Dr. Tim Stanley is a historian of the United States. His biography of Pat Buchanan is out now. His personal website is www.timothystanley.co.uk and you can follow him on Twitter @timothy_stanley.
Obama’s attack on private equity is hypocritical, shallow and a big mistake
There’s a good chance that Mitt Romney’s career at Bain Capital will become the defining issue of 2012. As Joshua Green at the Boston Globe writes, Bain is all about Romney’s election-winning claim to real world experience of creating jobs (Mitt puts the figure at around 100,000). Therefore, it’s imperative that Obama challenge that record and produce a counter-narrative: “Obama’s reelection, in other words, hinges on discrediting Romney as a viable alternative. That means going after Bain and private equity.”
Given that the very words “private equity” send a shudder down the spine of anyone in employment, that sounds like a smart move. We all instinctively despise the champagne and braces brigade who head up private equity – grease-haired upstarts just two years out of college who think they can save a business by changing the wallpaper and sacking everybody. Yet despite the profound cultural appeal of denouncing Bain as a “vampire” organisation, Obama’s gambit has received a poor reception across the press. Why?
For starters, the political influence of private equity groups like Bain extends well into the Democratic Party. One of Obama’s own campaign spokesmen, Federico Pena, works at Vestar Capital Partners. According to this report, Vestar has “laid off 1,000 workers from Del Monte this month, closed three factories and laid off 540 people at Solo Cup Co., and fired another 500 workers at BirdsEye food-processor in 2006.” And Pena isn’t the only “vampire” that Obama takes money from. In 2008, he received almost twice as much private equity cash as John McCain did – roughly $3.5 million.
Within the wider economy, the record of private equity is a great deal more beneficial than Obama’s attacks suggest. Firms like Bain borrow to acquire failing companies, streamline them, rebrand them, then sell them on at a profit. In the 1980s these “bloodsuckers” gained a reputation for asset-stripping – reducing the payroll down to a skeleton staff then selling off the company’s assets. Mitt Romney’s choice of career is not dissimilar to that of Gordon “Greed is Good” Gekko.
But the historical panic over the destructive capacity of private equity is misplaced. In most instances, it was in the investing firm’s interests to save rather than strip a business. In many cases, private equity was actually motivated by a benign desire to rescue family and industrial businesses from outdated ideas and practices. Bain points out that, “Despite political attacks that emphasize the few companies that have struggled … revenues grew in 80 percent of the more than 350 companies in which we have invested.” A survey of roughly 3,200 companies bought out by private equity firms between 1980 and 2005, found the companies lost jobs at a rate that was only one percent higher than comparable businesses. But those companies were also more likely to open new branches or see an upturn in profits. Crucially, their new found profitability often led to the creation of new jobs. Rebirth from wreckage; order from chaos. Private equity is very Zen.
And the moderate, pro-business wing of the Democratic Party knows it. That’s why Senator Mark Warner has defended Bain and why Mayor Cory Booker of Newark called Obama’s attacks on the firm “nauseating.” To quote Booker, “I live in a state where pension funds, unions and other people are investing in companies like Bain Capital. If you look at the totality of Bain Capital’s record, they’ve done a lot to support businesses, to grow businesses.” Booker is right. Roughly 60 percent of moneys that private equity receives are from pension funds, endowments and foundations.
In short, the anti-Bain agenda suggests that Obama “doesn’t get capitalism.” His administration has placed an emphasis upon government-led bailouts that have the aura of the command economy (Solyndra, high-speed rail, Chrsyler, General Motors). Because these operations are directed by social need rather than profitability, they’ve largely failed (automobiles are a notable exception). In contrast, Romney’s experience tells him that key to creating jobs is a mix of pleasure (investment) and pain (streamlining). For a country saddled by debt – a nation that must reform its welfare, tax and regulation systems simply to survive – the private equity model might actually prove more attractive to the enlightened voter.