The Federal Bailout That Saved Mitt Romney

By Tim Dickinson, Rolling Stone

30 August 12

Government documents prove the candidate's mythology is just that.

itt Romney likes to say he won't "apologize" for his success in business. But what he never says is "thank you" - to the American people - for the federal bailout of Bain & Company that made so much of his outsize wealth possible.

According to the candidate's mythology, Romney took leave of his duties at the private equity firm Bain Capital in 1990 and rode in on a white horse to lead a swift restructuring of Bain & Company, preventing the collapse of the consulting firm where his career began. When The Boston Globe reported on the rescue at the time of his Senate run against Ted Kennedy, campaign aides spun Romney as the wizard behind a "long-shot miracle," bragging that he had "saved bank depositors all over the country $30 million when he saved Bain & Company."

In fact, government documents on the bailout obtained by Rolling Stone show that the legend crafted by Romney is basically a lie. The federal records, obtained under the Freedom of Information Act, reveal that Romney's initial rescue attempt at Bain & Company was actually a disaster - leaving the firm so financially strapped that it had "no value as a going concern." Even worse, the federal bailout ultimately engineered by Romney screwed the FDIC - the bank insurance system backed by taxpayers - out of at least $10 million. And in an added insult, Romney rewarded top executives at Bain with hefty bonuses at the very moment that he was demanding his handout from the feds.

With his selection of Paul Ryan as his running mate, Romney has made fiscal stewardship the centerpiece of his campaign. A banner at MittRomney.com declared, "We have a moral responsibility not to spend more than we take in." Romney also opposed the federal bailout for Detroit automakers, famously arguing that the industry should be forced into bankruptcy. Government bailouts, he insists, are "the wrong way to go."

But the FDIC documents on the Bain deal - which were heavily redacted by the firm prior to release - show that as a wealthy businessman, Romney was willing to go to extremes to secure a federal bailout to serve his own interests. He had a lot at stake, both financially and politically. Had Bain & Company collapsed, insiders say, it would have dealt a grave setback to Bain Capital, where Romney went on to build a personal fortune valued at as much as $250 million. It would also have short-circuited his political career before it began, tagging Romney as a failed businessman unable to rescue his own firm.

"None of us wanted to see Bain be the laughingstock of the business world," recalls a longtime Romney lieutenant who asked not to be identified. "But Mitt's reputation was on the line."

Mitt Romney's Federal Bailout: The Documents

The trouble began in 1984, when Bain & Company spun off Bain Capital to engage in leveraged buyouts and put Romney in charge of the new operation. To free up money to invest in the new business, founder Bill Bain and his partners cashed out much of their stock in the consulting firm - leaving it saddled with about $200 million in debt. (Romney, though not a founder, reportedly profited from the deal.) "People will tell you that Bill raped the place clean, was greedy, didn't know when to stop," a former Bain consultant later conceded. "Did they take too much out of the firm? You bet."

The FDIC documents make clear what happened next: "Soon after the founders sold their equity," analysts reported, "business began to drop off." First came scandal: In the late 1980s, a Bain consultant became a key figure in an illegal stock manipulation scheme in London. The firm's reputation took a hit, and it fired 10 percent of its consulting force. By the time the 1989 recession began, Bain & Company found itself going broke fast. Cash flows weren't enough to service the debt imposed by the founders, and the firm could barely make payroll. In a panic, Bill Bain tapped Romney, his longtime protégé, to take the reins.

In Romney's own retelling, he casts himself as a selfless and loyal company man. "There was no upside," he told his cheerleading biographer Hugh Hewitt in 2007. "There was no particular reason to do it other than a sense of obligation and duty to an organization that had done great things for me."

In fact, Romney had a direct stake in the survival of Bain & Company: He had been working to build the Bain brand his entire career, and felt he had to save the firm at all costs. After all, Bain sold top-dollar strategic advice to big businesses about how to protect themselves from going bust. If Bain & Company went bankrupt, recalls the Romney deputy, "anyone associated with them would have looked clownish." Indeed, when a banker from Goldman Sachs urged Bain to consider bankruptcy as the obvious solution to the firm's woes, Romney's desperation began to show. He flatly refused to discuss it - and in the ensuing argument, one witness says, Romney almost ended up in a brawl when the Goldman banker advised him to "go fuck yourself." For the sake of Romney's career and fortune, bankruptcy was simply not an option - no matter who got screwed in the process.

According to the government records obtained by Rolling Stone, Bain & Company "defaulted on its debt obligations" at nearly the same time that "W. Mitt Romney . . . stepped in as managing director (and later chief executive) in 1990 and led the financial restructuring intended to get the firm back on track."

Romney moved decisively, and his early efforts appeared promising. He persuaded the founders to return $25 million of the cash they had raided from Bain & Company and forgive $75 million in debt, in return for protection from most future liabilities. Romney then consolidated Bain's massive debts into a single, binding loan agreement with four banks, which received liens on Bain's assets and agreed to delay repayments on the firm's debts for two years. The federal government also signed off on the deal, since the FDIC had recently taken control of a bank that was owed $30.6 million by Bain. Romney assured creditors that the restructuring would enable Bain to "operate normally, compensate its professionals competitively" and, ultimately, pay off its debts.

Almost as soon as the FDIC agreed to the loan restructuring, however, Romney's rescue plan began to fall apart. "The company realized early on that it would be unable to hit its revenue targets or manage the debt structure," the documents reveal. By the spring of 1992, Bain's decline was perilous: "If Bain goes into default," one analyst warned the FDIC, "the bank group will need to decide whether to force Bain into bankruptcy."

