are used to keeping an eye on things and signing off on major decisions while not being involved in the day-to-day operations. I find it unbelievable that Romney would let major decisions be made without his input by the company he created and owned and was responsible for, and was still officially the head.

When it comes to his tax returns, Romney is on even weaker ground. He cannot take a principled position and say that his tax returns are a private matter, like his health records or his underwear, and should be off-limits. That option is gone because he has already released one year’s worth and said he would release those for another year. He also apparently gave 23 years worth of his tax returns to the McCain camp when they were vetting him in 2008 for the vice president’s slot. Not doing so now makes it look as if he has something to hide. The people in McCain’s campaign who had access to Romney’s returns have not (as yet) called on him to release them, leading to speculation that they have seen things that may be damaging.

What surprises me is that Romney has been running, or planning to run, for president for at least a decade. He had to have known that people would expect his tax returns to be released. Whether one agrees with the practice or not, the release of many years of tax returns has now become routine and was started, ironically, by Romney’s own father when he ran for president. So how is it that Romney, by all accounts a careful planner, did not prepare for this in advance by making sure that there was nothing embarrassing in them in the last decade?

As I wrote before, I doubt that Romney did anything flatly illegal, though nowadays it is what is legal that is the real scandal. The things that I can think of that might cause Romney some embarrassment are possibly the disclosure of how wide and varied are his offshore holdings, revealing him to be much wealthier than even what people think now, and that he has been exploiting every loophole in the book to avoid paying taxes. While not illegal, this may not sit well with some people who might otherwise like him. The other potential embarrassment is that the tax rates he paid in the earlier years may be much less than the already absurdly low 13.9% he paid in 2010.

The fact that he is stalling on releasing his returns should not lead us to conclude that he has done something wrong. For example, the birthers made hay out of the fact that president Obama refused for years to ask for his long form birth certificate to be released. They argued that this must be because he had something to hide, when all it seems is that he resented being pressured to do something that was not routinely expected of others and was an affront to his dignity. When he released the document, there was nothing there and the birthers looked even more foolish than before.

It may be that Romney feels that giving in to pressure to release his tax returns would appear to be caving in to Obama and would make him look weak. He is right but he has no choice. He may have been able to brazen it out if he could get his supporters united behind him, though that was still a long shot. But his putative allies are not backing him on this rejectionist stance (see here, here, and here) and are urging him to release his returns.

Again, it is not clear that any of this is deeply revealing about what kind of president Romney may make, although it is extremely revealing about him as a person and the attitudes and practices of the oligarchic class of which he is a member.

UPDATE: Tom Tomorrow’s latest cartoon deals with this same issue.


  1. says

    Something of interest to me is Romney in 2008. If McCain had his records, and he wound up with Sarah Palin as his choice, it it tempting to infer that there’s something so damaging in Romney’s record that rolling the dice on an unknown Alaskan half-term governor seemed like a better choice.

  2. says

    Filing for extensions doesn’t mean much. My accountant does it automatically, every year. It’s part of an arrangement I have with him so that he can do my tax-work during his less-busy season instead of at crunch-time in March.

    I also don’t understand the question of Romney’s “being in charge” or not at Bain during any particular time. Was he still a shareholder? He’s either a filthy capitalist leech who had his hand on the steering wheel or a filthy capitalist leech that profited from other people’s undoing by sitting back and letting his minions do his dirty work. Either way, he’s a filthy capitalist leech.

  3. Mano Singham says

    According to the SEC filings made by Bain, Romney was listed as “sole stockholder, chairman of the board, chief executive officer, and president”. The news report goes on to say that “a Massachusetts financial disclosure form Romney filed in 2003 states that he still owned 100 percent of Bain Capital in 2002. And Romney’s state financial disclosure forms indicate he earned at least $100,000 as a Bain “executive” in 2001 and 2002, separate from investment earnings.”

    I think you know way more about this than I do. What do those statements imply to you?

  4. jamessweet says

    It may be that Romney feels that giving in to pressure to release his tax returns would appear to be caving in to Obama and would make him look weak. He is right but he has no choice.

