Romney’s risk-free deal with Bain

July 17, 2012

To understand the confusing conditions under which Mitt Romney left Bain Capital, you need to understand the unusual deal he struck when he was hired to run it.

Bill Bain’s idea was simple. His firm, Bain & Co., was making lots of money by advising companies in exchange for fees. The fact that it was making money was proof that its staff understood what it took to make struggling companies successful. So why not eliminate the middleman? Rather than advising companies for a fee only to watch the current management reap the big profits, Bain Capital would take over troubled companies, manage them to profitability and reap the rewards itself. And Bill Bain knew exactly who he wanted to run this venture: Mitt Romney.

And then Romney stunned his boss by saying no.


Richard Ellis/Getty Images

As Michael Kranish and Scott Helman, authors of “The Real Romney,” describe it, Romney “explained to Bain that he didn’t want to risk his position, earnings and reputation on an experiment. He found the offer appealing but didn’t want to make the decision in a ‘light or flippant manner.’ So Bain sweetened the pot. He guaranteed that if the experiment failed Romney would get his old job and salary back, plus any raises he would have earned during his absence. Still, Romney worried about the impact on his reputation if he proved unable to do the job. Again the pot was sweetened. Bain promised that, if necessary, he would craft a cover story saying that Romney’s return to Bain & Co. was needed because of his value as a consultant. ‘So,’ Bain explained, ‘there was no professional or financial risk.’ This time Romney said yes.”

Romney managed, in other words, that most unusual of career transitions: a move entirely without risk. And, as he tells it, he did the same thing when he left Bain Capital.

In 1999, Romney took a leave from Bain Capital to run the Salt Lake City Olympics. But from 1999 to 2002, he was listed on Securities and Exchange Commission documents as Bain Capital’s “sole stockholder, chairman of the board, chief executive officer and president.” He says he was an absentee executive who had neither knowledge of nor control over the decisions Bain made during this period. Then, when he subsequently decided to run for governor of Massachusetts, he signed papers dating his retirement from Bain to February 1999 — the actual date on which he ceased to be involved in, and responsible for, the company’s actions.

In other words, while Romney was running the Olympics and thinking about launching his campaign for governor, he kept his position at Bain in case he wanted or needed to return to it. He managed to complete one job and explore running for another all without losing his first job.

There’s nothing illegal about this. There’s nothing even wrong with it. Romney is clearly an effective negotiator and a prudent individual — both admirable qualities. But he is also a presidential candidate who is arguing that the tax code needs to do more to reward risk taking and the safety net needs to make it more difficult for those who don't take risks. To that end, he has proposed large tax cuts for the rich and deep cuts to the social safety net.

And yet, Romney's life and career show a man who did not have to take many risks, and perhaps wouldn't have used his talents to nearly the extent that he has if not for the fact that he was able to rely on three expansive of safety nets: that of family, personal and corporate wealth. In college, he sold stock his father had given him to support himself. At Bain and Co., he refused to move to Bain Capital until the company agreed to bear the risk incurred by his new venture. When he went to run the Salt Lake City Olympics, he kept his name atop Bain Capital to ensure he could come back if he couldn't find something better.

There's little in Romney's finances to back up the contention that the rich are insufficiently rewarded for the risks they take, and there is much in his history to support the idea and that safety nets have a role to play in empowering people -- even wealthy people who don't run the risk of economic ruin -- to take on risk. But Romney's policies seems to reflect the inverse of these lessons: They increase the rewards for taking risks that pay off handsomely while reducing the baseline level of security people need to take those risks. In that way, his platform seems likely to widen the economic gap between the rich and the poor, as it will be even harder for a working class father who can't count on having health insurance for his family to leave his company and start a new business, but it will be even more profitable for a son of privilege who doesn't face any severe risks to take a sweetheart deal to start a new business.

There is a sense in the United States that the rich play by different rules than the poor or the middle class — rules that make it easier for them to get even richer. Romney's history shows he has been aggressive in taking advantage of those rules, which is fine. But his proposed policies would make it even easier for the rich to stay rich and even more difficult for the poor to scrape by, which is not fine. As Romney likes to say, the American people don't resent success. But they do resent tax cuts for the rich at the cost of health care for the poor.

Thus far, Romney’s response has been indignation that anyone would question his business experience, technical arguments about whether his tax returns and SEC filings remained within the letter of the law, and an unwillingness to say how he’ll pay for his tax cuts or protect those who would be hurt by his spending cuts. That’s not going to be good enough. If Romney doesn’t come up with better answers, he’ll end up risking something very dear to him: his presidential campaign.

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Dylan Matthews | July 17, 2012