Early Bain-Ization – How A Few Got Rich Illegally Suppressing Unions

A look at one of Bain Capital’s first deals shows a get-rich-quick-at-everyone-else’s-expense pattern forming: borrow heavily, gut assets, cut wages, cut safety, crush unions, restructure for tax avoidance and sell with a sweetheart, insider deal. That pattern foreshadowed what happened to our jobs, communities, industries, economy and country since the early 1980s. An already-wealthy few got fantastically rich(er) and the rest of us paid the price.

A Financial Times Investigation

In FT investigation: Romney’s take-off the Financial Times (FT) investigated the $5 million buyout of Key Airlines, a “formative” deal from Mitt Romney’s company Bain Capital’s early years.
At the time Mitt Romney was at the consultant firm Bain & Company, and heard that Key Airlines was looking to be bought. Key Airlines had a $10 million per year government contract to shuttle pilots and support workers between Las Vegas and “Area 52,” where they were working on the then-secret F-117A stealth fighter. Romney formed Bain Capital in part to buy the airline. T. Coleman Andrews III, a former White House official recruited to Bain by Romney led the buyout for Bain and chaired its board of directors.
The Financial Times investigation showed how the purchase of Key Airlines helped establish the company’s method of doing business. They bought the company by borrowing all the money needed, 100% debt-financed, meaning Romney and Bain put up no money — and very little risk — of their own. They “restructured” the company; according to FT, “Bain also reshaped Key Airlines, turning it from a profitable, taxpaying company with a $13m balance sheet and its own aircraft, into an operating company with a $2m balance sheet and a holding company from which it sold assets separately.”
When the pilots tried to start a union, the company unlawfully suppressed the effort with what a federal judge called “blatant, grievous, wilful, deliberate and repeated violations.”

No-Risk Leveraged Purchase

One of the ways private-equity companies make money is by borrowing using the purchased company’s assets as collateral, and passing some or all of the borrowed money to themselves. Romney and Bain purchased Key Airlines by securing a $5 million loan with $2.5 million worth of aircraft owned by the company, and a $2 million guarantee of their own. In other words, they borrowed money to buy the company by promising the lender they would put up the company’s assets as collateral. (The company had a $10 million per year government contract.)
The bank lent the money with part of it personally guaranteed after satisfying themselves that the investors were worth enough money. In other words, they could finance a debt-only deal because they were already rich.

Restructuring To Avoid Taxes

When purchased, Key Airlines was making money and paying taxes. By borrowing, the company incurred debt servicing costs, which are deductible against taxes. The company also restructured in ways that cut taxes. According to FT, “Bain also reshaped Key Airlines, turning it from a profitable, taxpaying company with a $13m balance sheet and its own aircraft, into an operating company with a $2m balance sheet and a holding company from which it sold assets separately.”

Crushing The Union

Private equity companies cut costs. If you are not rich and have to work for a living, you are one of those “costs” that has to be cut. Your pay or your job are in the way of someone making a whole lot of money. Another “cost” to cut is the work environment. Worker safety can cost money, so it is one more thing that is in the way of someone making a whole lot of money. Providing a good, reliable product is another “cost” that is in the way of someone making a whole lot of money, and in an airline that “cost” is safe, well-maintained airplanes.
In 1985 a majority of Key’s pilots tried to form a union. According to FT, “the pilots cited safety concerns; management said that the pilots were unhappy because of their low pay.”
Bain was getting ready to sell the airline, and the worst thing that could happen to them would be a union, which could demand fair pay, worker safety and better maintenance and air safety procedures. Crushing the union — keeping pay low, and being able to ignore pleas for safer conditions for workers and passengers — would mean the Bain investors would make a lot of money. So they crushed the union.
According to FT,

There followed an unlawful attempt by Mr Andrews and Key management, in the words of District Court judge Roger Foley, “to stamp out any cockpit crew members’ union before it could come into being”.
In January 1986, Mr Andrews and Olen Rae Goodwin, interim president of the union, met in the Key Airlines trailer at Nellis. The court ruled that Mr Andrews had then “threatened [Mr] Goodwin’s job and he threatened to leave Key, and that the management team would also leave. He threatened to sell Key”.

