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CRACKING THE SYSTEM: How did Mitt Romney and other key figures at Bain Capital profit from a toy story that didn’t have a happy ending for most people?

written by Anthony Moore

© 2012

Question: How did Mitt Romney and other key figures at Bain Capital profit from a “toy story” that didn’t have a “happy ending” for most people?

Excerpt from Cracking the System: I have yet to see any of the Toy Story movies, but I don’t need to see any of them to know that they all have happy endings. After all, they’re Pixar movies, and Pixar only does happy endings—and not the kind of happy endings you get from massage parlors. I would be the first to agree that those kind of happy endings would be inappropriate for a children’s movie. Even so, the animated Snow White and the Seven Dwarfs movie released by Disney a long time ago gives me the impression that there may have been some of those kind of happy endings going on behind the scenes. Particularly when you consider she was a fair young maiden living with seven dwarfs who were all adult males who had no other women around and seemed to had never before even seen a woman let alone lived with one. Speaking of which, the previews of the newer big budget version of Snow White (Snow White and the Huntsman) give me the impression that the movie would have had some of those “adult happy endings” if it wasn’t for the fact that its distributors wanted to maintain its PG-13 rating. Especially with a name like “snow white,” which sounds like it could very well be the name of a powerful brand of cocaine. So, we can all agree that in some instances experiencing a “happy ending” when it comes to “snow white” isn’t exactly family friendly. Anyway, I digress.

The point I’m getting at is that when Bain Capital invested in KB Toys it didn’t result in a happy ending for the toy store—so it’s one toy story that didn’t have a happy ending; at least not for the toy store itself, although Bain Capital and senior level executives at KB Toys experienced happy endings at the expense of a whole bunch of other people. It’s the kind of perverted happy ending where the happiness of a few is obtained from the misery of the many—you know, just like when people force others to watch performances by their untalented kids so that they can feel like good parents (this is an injustice that’s often committed by powerful people in Hollywood).

In less than a year and a half, Bain Capital transformed $18 million into $85 million via a leveraged buyout of KB Toys. In December 2000, Bain invested $18 million of its own money and used $237 million in debt to acquire the toy store chain. In April of 2002, under the ownership of Bain, KB Toys obtained $66 million in additional debt. After that, the company used the cash it had on hand to pay out a “special” dividend. It was very special—so special that they profited by draining resources from the company and leading it down what turned out to be a path of destruction. The “special” dividend was a cash payout of $121 million, of which $85 million went to Bain and $36 million went to senior executives who signed off on the dividends.[1] I guess the $36 million the senior executives gave to themselves was a reward for giving Bain all that money. There’s nothing like a hard day’s work of giving out money irresponsibly. To make a long story short, in less than two years, KB Toys lost $109 million and filed for bankruptcy in 2004.[2] It closed half of its 1,200 stores and laid off more than half of its 16,000 employees. The bankruptcy filing caused the company who sold the toy store to Bain to lose $45 million of debt owed to it. Unsecured creditors got 8 cents on the dollar for the money they were owed. Bain blamed Wal-Mart for the problems KB Toys experienced.[3] I have no problem blaming Wal-Mart for its atrocities (as I do in this book), but just maybe the destruction of KB Toys had just a little something to do with the questionable “money management” decisions that took place. It’s probably more appropriate to call them “money-giving” decisions (since managing something implies handling it responsibly).

I did not point out Bain Capital’s handling of KB Toys to discredit Bain. I’m not saying that Bain hasn’t had a fair share of success stories. Nor am I saying that in every single one of its buyout did Bain discard employees at a faster rate than monogamy gets discarded at a swingers’ party. However, the reality is that in more than a few instances of its buyouts, Bain did discard employees at a faster rate than the rate at which the ability to act gets discarded in a Cinemax After Dark movie (that’s a very fast rate, by the way). If you’ve never seen a Cinemax After Dark movie, trust me when I say the acting leaves something to be desired. Of course, nobody in his right mind looks at these movies for any of the actresses ability to act—that would be the equivalent of picking up a copy of Playboy magazine just to make sure that the girls inside have nice personalities.

HOW THE PRECEDING BOOK EXCERPT CONTRIBUTES TO “CRACKING” THE SYSTEM: The excerpt above is from the chapter entitled The Game Has Changed, or Has It? Within this chapter there are sections such as Student Loans – Less About Educating and More About Money-Making. This section provides a broader context for the current state of college financing in the U.S. and the corresponding role of college within it. This is done by breaking down how and why the game has changed. It is explained how many of the failings of the U.S. economy and other ills perpetrated by the financial industry are actually the continuation and realization of a larger on-going trend. Also examined is the importance of understanding certain aspects of financial markets even if you’re not working in a finance-related industry, being that these aspects have a far-reaching, often unobvious, and (some would say) excessive impact on the U.S. as well as the world as a whole—student loans becoming more exploitive and burdensome is a byproduct of this reality. Also examined are the origins of this trend—a trend that has led to private equity fueled predatory practices such as the ones Bain Capital has engaged in as well as the practices that have resulted in Sallie Mae going from being an organization founded by the U.S. government (to help students pay for college) to being just another profit-driven company that was a highly coveted acquisition target by private equity firms and other large companies. Sallie Mae is currently a publicly traded strictly for-profit enterprise. The essence of this trend is the U.S. economy (driven by the finance industry) making a clearly noticeable shift toward the business practice of making money from the acquisition and selling of businesses while shifting away from a focus on more organic business success driven primarily by business expansion and development that spurs job-creation, infrastructure investment, as well as market growth.

This chapter also has a section entitled William E. Simon – Economic Pioneer or Plain Ol’ Pimp? It addresses Wesray Capital Corporation, a company that was a pioneer in the sometimes predatory practice of leveraged buyouts. The company’s founding is an example of the inter-connected relationships and revolving doors between government and business (especially as it relates to the finance industry). This is clearly demonstrated by one of the founders of Wesray, William Simon, who was Secretary of the U.S. Treasury before becoming one of the richest men in the U.S. due to his subsequent exploits as a financier. This pattern has been perpetuated in numerous instances, including in the case of the founding of the Blackstone Group, which is one of today’s largest financial services company and has been one of the biggest practitioners of leveraged buyouts in the most recent decade.

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