    I agree, and actually felt that Obama should have “caved” earlier on requesting the long form certificate from Hawaii. Nobody said being a national politician was fair…

  5. says

    100% ownership is the key. If you own all the shares, you control who the officers of the company are because you control 100% of the voting stock for electing a board of directors. It’s basically a shell that Romney can do whatever he wants with – typically the very rich will set up something like Bain, get it rolling with a ton of money, and then they can transfer wealth inter-generationally by electing their kids to the board and paying them a salary (or granting them shares in return for service) over time. Normally that’s done with a charity so the shell company can be heinously profitable without paying taxes…

    So, yeah, it doesn’t matter if Romney was CEO or Janitor of Bain if he owned all the shares – whoever is/was the CEO at any given time is doing his bidding whether directly or indirectly. If you look carefully you’ll probably find that Bain’s chief financial officer is Romney’s personal accountant, as well, or something like that. If there are people making deals for the company they’re part-time employees doing it on a case-by-case basis. You can infer that by the fact that Romney maintained 100% ownership – if he had any partners he’d have been tossing them chunks of stock. There are a variety of tricks like that that vulture capitalists like Romney play. One popular one (which is sort of like what Bain did) is to look for companies that are keeping too much cash in the bank, then leverage them out. Suppose you have a small software company that’s been doing pretty well, which has been amassing working capital and has $100m in the bank. So, let’s say it’s valued on the market at $500m and you can get your hands on $20m. You create a company with the $20m then immediately use it as collateral to borrow $500m (at one hell of an interest rate!) or more and use that to buy the company with the $100m in the bank. You then loot that company’s bank account to service the debt on your loan and now your company is worth $500m+ and you’re off to the races… It’s basically a ponzi scheme, sort of. Of course smaller firms learned to defend themselves against this kind of thing with “poison pill” clauses (in which owners of preferred shares get bought out at a heinous multiple if the company accepts an unsolicited purchase offer) etc.

    It is entirely legitimate that Romney’s financial shenanigans are being examined during the election – though you can be pretty sure that all the other oligarchs in Washington participate in the financial upside of these sorts of games. It’s like when everyone started sniffing at Hillary Clinton’s stinky stock deals (*) and they backed away from exposing that particular manure-pile to the public because everyone in Washington plays that game, too, and all the cockroaches would have been scurrying for the nearest dark cranny to hide in. It would have been unseemly.

    (* The trick that was being played there is that a broker trades a group of clients’ stocks as a group, then allocates which issues belonged in which clients’ portfolios after they see how the trades went. Imagine if I took $100,000 of my clients to play roulette in Vegas and then assigned most of the losses to Singham’s and Ranum’s accounts, and the winning bets to Clinton’s…)

  6. says

    We should just cut to the chase and have President be an unpaid position that goes to the highest bidder. The profits from auctioning the presidency go to the treasury and the president gets 4 years to loot as much as they can for themselves and their backers.

    That’s pretty much how it works anyhow.

  7. Mano Singham says

    Thanks a lot for this. I had only a hazy idea of how leveraged buyouts worked and why they often resulted in once-healthy companies going under.

  8. says

    Oh, yeah, another thing you’ll see a lot of in wholly owned companies is “perks” – like the CEO gets a company car, company apartment, company jet, etc. The IRS struggles to keep up with this kind of tricks but there are creative accountants who specialize in finding crazy loopholes for this purpose. And now the state of the art is to get congress to leave those crazy loopholes in legislation so you can exploit them for a couple years until they’re closed and then it’s on to the next one…

  9. says

    LBOs work everywhere. I know a lady who has been successfully leveraging trailer park lots in a certain part of the country. She now owns about 10 different trailer parks worth quite a lot in total.

    The way she started was she bought one, fixed it up (thereby raising its perceived value) and took out a loan for as much as she could get with it as collateral. She used that loan to buy another trailer park, and had a bunch of contractors zoom in, slap paint on it to make it look better, then raised the prices just a little to pay off the interest on the first loan. Lather, rinse, repeat. Now she’s in the 1% with a vengeance.

