Wednesday, January 11, 2012

How Romney can shine a light on his problem

Last night, in his victory speech in New Hampshire, Mitt Romney called out his opponents who have adopted the Democrats' message.
President Obama wants to put free enterprise on trial. In the last few days, we have seen some desperate Republicans join forces with him. This is such a mistake for our Party and for our nation. This country already has a leader who divides us with the bitter politics of envy. We must offer an alternative vision. I stand ready to lead us down a different path, where we are lifted up by our desire to succeed, not dragged down by a resentment of success. In these difficult times, we cannot abandon the core values that define us as unique — We are One Nation, Under God.

Make no mistake, in this campaign, I will offer the American ideals of economic freedom a clear and unapologetic defense.
That is good for a victory speech and he does well to join his Republican critics with Obama. But he can do more and the WSJ has laid out the arguments and data for him. He could do worse than adopting their pitch.
We have our policy differences with Mr. Romney, but by any reasonable measure Bain Capital has been a net job and wealth creator. Founded in 1984 as an offshoot of the Bain consulting company, Bain Capital's business is a combination of private equity and venture capital. The latter means taking a flyer on start-ups that may or may not pan out, something that neither Mr. Gingrich nor Mr. Obama seem to find offensive when those investments are made by Silicon Valley firms in "clean energy."

One Bain investment during Mr. Romney's tenure was to back an entrepreneur named Tom Stemberg, who was convinced he could provide savings for small-business owners if they were willing to shop at a store instead of taking deliveries. Today, the Staples chain of business-supply stores employs 90,000 people.

Bain also backed a start-up called Bright Horizons that now manages child-care centers for more than 700 corporate clients around the world. Many other venture bets failed, but that's capitalism, which is supposed to be a profit and loss system.

The loss part is what seems to trouble the Gingrich-Perry-Obama critics, especially in Bain's private-equity business. Like some 2,300 other such U.S. equity firms, Bain looks to buy companies that are underperforming or undervalued and turn them around.

Far from "looting," this is a vital contribution to capitalism and corporate governance. One of the persistent gripes of the left is that too many CEOs make too much money even as their companies flounder. Private-equity firms target such companies or subsidiaries, replace their management, and try to unlock the underlying value in the enterprise.

Private equity helps to promote dynamic capitalism that creates wealth, rather than dinosaur capitalism of the kind that prevails in Europe and futilely tries to prevent failure. Sometimes this means closing parts of the company and laying off employees, but the overriding goal is to create value, not destroy it.

A Wall Street Journal news story this week reported that Bain in the Romney era differed from many equity firms in buying more young and thus riskier companies. This contributed to a higher rate of bankruptcy or closure—22%—for companies held by Bain after eight years.

Bain disputes the Journal's calculations, but one test of overall success is whether investors keep entrusting a firm with their money. Mr. Romney and his colleagues raised $37 million for their first fund in 1984. Today, Bain Capital manages roughly $66 billion. Its investors include college endowments and public pension funds that have increased their investments in private equity to get larger returns than stocks and bonds provide. The people who benefit from those returns thus include average workers.
There are several dynamic stories of companies that they backed or rebuilt to make fine profits and employ many more people. However, there are counter examples and those are the ones that his enemies will single out and turn into moving ads excoriating Romney. But these stories need to be put in context.
The tougher questions for Mr. Romney involve the cases in which Bain took early payouts in dividends and management fees after purchasing existing businesses that ultimately went bankrupt. There are several in this category, including another steel company called GSI, though its hundreds of job losses were far fewer than the jobs created at Steel Dynamics.

The medical-equipment maker once known as Dade International is now much larger than it was when Bain bought it in the 1990s. But Mr. Romney's company later sold its stake, and heavy debts taken on during the Bain years forced Dade to spend two months in bankruptcy in 2002 and cost 2,000 jobs. The company later resumed its rapid growth, and Siemens bought it in 2007 for $7 billion.

Certainly Bain Capital made sure that its investment partners were paid first, but the larger truth is that the invisible hand worked pretty well. Notice that because the overall job statistics for Bain investments are by all accounts positive, many critics attack the Romney record with claims about private equity in general. The left is cheering a study commissioned by the Census Bureau that found that companies bought by private-equity firms suffer more job losses soon after a buy-out than similar firms that didn't experience buy-outs.

But this is hardly surprising since the companies were acquired in part because they were underperforming. The critics also don't mention that the Census study found that firms acquired in private-equity transactions created more new jobs in the ensuing decade. Imagine what might have happened if Chrysler or GM had been bought by private equity two or three decades ago. They might have been turned around much earlier, at far less pain to fewer workers, and without any taxpayer cost.
Romney can make this argument and he has the record to back it up. He can challenge Newt Gingrich who is using the millions of his casino-owner pal to run his ads against Romney's Bain experience as if making your millions off of a casino is somehow more moral than risking capital to help build up businesses that would have gone out of business without Bain's investment. As Ross Kaminsky writes,
If Gingrich's claim is that making money should be done with zero negative impact on others, it is, if you'll pardon the pun, particularly rich that the Super PAC about to attack Romney is being funded by a $5 million donation from Sheldon Adelson, Chairman and CEO of the Las Vegas Sands Corporation. Las Vegas Sands, which owns and operates casinos in the U.S., Macau, and Singapore, reported 2010 revenue of $6.85 billion and net income of $599 million -- all generously received from gamblers big and small. If there were ever a business likely to do financial harm to its customers, it's the casino business.
Kaminsky goes on to show how Gingrich got three strikes on one pitch in his attacks on Romney's business past. Read his entire post; it's very good.

Newt is on his own self-destructive path determined to take Romney down with him. But, in so doing, he is giving Romney the opportunity to turn his weaknesses into a strength. Certainly, the Democrats would make this argument if Romney is the nominee. Better that he get this message out now and gets adept at delivering it now than later. The media will still love the story, but Romney can seize this opportunity and help inoculate himself for the rest of the campaign.