‘Just the Way Business Works’

    In the midst of all the talk of private equity, vampire capitalism, anti-Robin Hoods, and even apple-and-coconut comparisons, perhaps the voice of reason needs to cut through all the hyperbole and put the entire matter into perspective:

Now, we knew from the start that [it] was going to entail some risk, by definition. If it was a risk-free proposition, then we wouldn’t have to worry about it. But the overall portfolio has been successful. It has allowed us to help companies... It’s helped create jobs. There were going to be some companies that did not work out; [this] was one of them. But the process by which the decision was made was on the merits. It was straightforward. And of course there were going to be debates internally when you’re dealing with something as complicated as this.  

*   *   *   *   *

        There are no guarantees in the business world about success and failure.  That is just the way business works, and everyone recognizes that...  you cannot measure the success based on one company or the other.

So, is this Mitt Romney explaining what happened in the case of Bain Capital and GST Steel?  Or a Romney spokesman patiently explaining private equity to some journalists?  No, actually the first quote is from President Barack Obama, and the second from Press Secretary Jay Carney.  Both are addressing the failure of solar-panel maker Solyndra, which, despite a $535 million loan guarantee from the government, filed for bankruptcy in 2011, laying off 1,100 workers in the process.
    In a quote reminiscent of the Bain Capital commercials the Obama administration has been running against Romney lately, "'I was told by a security guard to get my [stuff] and leave,' one [Solyndra] employee said."  However, as Jay Carney said, "you cannot measure the success based on one company or the other."
    But that was last year.  And besides, the Obama administration was only trying to save the planet.  Romney just wanted to make money.  As I said at the beginning, it's all about perspective.  And there's nothing like an election to bring things into focus.

The Chronicles of the Chronicle: Part II

    On May 8th, I wrote about the firing of blogger Naomi Schaefer Riley from the Brainstorm blog of the Chronicle of Higher Education.  Rather than conducting an examination of Riley's work, I focused on another brainstorm blogger Laurie Essig to see if her writing "conform[ed] to the journalistic standards and civil tone" that Liz McMillen had cited in her reasons for firing Riley.  My investigation showed that a post Essig had written the same week as the Riley controversy raged was not merely uncivil, but smeared the voters of North Carolina and a state senator's wife with a quote from a Huffington Post story that was later partly retracted.  Ms. Essig's post was even time-stamped after the HuffPo piece was updated, yet it did not take the new information into account.  Indeed, as of today, her original screed remains posted and uncorrected at Brainstorm.
    It was with anticipation then that I read Ms. Essig's latest post, Count Romney and the Reign of Bain Capital.  While this post is clearly less vitriolic than the earlier one, the scholarship is once again found wanting.  Ms. Essig has no problem with the Obama campaign using the "vampire" metaphor for private equity firms; rather, she seems to feel it doesn't go far enough and that the Obama team could be making more of it:

The Obama campaign’s vampire metaphor is hardly anti-capitalist propaganda. It is, in fact, a fairly accurate description of what happens when neoliberal economic policies lead to almost zero regulation of the market. Bain Capital did in fact bankrupt the company featured in the ad, Kansas City’s GST Steel. According to The Week,

In 2001, shortly after Romney left Bain, GST went bankrupt, 750 employees lost their livelihoods and pensions, and Bain walked away with a $12-million profit.

Alas, what Obama and the Dems are offering is not a larger critique of the no-holds-barred capitalism of the past three decades, but rather a plan to mitigate the effects of rising income inequality with government programs.

    However, if one follows the link to The Week, it turns out The Week is not saying what Ms. Essig implies, that "Bain Capital did in fact bankrupt the company featured in the ad."  They are simply restating what the Obama ad implied.  In fact, immediately after the description of the ad comes this: "Democratic donor and financier Steve Rattner, who oversaw the auto bailout ... called the attack 'unfair,' arguing that it was not Bain's responsibility to create or preserve jobs, but to make profits for its investors."  The passage that contained the quote Ms. Essig cited did more to cast doubt on the claim than it did to confirm it.
    In addition to this distortion, Ms. Essig is trafficking in the classic logical fallacy, post hoc ergo propter hoc:  Bain Capital owned GST Steel.  GST Steel went bankrupt.  Therefore, Bain bankrupted GST Steel.  This amounts to:  I own a dog.  My dog died.  Therefore, I killed my dog.  The assertion is vacuous.
    The real story of Bain and GST Steel is actually quite different from the one Essig and the Obama campaign have spun, as Kimberly Strassel of the Wall Street Journal recently pointed out.  The Obama campaign at least provides some further detail they believe backs up their contention, but Ms. Essig cites nothing at all, dealing another blow to Brainstorm's aspirations of "scholarship."
    Although I did not explicitly state this in my May 8th post, I have no desire to see Ms. Essig lose per position at Brainstorm.  I simply would like to see her editor, Liz McMillen, own up to the blatant double standard that prompted her to fire Naomi Riley.  She and the Chronicle certainly have every right to hire whomever they wish to blog on Brainstorm, as well as the right to fire them, even for their ideology (as long as it's in keeping with their contract.)  But as a prominent voice in the ostensibly open-minded community of academia, the Chronicle should at least have the integrity to acknowledge its biases.