A court later found that Key’s management had illegally suppressed the union, and awarded $500,000 in punitive damages.
Labor bosses: When asked about this recently Romney had this to say,

“President Obama continues to put the interests of labour bosses ahead of the interests of Americans looking for work. By contrast, Governor Romney has grown companies and created jobs, in the private sector and as governor of Massachusetts, and will get America working again,” said Michele Davis, a spokeswoman.

Please click through to the original Financial Times story for more.
“Blatant, grievous, wilful, deliberate and repeated violations”: Another FT story, Romney link to union suppression ruling explains further,

“The anti-union activities in this case are not merely unfair labour practices as Key argues, but blatant, grievous, wilful, deliberate and repeated violations of the Railway Labour Act,” Roger Foley, federal judge for the District of Nevada, wrote in 1992, in a case brought by two Key pilots.

That’s how a federal judge worded it. (Note how a case that started in 85 takes till 92 to get a ruling.) This is what the airline had done:

According to the court ruling, Key held coercive meetings with pilots; said management would leave and the company lose contracts; and told pilots that salaries, bonuses and benefits could be frozen. Federal labour law forbids an airline “to interfere in any way with the organisation of its employees”.

Sold For A Lot

The once-profitable company was struggling, losing money, had only $2 million in assets — down from $13 million when Bain bought it — and had just avoided (illegally suppressed) unionization. But Bain was able to sell part of it to Presidential Airways– a company in which Bain was also an investor, with Andrews on its Board — for $18 million. They sold other parts of the company for further profit. The Bain partners got rich(er).
According to FT

In the final analysis, it is hard to say whether Bain Capital was good or bad for Key Airlines.
The operating company had higher sales, was more focused, more efficient and employed more people by the time that Bain sold out.
On the other hand, it was also more fragile, with only one line of business, net losses and a weak balance sheet.

So a look at Bain Capital’s early, “formative” years tell us a lot about what has happened to our country, and our jobs, and our economy. This was the beginning of a pattern of Bain-ization that swept through the economy. Good jobs were replaced with low-wage, insecure jobs. They used various schemes to avoid taxes. They suppressed unions. They gutted the assets of good companies. They cut costs (us) and cut costs (safety) and cut costs (product quality) and cut costs (customer support) and cut corners and cut We, the People out of the equation.
This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
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So DID Mitt Romney Really “Create Jobs” At Staples?

Did Mitt Romney really “create 100,000 jobs” with Staples? Simple answer: only if no one else was selling office supplies, stationery, etc. before Staples came along. What Staples did was force many competing stationery, office supply and computer stores out of business, probably shifting their employees into lower-wage jobs. Staples was just one more part of the Wal-Martization of our economy in the last few decades. In our system the wealthy few have the power to lay people off or force pay cuts and then pocket the difference for themselves. We have to come to grips with that, and fix the system.

Job Creator?

Mitt Romney says he should be President because he and his company Bain Capital created 100,000 jobs at Staples and “created jobs” at other companies that Bain took over. So … did Mitt Romney really “create jobs” at Staples? Or did he and Bain really just follow the Wal-Mart model, using the advantages that come with having large, national chains, putting a number of local, smaller businesses out of business, while shifting a lot of people into lower-paying jobs? Understanding the difference is important because Romney says he will help the country “create jobs” the way he helped “create jobs” at Staples.
He says his experience is just what is needed to solve our national jobs emergency. He wants to apply the methods that “created 100,000 jobs at Staples” to the entire country. He says he will cut regulations and cut government and make the country more “business-friendly.” This means we should take a good look at Staples and the rest of the companies Mitt Romney and Bain Capital and others like them operated, and decide if this is really the way We, the People want to go.

Staples

Staples grew into a major chain because they consolidated what different kinds of stores sold, offering a one-stop-shop for stationery products, office supplies, office-furniture, computers, etc. They also were able to be competitive because of the advantages of scale as they grew into a national chain, centralizing functions like accounting, purchasing, legal, marketing, etc. And never underestimate the power of having a ton of cash at your disposal. This is all just smart business, well executed.
As Staples grew it overtook competing chains like Businessland and others. In other words, Staples took business from other, existing stores — often local retailers. Staples did not “create” jobs, it shifted office-supply jobs from local stores, etc., probably to lower-paying jobs. (The former owners of local businesses certainly were worse off from this.) They likely even lowered overall office-supply, stationery, etc. employment in the larger economy.