    You’ll note that other than a coat of paint and a price hike, the denizens of the trailer parks’ lives are no better or worse. You’ll also note that other than making a lot of phone calls and signing on loans and purchase agreements, she didn’t actually do any work and certainly hasn’t created any jobs.

    Her plan is that when she owns all the trailer parks in her area of activity and there’s no competition left, then all the prices are going to go up together, rather sharply, and she’s going to use that as collateral to start buying something else entirely. Nice, huh? And she’s pretty sure nobody’ll do anything because law-makers don’t care about people who live in trailer parks anyway.

  10. says

    Most importantly, it certainly doesn’t create any jobs or stimulate anything new happening. Unless you want to count “jobs” as “people whose lives I hold in my hand” – but to them it’s just “meet the new boss, same as the old boss…”

  11. says

    It’s also plausible that McCain simply didn’t like Romney, or thought his chances were better with a woman on the ticket. (Why that woman may remain a mystery puzzling historians of future generations.)

  12. says

    The more time goes by, the more I think the idea of lotto government (selecting officials at random) would actually work better than what we have. At first, I had just entertained it as a joke. Yet corruption is so severe now that I’m forced to take radical ideas seriously.

    Random selection can be done pretty cheaply, too, far cheaper than elections. For example, for the next House of Representatives we generate a random list of hundreds of thousands of social security numbers. Then we do the lookup and strike all the ones who are not at least age 25, not citizens for seven years, and so forth with the requirements. Finally, we go state by state (and district by district), picking out residents in order until that state’s quota is filled.

    Someone could game the system by controlling the machine that generates the numbers, but they’d have to be extraordinarily clever about how they do it in order to avoid detection. We can tell if the list of numbers is not uniformly random using statistics, for instance. It would also be extremely suspect if the list of people produced did not resemble the actual demographics of the country, the actual class/wealth breakdown, and so forth. There are many different tests which can be done to check for legitimacy.

    If we put enough computer scientists, statisticians, and social scientists into a room together I’m sure they could find a more sophisticated method with high reliability.

  13. says

    I’ve said to several people that what Bain Capital did was not too different from what the Mafia calls a bust-out scheme — buy into a business, milk it dry, leave the leftovers for the scavengers. If it was Gil “Mittens” Romano and not Willard Mitt Romney, there’d be RICO charges, not a presidential campaign.

  14. Vincenzo says

    On second thought, this seems a quite interesting shenanigan, whose keystone seems to be the use of an IRA to avoid the trap of owning a foreign personal holding company. Here is the barebone of how I suspect this would work. Bain made $100M and would like to give $1M to Mitt for his services, but cannot do so directly or else Mitt would have to pay taxes. However, Mitt has established an IRA account with Rearguard Capital (a fully owned subsidiary of Bain), and invested $5K into Rearguard’s Mittens Fund. The Mittens Fund in turn invests in the NoIRS, Inc., a start-up company based in St. Lucia, and curiously fully owned by Mitt (but nobody knows this, since we are now out in the islands). NoIRS, Inc. enters into a derivative contract with Bain (?!), whereby Bain loses $1M and NoIRS makes $1M. What a stroke of luck! I did not see that coming. Now, NoIRS makes a distribution to its investor. Relax, there’s only one: the Mittens Fund. In turn, the Mittens Fund must by law pass on its gain to its investors. In general, the distribution is required since the investor must pay taxes on the gain. But, this time the gain is in an IRA, so taxes are postponed. In the end, Mitt just made $1M but can postpone taxes until (or if) he withdraws it.

    The beauty of the scheme, though, is the IRA vehicle. Suppose that NoIRS had avoided the distribution to Mittens and kept the $1M in the tropical island of St. Lucia. If Mitt fails to declare NoIRS, he is a tax evasor. If he declares NoIRS, NoIRS becomes a so-called foreign personal holding company, and Mitt would be slammed with substantial US taxes. Instead, it is the distribution into a tax-deferred IRA that makes it all work, and legally so (you also need to have some minions at Bain to create Rearguard Capital).

    I am sure that there are more details than this, but in general, it looks like an intellectually neat and absolutely legal method. As for its ethical implications, you can always rely on the 99% to pay taxes.

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