Some Equity is More Evil Than Others

    President Obama headlined a pricey fundraiser on Monday at the home of the president of the Blackstone Group in New York.  ABC News reports:

Hamilton “Tony” James — the president of the Blackstone Group, the nation’s largest private equity firm — is hosting a $35,800-a-head dinner for Obama, with 60 Democratic allies expected to attend, according to a campaign official. Many in attendance are expected to have ties to the private equity sector.

What makes the timing particularly interesting is that Monday also marked the beginning of the Obama campaign's latest round of attacks on Mitt Romney's record at the private equity firm he once headed, Bain Capital, even going so far as to set up a separate website called Romney Economics.  (I should at least in passing gratefully acknowledge that so far the Obama campaign has resisted employing the term "Romneynomics.")  One of the banners on the website reads "The Romney Model" and clicking on it brings up the following:

This is of course meant to evoke memories of the fictitious Gordon Gekko's (protrayed by Michael Douglas) infamous "Greed is good" credo from the film "Wall Street."  Bain, and by extension, Romney, cared nothing for workers, only for profit.  A video produced by the Obama campaign even contains a quote from someone who lost a job at a company Bain managed calling the equity firm a "vampire."

    So is the President's fundraiser of choice today a different kind of vampire, er, equity capitalist?  The Blackstone Group lays out its mission on its website under the heading "Our Approach."

Blackstone’s primary objective is to manage our business — and our Limited Partners’ capital — with care, discipline and patience.  We strive to deliver compelling risk-adjusted returns over the long term.  Many of our investment vehicles, such as our corporate and real estate private equity funds and credit funds, are structured with lives of up to ten years or longer.  This long-range view enables us not only to ride out market cycles, but also to maximize value through operational improvements over time. [emphasis added]

At this point you are probably asking yourself, "Where is the part about 'creating jobs'?" I, too, searched in vain for it.  Even more shocking are these quotes from "Selected Transactions" also on the Blackstone Group website [emphasis added]:

• Kraft executed the transaction as a tax-free split-off and merger to maximize after-tax shareholder value and realized approximately $2.6 billion in value.
• Stiefel’s objective was to ... maximize value for its shareholders.  Stiefel and Blackstone determined that a sale process may be able to create superior shareholder value and pursued a targeted auction including the most viable strategic parties.
• As part of this process, Blackstone evaluated and executed asset sales to maximize overall value.

There are more, but you get the idea.  Blackstone's "Approach" is identical to that of Mitt Romney's fellow Bain vampire, Marc Walpow: create wealth for investors.  Although the impression President Obama gives is certainly to the contrary, I can say with certainty that when the Obamas, as any investor, seek to invest their considerable resources, the item at the top of the list is not "how many jobs will my investment create," but rather, "what will provide the greatest return."  Obviously the list will include other factors: level of risk, length of time of the investment, and even more aesthetic considerations, such as "what industries or sectors am I comfortable with" and yes, even considerations about jobs and employee working conditions within an industry.  Both Blackstone Group and Bain Capital tout their successes in job creation when it is consistent with their primary focus.
    Despite the unparalleled success of the free market/capitalist system in the United States that has eclipsed all other nations in history, even with its warts, in the degree and widespread nature of the prosperity it has produced, there are still many who get squeamish about the dog-eat-dog perception with which free markets are often caricatured.  Certainly there are excesses, greed, cruelty, and injustice, and God has ordained governments to keep such proclivities of mankind in check.  Laws and regulations and the reach of both will be a constant source of push and pull between business, government, and society at large.  Our system has flaws and has room for improvement, but compared to all others, there frankly is no comparison.  And based on the President's $35,800 per plate fundraiser today, after deducting for food, travel, and Hope 'n Change napkins, I have no doubt his 2012 election campaign has turned a fairly healthy "profit."  The President may decry the carnage left behind by greedy vampires in private business in their thirst for greater and greater returns, but he knows that even in his business, politics, money is the lifeblood.