Obama Clearly Does Not Get Business — And Makes No Sense When Ripping Romney

Impact

Our country needs a president who can lead us out of the worst economic crisis since the Great Depression. Rather than debating the relative skills of each candidate, liberal Democrats, led by Barack Obama, have viciously assaulted Mitt Romney for being a successful businessperson.

I would like to stipulate a few facts about Romney. He is guilty of amassing a large personal fortune; he is an extremely successful private equity investor; he pays his taxes as required by law (not more, not less); and he takes advantage of loopholes approved by Congress to minimize his tax liabilities. Moreover, he is guilty of investing in legitimate offshore entities that pay no U.S. taxes such as casualty insurance companies.

Every time I tune into a left-wing news program, the talking heads are blathering about Romney’s career as if he were a felon, while ignoring Obama’s record. The president has dragged this country down economically during his tenure. He has been unable to lead or compromise, bring amity to Washington, D.C., or improve the global reputation of America. He has fanned the flames of class warfare for political gain to the detriment of this country. Rather than defending his own accomplishments, which have been few and far between, he denigrates a another man’s accomplishments.

I would like to present Mitt Romney in a more even handed manner, call it Mitt 101. Let’s begin with Bain Capital, a company Romney founded and where he made his fortune. Generally, the business of Bain is investment in companies that are underperforming in some way or that need a radical change in ownership for a myriad of possible reasons. These investments usually are retained for seven to 10 years, at which time they are ideally sold for a profit. Bain encourages its portfolio companies to earn more money by improving products, operating more efficiently (which sometimes necessitates cutting unproductive employees), recapitalizing the balance sheet, etc.

Bain is compensated by its limited investors. They include public pension funds, private pension funds, universities, not-for-profit entities, wealthy individuals, sovereign governments and many more. Compensation comes to Bain in two forms: (1) an annual management fee equal to about 2% of funds not yet invested (2) a percentage of profits from investment activities equal to about 20-25%. The former is paid to reimburse Bain for its operating expenses, salaries and expertise; the latter is paid only if investments are successful.

In many cases, private equity investments are sold off in tranches when they are taken public. This could result in payments to Bain employees over an extended period of time.

Mitt Romney shared in the profits of Bain while he was active at the company. After he finally negotiated the transfer of power to his partners in the early 2000s, he continued to receive residual payments for deals done during his tenure plus a premium for his efforts as founder and senior partner. Many private equity dealmakers who retire also receive residual payments long after they stop working.

It should be acknowledged that some private equity investors do receive out-sized compensation. Do they deserve it? Well, they are compensated mostly when their transactions are successful, so I would say yes.

Do private equity investors provide a productive service? Pension funds and other investors in their funds think so, as many have received extraordinary returns. Beneficiaries include cops, firefighters, teachers, municipal workers, college students, etc.

Do private equity investors provide services that benefit our economy? If Bain turns a failing company around, jobs are saved and created in some cases. If a company’s founder wants to retire and “cash out,” private equity is a good source of funding. If public investors want to cash out, private equity investors can facilitate their objectives.

Everyone should know that the private equity business receives a very lucrative tax break that is controversial, to say the least. When a private equity investor is paid 20-25% of the gains on a successful investment, he only pays capital gains tax on the amount received. The private equity investor has paid no cash for this “carried interest.” Critics say that these gains should be taxed at the normal income rate. This issue is currently being debated in Congress.

When investors build a successful business and earn significant profits, they are constantly seeking new ways to invest and diversify their personal assets. Some money may be invested in stocks and bonds of public companies; some in tax free municipal securities and some in legitimate and legal offshore investments that do not pay U.S. taxes.

Romney has been criticized because he has only made public a summary of his latest tax returns. This custom is exactly that, a custom, and not a legal requirement for candidates. Do the American voters need to know about a candidate’s personal financial activity? I think yes, to a degree. Should they be privy to every investment? No, unless a questionable investment surfaces.

Romney has decided to provide summaries of his current net worth and not provide historical information, as his father did many years ago when he ran for office. Understand that George Romney was the CEO of American Motors, a public company that disclosed the elder Romney’s compensation every year.

I think the election should get back to what’s really important, who can manage the economy better. Obama has a record that he is not proud of, so he wants to change the subject. Focusing on Romney’s private financial life is a canard. The president is diverting us from what is truly important, his record.