A year ago I wrote about the sad story of the Simmons Mattress company, a well run outfit that got caught in the cross hairs of the investment bankers, and while they never had a problem making and selling mattresses at a profit they were bought and sold by a series of investment bankers, each one artificially pumping up the book value of the company, borrowing against the inflated value to pay themselves outrageous fees and to repay their investment, and ultimately driving the company into bankruptcy. Factories closed, people were laid off, suppliers short-changed, as the investment bankers took close to a billion dollars out of the value generations of hard working people had created.
This view of manufacturing as a piggy bank to be looted by clever financiers is actually quite common. I could have just as easily written about American Pad & Paper – AMPAD – a paper products manufacturer bought and sold by by an investment banking outfit and ending up in bankruptcy. The investment bankers put $5 million into the deal, took AMPAD debt from $11 million up to $400 million – a fourth of that new debt going to pay the investment banker. $5 million in, $100 million out, and the company ending up broke, 200 employees laid off and a plant closed. Another chunk of the $400 million went toward buying an AMPAD competitor – and promptly closing the competitor's plant and laying off 185 people. That deal jacked up the revenues of AMPAD, making it appear more valuable, in turn making the $100 million to the investment banker possible.
These sorts of leveraged buyout games have made investment bankers millionaires, and destroyed tens of thousands of manufacturing companies over the last thirty years. It is a legal way to suck all of the value others have created from a company without adding anything. Said the head of the investment banking outfit when asked about the plant closings and payoffs, "Sometimes the medicine is a little bitter but it is necessary to save the life of the patient. My job was to try and make the enterprise successful, and in my view the best security a family can have is that the business they work for is strong." Given that the manufacturers went into bankruptcy, the security was apparently for the banker's own family, and the business that remained strong was the investment banking company.
For those wondering why the destruction of a couple of paper companies a few decades ago is worth a blog post today, I should mention that the investment banking company was Bain Capital. The guy in charge, the author of the quote, and the one who made the most from the looting was Mitt Romney.
Romney is touted as an accomplished business person who can bring private sector thinking and leadership to the White House. The reality is he went straight from Harvard to consulting to investment banking to politics (with a brief stint running the Olympics along the way). His publicists make a lot of noise about Staples and a few other high profile companies Bain Capital backed, but leaves out the dozens of others - like GS Industries, a steel company that ended up bankrupt with a plant closed and 750 people laid off - that were looted for incredible returns and left high and dry. And they certainly don't like to discuss the shell companies in the Cayman Islands and the Bahamas Romney set up to enable foreign investors to put money into Bain investments while ducking US tax rates.
I cannot imagine anything worse for American manufacturing than putting a slick bottom feeder like Romney in the White House. His web site says he has, "an intimate knowledge of how our economy works." You bet he does. His use of that intimate knowledge is why he's wealthy and a lot of manufacturers are in shambles.