The professional political media have expressed considerable consternation about “Obama’s Attack On Bain… And The Capitalist Way of Life!” Is it fair to examine a candidate’s business experience, especially when said candidate touts his business acumen as bona fides for running the country? Really? This is debatable?
I’d like to suggest a thought experiment. Mitt Romney wants to bring his business sense to running our country. His business ways are a way of American life. So let’s see how a private equity scenario might play out in my neighborhood…
I’ve always like my neighbor’s house. I asked some banker friends if they knew anything about the house or the family that owned it. And, as luck would have it, my banker friends did know about the house and the family. They told me that the house was worth $250,000, but the neighbor only owed $25,000 on it. They also informed me that the family had a bank account with $210,000 set aside for their children’s college education.
I told my banker friends that I wanted to buy that house. I asked them if I could use my neighbor’s house and bank accounts as collateral for the loan to buy the house. They said, “Sure!”
So I bought my neighbor’s house using my neighbor’s income and assets as collateral for the loan.
Once I took possession of the home, I named myself the new head of my neighbor’s family. Since I bought the house from the family, and I was now the head-of-the-family, I paid myself the money my neighbors would have received when I bought the house from them.
I was so proud of myself that I dipped into my neighbor’s college fund and paid myself a $55,000 management fee for being so brilliant. Oh, yeah, and for my new responsibilities as head-of-the-family. Almost forgot about that. So I took another $15,000 out of that college fund, just to be safe.
The family was really nervous about all these changes. Who could blame them? But as the new head-of-the-family, it was my responsibility to take care of them. After I asked the parents to vacate the master bedroom – I was the head-of-the-family after all – I told them that I’d build them a nice bedroom suite in the basement. “It’d be great,” I told them, “just you wait and see.”
I looked around the house and saw a few other changes that I wanted to make, so I went back to my banker friends and asked for another loan against the house to spruce up the place. Another $225,000 should do the trick.
I called up plumbers, electricians, roofers, framers, landscapers, drywallers, designers, architects and got them working on sprucing up the place.
Managing all of that construction chaos was a lot of work. I needed another management fee. Another $50,000 did the trick.
And then I had a very serious conversation with my neighbors. I explained that I’m doing a lot for them, but it takes money to do this. I told them that they needed to increase their income by 25% in order to cover the monthly payments on those loans I took out.
I also asked them to cut out any money they were spending on groceries. I said, “Think of how much space is wasted storing food, not to mention all the space taken up by the appliances used to cook the stuff. We can make more efficient use of the space without all that kitchen-y stuff taking up square footage. It’ll make a lot more sense for you to eat all your meals at restaurants – leave food storage and prep to the professionals.”
I wanted to redecorate, as well. So I sold all the household furnishings on Craigslist – that old stuff had to go! I pocketed about $12,000 by selling those furnishings.
But now I had an empty house I needed to fill with new stuff. So back to the bankers I went, and I got another line of credit against the house for $75,000 to pay for the new furnishings. But, again, this was a lot of work. So I dipped into the college fund one more time for $20,000 in management fees.
Have you ever tried living in a house while you’re renovating it? It is impossible. So, being the responsible head-of-the-family, I moved myself and my neighbor’s family to a really nice hotel that I own. For six months! I think they’ve seen the error of their ways with the whole “cooking” thing. Six months of restaurant dining was the best!
When the construction on the house was finally done and all the new furnishings were in place, we were ready to move back in. But we had a little problem. Remember how I asked my neighbors to make 25% more money to take care of these loan payments. They got a 2% raise at the beginning of the year, but that was it. And the hotel and restaurant bills were pretty high, so I had to use a lot of the money we borrowed for construction and redecorating to pay the hotel and restaurant. That alone came to $185,000. So, we were coming up short and couldn’t pay the plumbers, electricians, framers, landscapers, drywallers, designers, architects, or decorators… or the bank.
So I had to make a very big head-of-the-family decision. And big decisions are really hard to make. So, for all my troubles, I needed one last management fee from the college fund – the last $70,000. And then I made the big decision.
I decided to hand the bank the keys to house, let them take possession of it, and name them the new head-of-the-family. I thought maybe the bank could sell it and make back some of its money. Who knew the $250,000 house I bought, then poured another $300,000 into, would only be worth $295,000 when all was said and done?
When all was said and done, I walked away with $657,000 ($250,000 for buying the house, $210,000 in management fees, $12,000 for the old furnishings, and $185,000 for my hotel and restaurant.). Since the bank’s loans were secured, they got first shot at being made whole. The bank had loans of $550,000 against the house, but could only sell it for $295,000, leaving them in the hole for $255,000. But only $435,000 of the $550,000 in loan proceeds were used, so the bank recouped $115,000. That left them short only $140,000. What about the plumbers, electricians, framers, landscapers, drywallers, designers, architects, and decorators? Their claims against the family were “unsecured,” so they would have to split whatever assets were left. After the bank got its share, there were no assets left. So, that meant there wasn’t any money left to pay the plumbers, electricians, framers, landscapers, drywallers, designers, architects, or decorators. They lost $300,000.
And what about my neighbors? Well, they aren’t neighbors anymore. They had to leave the house when the bank foreclosed on it. The kids won’t be able to go to college, because their college funds are gone. My neighbors believe so much in the value of a college education that they would’ve borrowed money for their kids’ tuition. But, their credit is shot because of the foreclosure. And the bankruptcy. Oh yeah, they had to declare bankruptcy, too, because they couldn’t pay the plumbers, electricians, framers, landscapers, drywallers, designers, architects, or decorators. I heard some of the plumbers, electricians, framers, landscapers, drywallers, designers, architects, and decorators had to declare bankruptcy, too, since they didn’t get paid.
But, as Mitt says, “That’s the way America works.” Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain. The $900,000 they lost someone else gained.
Of course no one would stand for this if one’s life could be taken over in such a manner. But replace the house with a company, the college fund with a pension fund and you’re not very far off mark in describing how private equity can disrupt the lives of so many for the benefit of so few.
So is this a “fair” line of attack? Is it fair to consider the adverse reactions to a particular action? Why don’t you ask all those pregnant women who used Thalidomide to treat morning sickness? Thalidomide was an effective treatment for morning sickness, so why even worry about the extremely high rate of birth defects attributed to the drug?
Being a good steward to our country means taking as many of the costs and benefits into account as possible. Mitt Romney’s business experience is fair game. And it does not speak well of his ability to govern for the benefit of us all.