With his rescue plan a bust, Romney was forced to slink back to the banks to negotiate a new round of debt relief. There was only one catch: Even though Bain & Company was deep in debt and sinking fast, the firm was actually flush with cash - most of it from the looted money that Bill Bain and other partners had given back. "Liquidity is strong based on the significant cash balance which Bain is carrying," one federal document reads.

Under normal circumstances, such ample reserves would have made liquidating Bain an attractive option: Creditors could simply divvy up the stockpiled cash and be done with the troubled firm. But Bain had inserted a poison pill in its loan agreement with the banks: Instead of being required to use its cash to pay back the firm's creditors, the money could be pocketed by Bain executives in the form of fat bonuses - starting with VPs making $200,000 and up. "The company can deplete its cash balances by making officer-bonus payments," the FDIC lamented, "and still be in compliance with the loan documents."

What's more, the bonus loophole gave Romney a perverse form of leverage: If the banks and the FDIC didn't give in to his demands and forgive much of Bain's debts, Romney would raid the firm's coffers, pushing it into the very bankruptcy that the loan agreement had been intended to avert. The losers in this game would not only be Bain's creditors - including the federal government - but the firm's nearly 1,000 employees worldwide.

In March 1992, according to the FDIC documents, Romney approached the banks and played the bonus card. Allow Bain to pay off its debt at a deep discount, he demanded - just 35 cents on the dollar. Otherwise, the "majority" of the firm's "excess cash" would "be available for the bonus pool to its officers at a vice president level and above."

The next month, when the banks balked at the deal, Romney decided to prove he wasn't bluffing. "As the bank group did not accept the proposal from Bain," the records show, "Bain's senior management has decided to go forth with the distribution of bonuses." (Bain's lawyers redacted the amount of the executive payouts, and the Romney campaign refused to comment on whether Romney himself received a bonus.)

Romney's decision to place executive compensation over fiscal responsibility immediately put Bain on the ropes. By that July, FDIC analysts reported, Bain had so little money left that "the company will actually run out of cash and default on the existing debt structure" as early as 1995. If that happened, Bain employees and American consumers would take the hit - an alternative that analysts considered "catastrophic."

But Romney didn't dole out all of Bain's cash as bonuses right away. According to a record from May 1992, he set aside some of the money to put one last squeeze on the firm's creditors. Romney now demanded that the banks and the government agree to a deal that was even less favorable than the last - to retire Bain's debts "at a price up to but not exceeding 30 cents on the dollar."

The FDIC considered finding a buyer to take over its loans to Bain, but analysts concluded that "Bain has no value as a going concern." And the government wasn't likely to get much out of Bain if it allowed the firm to go bankrupt: The loan agreement engineered by Romney had left the FDIC "virtually unsecured" on the $30.6 million it was owed by Bain. "Once bonuses are paid," the analysts warned, "all members of the bank group believe this company will dissolve during 1993."

About the only assets left would be Bain's office equipment. The records show FDIC analysts pathetically attempting to assess the value of such items, including an HP LaserJet printer, before concluding that most of the gear was so old that the government's "portion of any liquidation proceeds would be negligible."

How had Romney scored such a favorable deal at the FDIC's expense? It didn't hurt that he had close ties to the agency - the kind of "crony capitalism" he now decries. A month before he closed the 1991 loan agreement, Romney promoted a former FDIC bank examiner to become a senior executive at Bain. He also had pull at the top: FDIC chairman Bill Seidman, who had served as finance chair for Romney's father when he ran for president in 1968.

The federal documents also reveal that, contrary to Romney's claim that he returned full time to Bain Capital in 1992, he remained involved in bailout negotiations to the very end. In a letter dated March 23rd, 1993, Romney reassured creditors that his latest scheme would return Bain & Company to "long-term financial stability." That same month, Romney once again threatened to "pay out maximum bonus distributions" to top executives unless much of Bain's debt was erased.

In the end, the government surrendered. At the time, The Boston Globe cited bankers dismissing the bailout as "relatively routine" - but the federal documents reveal it was anything but. The FDIC agreed to accept nearly $5 million in cash to retire $15 million in Bain's debt - an immediate government bailout of $10 million. All told, the FDIC estimated it would recoup just $14 million of the $30 million that Romney's firm owed the government.

It was a raw deal - but Romney's threat to loot his own firm had left the government with no other choice. If the FDIC had pushed Bain into bankruptcy, the records reveal, the agency would have recouped just $3.56 million from the firm.

The Romney campaign refused to respond to questions for this article; a spokeswoman said only that "Mitt Romney turned around Bain & Company by getting all parties to come to the table and make difficult decisions." But while taxpayers did not finance the bailout, the debt forgiven by the government was booked as a loss to the FDIC - and then recouped through higher insurance premiums from banks. And banks, of course, are notorious for finding ways to pass their costs along to customers, usually in the form of higher fees. Thanks to the nature of the market, in other words, the bailout negotiated by Romney ultimately wound up being paid by the American people.

Even as consumers took a loss, however, a small group of investors wound up getting a good deal in the bailout. Bain Capital - the very firm that had triggered the crisis in the first place - walked away with $4 million. That was the fee it charged Bain & Company for loaning the consulting firm the services of its chief executive - one Willard Mitt Romney.