A Golden Opportunity

Apparently Mitt Romney will be the Republican candidate for president next fall. Consequently, it was inevitable that his career as head of a private equity firm would become an issue he would have to deal with as he runs for president. Over the last two decades many of these deal-makers have grown fabulously wealthy by acquiring struggling companies and restructuring them in order to improve their value and sell them for a profit. In the process many jobs were lost. Of course many jobs were also created if the firms were eventually successful. But some have used the loss of any jobs as an indictment of capitalism, and it is far better the debate regarding capitalism and private equity comes to the forefront now rather than next fall. Barack Obama will certainly press the issue hard in attempting to demonize his opponent, but at least now it will be out in the open and hopefully the arguments well known.

Many folks regard private equity investors as the epitome of the kind of rapacious bandits that represent the unrestrained greed and reckless behavior that has destroyed the global financial system and brought the Western economies to their knees. That is a bit of a stretch, since private equity firms generally did not indulge in the leveraged trading orgy of collateralized mortgage obligations and credit default swaps carried on by the too big to fail banking institutions at the epicenter of the financial collapse.

But the critics do have a few legitimate arguments. Some private equity firms are guilty of buying struggling companies solely for the purpose of leveraging them up with debt, paying themselves huge dividends from the borrowed money that oftentimes exceeded their investment (providing an instant profit), arbitrarily laying off large numbers of people to reduce expenses, then selling the over-leveraged carcass off to go bankrupt a couple years down the road. That is called looting and it is inexcusable, irresponsible and immoral. It should also have been illegal. The private equity executives that engaged in this behavior should be in jail and required to forfeit all of their earnings from the activity.

However, not all private equity firms operated in this despicable fashion. Private equity, when conducted in a responsible manner, may be the purest form of capitalism and one of the most beneficial when companies that would have gone bankrupt without outside intervention and restructuring manage to regain profitability and grow. Instead of everyone losing their job, the company can retain a significant portion of its people while replacing those at the top with more effective managers. The company may even become a substantial new job generator as profitable operations resume. To date I have seen no credible evidence that Bain and Company pursued the looting strategy rather than the objective of corporate regeneration for the benefit of all. If evidence that I am mistaken comes to light, then Romney is toast, as he should be.

Unfortunately, it appears that many Republicans are not doing the Party a favor by disparaging capitalism and accusing Romney in particular, and private equity investors in general, of plundering and pillaging. Either they do not really understand capitalism or they are political opportunists who desire to tap into the voters concern over the unfortunate growth of income inequality in America. In order to combat these perceptions, Romney must produce a verifiable report that proves Bain and Company did not engage in looting and that the firm was responsible for creating far more jobs than were lost by their investment and restructuring operations. If he doesn't, Obama will tear him to pieces with this issue next fall.

Certainly income inequality and Wall Street excess needs to be rationally addressed and reversed, but the redistribution of income policies of the current administration will not get it done. There ain't enough rich folks for that to succeed. 'Tax the rich, feed the poor til there are no rich no more' may have been a great line in an early 70's counterculture song (Alvin Lee, Ten Years After, 1971), but it is not a viable long term policy. Europe is the living proof. Only the economic growth generating attributes inherent in capitalism have the potential ability to raise living standards for all rather than for a privileged few.

Actually, all of this creates a tremendous, and critical, opportunity for Mitt Romney and our country. Romney must make a strong case for the job creation and abundant affluence that has been the legacy of capitalism in America versus the inevitable decline of living standards resulting from government control of the economy. Again, the ace in the hole for making this case is Europe. Unfortunately, with nearly half of Americans today receiving more from the government than they pay in, the majority of voters may not be listening. Something for nothing always appeals to people, particularly when it is legitimized by society. That has to change.

Democracy made America free. Capitalism made it great. Like it or not, Mitt Romney has perhaps been chosen by fate to be the man to lead America back from the precipice, to restore the United States back to its basic principles of individual liberty, equal opportunity, impartial justice, limited government and free enterprise. To regenerate an industrious work ethic in Americans we must be able to gain rewards from our efforts. That message must be eloquently and convincingly delivered. It would help if Romney would lose his patrician mannerisms as quickly as Obama acquired his. Regardless, Mitt Romney may be our last chance. He may not be up to it. Let's pray that he is.