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- iHaveNet.com: Politics
by Robyn Blumner
If Mitt Romney wins the
He will tout his credentials as a savvy businessman who should be given the reins of the American economy because he knows how to create jobs.
What Romney won't tell you is that what he really knows how to do is create massive amounts of wealth for himself and his partners. Jobs, however, are another matter.
Romney co-founded the private equity firm
The actions of Romney's firm are detailed in the highly illuminating book by financial reporter Josh Kosman, "The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy."
The chapter that focuses on Romney and
Private equity firms operate through leveraged buyouts. They create limited partnerships to buy companies, usually pretty healthy ones since it's the only way to initially attract financing, and then they burden the companies with debt while trying to make the balance sheets look good, often by cutting costs such as workers or their benefits, to flip the companies within five years for a profit.
Private equity firms put a relatively small amount down, say 20 percent, and the companies they are buying borrow the rest from banks making them responsible for repayment. Suddenly, a company that had a reasonable debt load, if any, is subjected to crushing repayment obligations.
According to Kosman, the only reason this works is because of a major tax loophole that allows the interest on these loans to be tax deductible.
Now, when a business borrows money for capital equipment or a major expansion, it makes sense for the government to encourage that investment by making the interest tax deductible. But here the debt exists just so some clever rich guys can buy a company without much financial risk to themselves. By deducting the interest on the debt, the company sharply reduces its tax liabilities and can use that money to make its debt payments.
Got it so far? Spend little, borrow big, evade taxes and get control of a lucrative asset.
Now the fun starts. To make a company look more profitable and valuable to a potential buyer, Kosman says, the companies are managed for short-term gains. Private equity firms often do this by making "deep cuts in spending on current operations and on research to develop new products." Employees get fired. Reinvestment in the company is shortchanged -- just the opposite of expanding economic growth and job opportunity.
Inventively, Romney's
Romney denies that he was part of the decision to extract large sums from businesses that collapsed. But Kosman cites Geoffrey Rehnert, who helped start
When companies managed by private equity firms do go bankrupt, as many do, crippled by debt and gouging, the private equity firms have already made a tidy profit from high transaction fees, management fees and dividend payments. It's the employees and creditors who lose big.
While there may be cases where
"Millions for me, a pink slip for thee," is the business playbook of many private equity firms, and Romney was one of their savviest players.
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