David Stockman has a brutal piece in the Daily Beast today about Mitt Romney’s years as head of Bain Capital:
Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses….That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.
So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise. I know this from 17 years of experience doing leveraged buyouts at one of the pioneering private-equity houses, Blackstone, and then my own firm. I know the pitfalls of private equity. The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest-profit exit possible. Occasionally, we did invest in genuine growth companies, but without cheap debt and deep tax subsidies, most deals would not make economic sense.
The rest of the piece is mostly a detailed rundown of Bain’s failures and successes, and it’s interesting enough. But I wish Stockman had gone into more detail on the highlighted bits above. He’s right that the Bain model — along with so much that Wall Street does — provides very little in the way of either social value or genuine economic growth. Only the tax preferences for both debt and capital gains make most private equity deals worth doing, something that’s yet another argument for taxing capital gains more heavily than we do now. It’s too bad Stockman doesn’t provide chapter and verse on that to go along with his Mitt bashing. I guess it must have seemed a little too esoteric for the Daily Beast to be interested in.