Sunday, January 15, 2012

A Canadian Perspective on Mitt Romney's Brand of Capitalism

Back in September 2010 , I was  asked by the editor of the Mark News to contribute to a series on Canada's most influential people.  I chose to write a short profile of Gerry Schwartz, the founder of Onex Corporation, Canada's leading private equity (buyout) firm.  Since the  2012 U.S. presidential campaign is starting to turn in part on Romney's record as a co-founder and executive at Bain Capital, it may interest readers to look at my article:

What I found was that even though Gerry Schwartz is a relatively 'good' leveraged buy-out (LBO) specialist, in the sense that he prefers to grow firms rather than simply flip them for a quick profit,  I couldn't entirely shake my ambivalence about his business in the context of the current economic crisis.  To be sure, Schwartz, like Romney,  has not made  his fortune from re-packaged mortgage debt on sub-prime mortgages, or by betting against his own clients(!).  But they have both exemplified the big shift in financial capitalism that started in the 1980s: away from industrial start-ups to the more lucrative areas of  "take-overs" and "re-structuring". Associated with this phenomenon was the invention of the Leveraged Buy Out itself, which just threw out of the window age-old strictures about how much money one should be able to borrow on a given amount of equity.  This helped to provide the context, if not the specific content, of the 2008 Financial Crisis.
Now that we are in a Great Recession--"great" because practically everyone both public and private is having to de-leverage  debt before they can start buying, investing or hiring again---it would be ironic indeed if America were to turn to a LBO king for its economic salvation.

Interested readers should also follow up on these two quotes:
"Romney soon switched Bain Capital's focus from startups to the relatively new business of leveraged buyouts: buying existing firms with money mostly borrowed against their assets....   Less an entrepreneur than an executive running an investment operation, Romney excelled at presenting and selling the deals the company made."  ------  "Mitt Romney", Wikipedia

 ‘I don’t like what private equity firms do in terms of taking out every dime they can and leveraging [companies] up so that they really aren’t equipped, in some cases, for the future.’”
                                                                    ----Warren Buffett, quoted in the Wall Street Journal.

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