Turnaround Capitalism

By Rich Lowry
Friday, January 13, 2012

Barry Bennett is the Leni Riefenstahl of the blistering attack documentary. The political operative’s half-hour anti–Bain Capital film, endorsed by the increasingly unhinged Newt Gingrich and aired by his super PAC, is anti-market agitprop worthy of Michael Moore. If the Academy gave an award for tendentiousness, Bennett would be a sure-fire nominee.

Yet his production is at times affecting and effective. Put aside its dishonesties and over-the-top insinuations about the Mitt Romney–run private-equity firm (it raised seed money from Latin America!). The film captures a conflict of visions. From below, from the workers at Bain-acquired firms that went bust, the vision is about family, community, and security. From above, it is about efficiency and profit.

Defenders of Bain and Romney himself use the famous phrase of the great economist Joseph Schumpeter, “creative destruction,” to describe the firm’s work. The former employees interviewed by Bennett are a reminder that, for all the glories of the first half of that formulation, the second half can be hell. But what’s the alternative to this Schumpeterian churn?

One worker laments, “I just wish they’d left us alone.” In a free economy, though, no one leaves you alone. Competitors, domestic and foreign, are all around. The way things have always been done is a formula, sooner or later, for obsolescence.

The Wall Street Journal did an analysis of Bain’s record during Romney’s tenure from 1984 to 1999. It found that of 77 businesses Bain invested in, 22 percent eventually filed for bankruptcy reorganization or shut down. That seems high, except Bain’s investments “focused on smaller and sometimes troubled companies that Bain hoped to fix or build.” This wasn’t so much “vulture capitalism,” in the words of the always-subtle Rick Perry, as “turnaround capitalism.”

Gingrich, speaking with the purity of someone whose own business model depended on being a peculiarly well-compensated historian, has fastened on a Reuters article about Bain’s handling of a Kansas City, Mo., steel mill. According to Reuters, Bain took on the mill despite “obvious” risks, including out-of-date equipment and formidable competition.

After Bain’s $8 million takeover, the mill announced plans for a $98 million modernization. It merged with another operation “to form one of the largest mini-mill steel producers in the U.S.” Bain re-invested another $16.5 million. When an industry competitor tried to buy the new steel company, Bain declined. These weren’t the acts of a scavenger picking at a carcass.

Still, it didn’t end well, as Reuters relates. Management performed poorly. Cheap imports from Asia drove down prices. Energy costs rose. The financial crisis in Asia diminished demand. A unionized work force hampered its productivity. Are we to believe that if Mitt Romney had simply been a nicer guy, it would have worked out differently?

Bain made money on the deal anyway, since the doomed steel company took on debt to pay dividends. But Bain clearly didn’t want to bankrupt its own enterprise. It did want to get a return as soon as possible. Otherwise, why bother taking on such a tenuous proposition? This thinking certainly doesn’t shock the conscience of all the institutional investors in private equity — the public pension plans, the charities, the university endowments — who get on board expecting precisely such returns.

Firms like Bain revived an American business world that in the late 1970s and early 1980s had grown “sloppy,” “complacent,” and “lazy,” in the words of Bain executives who spoke to New York magazine. Their rise disrupted the old corporate culture and drove a productivity revolution. They serve the same purpose today. This doesn’t justify every sharp practice, or the motives involved. Through the wonders of the invisible hand, though, the restless quest for profit is the source of our wealth and dynamism.

That may not be a comfortable or simple case to make in a political campaign. Mitt Romney, portrayed as a cross between Gordon Gekko and Snidely Whiplash, now has no choice but to make it.