Tuesday, May 22, 2012

Bailing on Bain Capital

The Pension Benefit Guaranty Corporation (PBGC) is a Unites States Government Agency that protects the retirement incomes of retirees in the private-sector. It is financed by insurance premiums that it collects from companies that have defined benefit pension plans. Of course, it has investment income and assets from pension plans entrusted to it, as well as recoveries from the companies formerly responsible for the plans. You can think of it as an FDIC for pension funds.

Suppose you are a company that is struggling to stay alive, say, because you manufacture buggy-whips, and your business plan is out of date. One thing you can do is close up shop, and sell your assets. With the proceeds, you can pay off your debts, and purchase annuities to pay for the retirement of your employees. Then you can walk away with your head held high.

Another way out of the situation is to find a white knight to rescue your company. The white knight could be a company like Bain Capital. Bain could give your company an infusion of capital with which to upgrade your product line. Let’s say their consultants suggest that you get out of buggy whips and into remote starters for automobiles, and change your name from Acme Buggy-Whips to Detroit Autostart. With the new capital, you can borrow a ton of money, and buy some robots to make remote starters. The gains in efficiency allow you to cut costs by firing workers. The cost savings allow you to pay a nice consulting fee to those Bain Capital consultants who had the wisdom and insight to see the problems of the buggy whip business.

When I say a nice consulting fee, I mean a fee that is so generous that it sucks all of the liquid capital out of your company. Uh-oh. Where are you going to get the money to pay off those debts? Here’s an idea: screw the debtors. The bankruptcy courts are at your beck and call. And, as Mitt Romney famously said, “Let Detroit go bankrupt.”

Shed no tears for the creditors who sold you robots to make auto-starters. They knew what they were doing. They looked at your books and decided that your company had a place in their portfolio. They assessed the risks, and charged an interest rate that was commensurate with those risks. If they made 500 loans like the one to you, and yours is the only one to go south, they will be okay.

The employees are another story. They actually earned those benefits with their labor. They went to work on the assumption that you would fund their retirements. They can’t hedge with 500 other pensions, and that’s why the PBGC exists. The government will pick up the pension liability and the worker’s will not have to live out their retirements in poverty and despair.

When you made obscene amounts of money on “consulting fees,” laid off a bunch of workers, and skipped out on their retirements, you really can’t walk away with your head held high. After all, insurance – which is what the PBGC is – usually doesn’t insure against losses that the insured causes. So some shame is appropriate. Unless you have no conscience, in which case, you can get the Republican nomination for the Presidency of the United States of America. After all, it’s the United States of America who sucked up your obligations to your workers.

One question remains. How much did the United States government pay to bail out the companies that Bain Capital led into bankruptcy?

“…and tell ’em Big Mitch sent ya!”

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