Low Wages?

How do these”Romney job creator” jobs stack up against other jobs? Average Staples salaries for job postings nationwide are 51% lower than average salaries for all job postings. The pay at Staples appears to be around $8-10 an hour. That’s $16-20,000 a year, certainly not enough to support a family, or even pay rent in many areas, never mind buying food. (The 2012 poverty guideline for family of four is $23,050.)

Wal-Martization

Big, national chain stores like Wal-Mart have tremendous advantages over local businesses because they are able to take advantage of scale. They buy from manufacturers and distributors in mass quantities, which means they can demand lower prices from them, and offer lower prices to customers. They can centralize accounting, HR and other management functions and employ these people in-house instead of contracting with local accounting firms, etc., also enabling them to offer lower prices.
And when they are big enough they can squeeze, and squeeze and squeeze their workers for lower wages and fewer benefits, their suppliers for discounts and other concessions, and even their customers by reducing support and staff, again enabling them to offer lower prices.
This is just the kind of “job creation” that makes a few people really wealthy at the expense of the rest of us, “hollowing out” the middle class.
(Here’s an industry secret –those multi-page advertising supplements that come in the Sunday paper are profit centers for the chains, not an advertising expense. The market power of these big chains enables them to demand “market development” payments from product manufacturers and distributors before they can gain shelf space, effectively making the newspaper and other advertising into profit centers instead of advertising costs.)

The Effect On America

I wrote about the impact of this “squeeze them all” business model on the American landscape in Lorain, OH Keep It Made In America Town Hall Meeting:

As you drive from town to town in Michigan and Ohio you see one after another a ring of the “big box” stores and national chain stores around each city. You also see the “brownfields” of rusted-out, closed factories, empty, falling-down buildings. Then you go to the downtown and you see boarded up houses, empty storefronts, deteriorating and deteriorated communities, idle people standing on corners. As you drive into these towns you can just see what is happening in a nutshell.
You used to hear about how Wal-Mart was predatory, how it would show up in an area and after a while the downtowns would dry up, local business-owners would go broke, local business employees would be laid off, and the local people would have to work for low wages at Wal-Mart, while the region’s spending money would go off to the wealthy few who run these things.
Well a juicy story of devastation like that one gets around, and there are those who hear it and say, “Hey, that’s a great idea, I wanna get me some of that.” So the Wal-Mart business model has taken off and now there are any number of these vultures, ringing the cities and towns around the country, so often private-equity owned. They are draining away the lifeblood of the downtowns, fighting off the unions to keep wages down, even demanding tax breaks to move in and “create jobs.” You see all the same stores circling every town now, running all of the local and regional businesses unto the ground.

Restructuring?

The changes in our economy that are hollowing out the middle class come from the restructuring that Wal-Martization represents. (And bad trade deals, never forget that.) Big, national chains have natural advantages over small, local businesses. And when they are big enough they have the power to squeeze employees, suppliers and even customers. The same kinds of advantages also hold for other industries.
Big, multinational corporations have advantages of scale over smaller companies. Etc., throughout our system. And big companies have tremendous power to squeeze workers, making them accept lower pay and benefits. They have the power to squeeze suppliers and customers as well.
These giant companies even have the power to squeeze communities and even states, demanding tax concessions with the threat of relocation. This has put our tax base in a downward spiral along with our wages.
These giant businesses have the wealth and power to force changes that move the benefits of business and our economy entirely to a few at the very top.

