I almost feel I need to apologize for writing so much about this, but the Gingrich/Perry v Romney/Bain business has fascinated me far more than I expected it would, and much more than the usual campaign imbroglio. I think the reason is that it conjures up a host of deeper issues to ponder—about capitalism and free enterprise in general, and about the business of finance and how that fits into the mix.
So I may come out with quite a few posts related to this before it’s done. Not that I expect it to be done all that soon. And even if the Republicans start leaving the topic alone (which I doubt), the Democrats will be sure to pick it up if Romney is nominated. Of that you can be certain, if you can be certain of anything at all in this election.
Much of the brouhaha about Gingrich’s (and to a lesser extent, Perry’s) recent attacks on Bain’s tenure have centered on statements about looting and vulture capitalism. But these recent remarks by Gingrich in South Carolina about Romney and Bain had a somewhat different focus [emphasis mine]:
I think it’s funny that on the one hand [Romney] wants to run around touting his record, on other hand if anybody asks a question about his record, he hides behind an entire framework and to question the facts is to be anti-capitalist. That is nonsense — baloney is the term I think I was using the other morning. The fact is, we have a right to know. We have a right to know what happened at Goldman Sachs, we have a right to to know what happened with trillions of dollars in New York. We have a right to know what happens when companies go bankrupt. I think the country would like to know. And if we’re going to run a presidential campaign on a record, the record has to be open to review. Now this is not anti-capitalism. That is the smoke screen of those who are afraid to be accountable.
Just so you don’t think this “people’s right to know” meme was a momentary thing for Newt, he also said [emphasis mine]:
I am for entrepreneurship, but I am also for the American people’s right to understand how the games are being played: Are they fair to the American people, or are the deals being cut on behalf of Wall Street institutions and very rich people?
I’ve read that last statement of Gingrich’s several times, and it’s hard to escape the conclusion that he is suggesting that the deals should give some general “fairness” and benefit to the “American people” as a whole, rather than profit to the “Wall Street institutions” and the “very rich people” who populate them. I just can’t parse the statement any other way.
This actually doesn’t seem like a fiscally conservative notion or a capitalist one. What does Gingrich mean when he says that Bain or similar companies shouldn’t cut deals “on behalf” of themselves? Why not? Because they are “very rich” already? Should they make no profit at all? How much would be too much? And who gets to decide where to draw the line?
I keep saying that I’m no financial expert, and I’m not. But I was under the impression that capitalism and free markets were supposed to work this way: first and foremost, people work very hard to make money for themselves. In the process, if they start a company and grow and manage it well they make money not only for themselves, but for their stockholders too if stock is involved. They also provide wages and salaries to employees, and a service to the general public (the “American people”?): the company’s products, or whatever else it is that’s being offered, are bought and used if they are good enough and reasonably enough priced. Thus, it’s competition and the profit motive that end up benefiting us as a whole—with no significant sacrifice of liberty, and with the idea that everyone has an opportunity to make it although not everyone will.
Of course, it doesn’t always work out perfectly, or even nearly so. But built into the deal is that companies will sometimes do poorly, and then sometimes they will fail. When they’re on the cusp of failure, or just not doing very well, other companies (such as Bain, for example) may be asked to come in and evaluate the situation and do what’s necessary to save the struggling company, which often involves implementing rather Draconian measures. If that doesn’t work, the troubled company can go under. That means the loss of all the jobs there, not just some. In the process, the turnaround company often makes money for its pains (why else would it engage in the endeavor?), although it sometimes loses money because the entire undertaking is inherently very risky. That’s why not everybody attempts this sort of thing, and not everyone can make a profit at it when they do.
Certain transactions along the way are supposed to be open to public scrutiny. And of course, those who break the law in the process of doing business are supposed to be pursued and apprehended. But generally there are certain restrictions on that “right to know” that’s so dear to Newt, limits that protect the companies’ ability to do business:
Bain has blocked many of the avenues that would enable reporters to get information on their own, declining to give The Wall Street Journal a list of the companies it has invested in (“citing privacy reasons”) or even any information about when its involvement with its investments ended.
It’s not clear how much of a choice Bain has about what it can disclose. Private equity companies often tend to have confidentiality agreements with their investors (Bain would not comment on what agreements it has). Several equity experts interviewed for this story thought any disclosures from Bain were likely to spook its investors.
The private equity business model is based on taking companies out of the public markets, where reporting requirements are strict and investors punishing, making changes that will hopefully make them more profitable and then selling them or taking them public through an IPO.
The part that happens behind the curtain is not always pretty, and private equity firms have learned over the years that it’s hard to tell a complicated story in the media.
You better believe it.
So, do we have “a right to know what happened when companies go bankrupt [and companies such as Bain takes over in the private equity business],” as Gingrich insists? And how would he suggest that such a right be enforced? And what about those confidentiality agreements? Does he think they should be outlawed? And is that anti-capitalist?