“Ironically, Mitt Romney knows better than anyone that business can’t always do it alone. When Bain & Company was on the verge of bankruptcy Romney himself negotiated a $10 million bailout with the FDIC.”
— Obama deputy campaign manager Stephanie Cutter, in Web video issued July 24, 2012
Once again some ancient Massachusetts history has entered the 2012 campaign.
Seeking to rebut Mitt Romney’s claim that President Obama believes business owners don’t build their own companies — for which we gave Romney Three Pinocchios — Cutter has now tried to turn the tables on Romney by arguing that Romney himself could not survive without the help of government assistance.
This issue briefly flared up during the GOP primary season, when former House speaker Newt Gingrich raised it, so let’s see what really happened.
First of all, Bain & Company is not the same thing as Bain Capital, the private equity firm from which Romney made his fortune. Bain Capital is a spin-off from Bain & Company, which is a traditional consulting firm. But in the early 1990s, Bain & Company overextended itself after an ill-advised decision in 1985-1986 by the firm’s eight founding partners to take $200 million out of the firm, for themselves, with borrowed money. (Romney, who had left in 1984, was not a founder.)
In 1990, Romney was brought in to fix things. He certainly had a stake in the outcome, in part because the Bain brand name would be damaged by a bankruptcy and because Bain & Company partners were investors in Bain Capital.
According to the book by Boston Globe reporters, “The Real Romney,” Romney drove a hard bargain with the firm’s creditors but especially with his former colleagues: “He was toughest when it came to negotiation with the partners at Bain & Company. He told the founding partners they had to give up about $100 million, or half the money they’d been planning to take out of the firm.”
Other lenders accepted 80 cents on the dollar, realizing that a default would leave them with even less.
Meanwhile, Bain & Company also owed $38 million to the Bank of New England. But the Bank of New England had made many bad loans, faltered and by early 1991 had been seized by the federal government. The Federal Deposit Insurance Corp. sold the bank to Fleet Financial, a Rhode Island bank, and a Fleet subsidiary was tasked with trying to collect on the outstanding loans.
After months of negotiations, the outstanding loan was reduced by $10 million, including forgone interest.
The FDIC deals with this problem constantly when it seizes banks, figuring out how it can get the most money out of distressed loans. Changing the terms or reducing the loan is fairly typical, as the FDIC indicates in its Guide to Bank Failure.
The FDIC’s Resolution Handbook also says (page 80):
Restructuring a loan for a financially distressed borrower is normally more productive for the receiver than foreclosing on the collateral or initiating lawsuits to collect the debt. Maximizing recovery on failed institution assets is the receiver’s responsibility, and litigation expenses can very rapidly consume any funds recovered
The FDIC tries to collect as much as possible, but ultimately has to make good on deposits at least up to $250,000. (In the Bank of New England case, the limit was $100,000 at the time, but the agency decided to guarantee all deposits.) But any shortfall is made up through assessments made on FDIC-member banks.
That’s right — no taxpayer money is involved. The FDIC prides itself on not taking taxpayer funds.
So does this qualify as a “bailout”? The dictionary definition of bailout refers to “ rescue from financial distress.” By that standard, some of the Bain Capital deals so heavily criticized by the Obama campaign, such as Ampad and GS Industries, might qualify as “bailouts.” A more proper term — the one used by the FDIC — is “loan restructuring.”
Cutter’s statement is cleverly and carefully worded, since it never mentions taxpayer funds. But her introductory sentence — “Mitt Romney knows better than anyone that business can’t always do it alone” — certainly suggests taxpayer funds were involved. The clear implication is that he benefited from a bailout like the Wall Street banks during the financial crisis.
That’s not the case, though one can get into a theoretical argument as to whether the FDIC’s money, once collected from banks, is actually then “government money.”
The Pinocchio Test
Cutter treads very close to the line here. She implies, but never really says, that Romney, on behalf of “Bain,” got a taxpayer-funded bailout.
But in reality, Romney rescued his former firm, including restructuring its bank loans, in a deal in which his former partners were given the toughest medicine. Bain & Company survives to this day, which certainly suggests Romney’s solution was a better outcome than letting the firm collapse.
We wavered between one and two Pinocchios here. Calling a loan-restructuring a “bailout” is a real stretch, especially since there does not appear to be an unusual transaction. But Cutter can reasonably claim that Bain & Company benefited from government procedures, already in place, to help it deal with its financial troubles. It’s too bad she did not phrase it that way.
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