The Playing Field

As I wrote above, this is all just smart business, well executed. Business are just neutral bundles of contracts that operating on a playing field of laws and regulations. They only do what we let them do with the laws and regulations that we set out there for them to operate under, and those that do that the best and smartest win the game.
But why would We, the People allow businesses to do things the way Wal-Mart and the rest do them with the terrible results we see all around us? Don’t we want businesses that benefit all of us? Isn’t that the point of having a We, the People country? Don’t we want businesses that pay good wages, provide good products and services, and pay us back with taxes that enable us to have good infrastructure, internal improvements, and public structures like good schools, universities, courts, police, firefighters, health care, retirement and a fair share of all the other benefits of modern society?
Why is the playing field defined in a way that is so obviously hurting us and funneling all the benefits of our economy to a very few at the top? This restructuring is occurring the way it is because we let these businesses do these things to us. Businesses are not good or bad — they can’t be, they are not sentient and do not have morals. They are just bundles of contracts. Again, businesses are neutral, operating on a playing field defined by us. We can change that.
Our problem today is that a few people are able to change the rules of that playing field, for their own benefit. Once we allow money to influence our government decision-making and our public attitudes and understandings at all, then of course it will influence that decision making to their advantage, and will do so more and more as they gain more wealth and power from it, until there is nothing left. This is the road we are on.
The playing field is tilting and tilting and We, the People are starting to fall off the edge.

What Can We Do?

Cut to the chase. We currently operate under an economic paradigm, or system, in which the Romneys have so much power they can fire masses of people or force people to take pay cuts, and then pocket the difference for themselves. They can squeeze their suppliers for greater and greater concessions and then pocket the difference for themselves. We have to come to grips with that.
Romney/Bain didn’t really create jobs with Staples, they put small office and stationery retailers and other already-existing competitors out of businesses and moved the workers from those outlets into jobs at Staples that pay very little. In other words, they didn’t create 100,000 jobs, they lowered 100,000 people’s wages.
Romney made his money opertating on a playing field of business rules that let him and Bain and Wal-Mart and the rest do what they do. They were all able to tilt that playing field in their favor using the wealth and power they already had, and they tilted it in ways that gain them more wealth and power.
Mitt Romney gained his wealth and power on that playing field, and is campaigning with a promise to further tilt that playing field in favor of the few who already have great wealth and power.
We can change those rules. We can demand better pay, higher taxes at the top, better products, better service, and all the things sensible people would demand if We, the People were really in charge.
This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
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Note – while researching this post I came across Jonathan Tasini making a number of these points in the LA Times in January, in Not all jobs are equal,

Even if he’s telling the truth by some measures, the fact is that private equity buyouts often enrich those who arrange them by sharp cost-cutting, including dismantling pay and benefits for most of the workers who remain or new hires who join the more “efficient” enterprise. It’s simple math: To service the huge debt taken on in virtually every buyout, workers take cuts. And the new jobs aren’t necessarily a path to the American dream.
Take Staples, which Romney trumpets as one of his successes. The company certainly pays some of its employees well: Staples Chairman and Chief Executive Ronald L. Sargent received a total pay package of more than $15 million in 2010. But jobs in retail — one of the fastest-growing job sectors in recent decades — tend to pay poorly, and Staples jobs don’t seem to be an exception to that rule.

Romney/Bain/Accounts – Where Is Our Country’s News Media?

Back when Bill Clinton was President there was a huge media-swarm controversy because a decade before her husband was elected Hillary Clinton had made $100,000 over ten months by investing in cattle futures. Now, skip forward to 2012. Report after report circulates about a candidate for President who owns a secret company in Bermuda, Swiss and Cayman Islands bank accounts and an IRA containing as much as $100 million — and who may have filed SEC documents containing false information (a felony). Huge media swarm this time? Not so much.

Cattle Futures?

In the 1970s Hillary Clinton made some speculative investments. Over a period of 10 months she made investments in cattle futures that did well, earning $100,000. Later when her husband was President, the media wanted to find out how she was able to make such a large, huge, ginormous sum from speculative investments.
Take a look at the 350,000-or-so web references to cattle futures trades made by Hillary Clinton way back in the 1970s. This might give you an idea of how big a deal it was back in the mid-90’s that Hillary Clinton had made $100,000 (!!!) on speculative investments back in the 1970s. (The number of stories located online is possibly reduced by the fact that the media swarm happened in the mid-1990s — largely before the Internet.)
Look at the outlets that assigned teams of reporters to investigate: All the TV networks, the Washington Post, New York Times, Newsweek, and all of the rest of the jouranilmalism crowd were all over what was considered to be a major story.
This story was investigated, written about, investigated, written about, and investigated. No evidence of any wrongdoing was ever found — which many in the media took as clear proof that there had been a massive cover-up.

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