Romney's Housing Plan Looks a Lot Like Obama's

Amid a Friday afternoon focused squarely on the details of Mitt Romney’s 2011 tax returns, the Republican candidate also quietly released a white paper on the candidate’s housing policy. As I’ve written before, the campaigns have remained quite silent on housing and foreclosures, even though the housing market’s struggles are arguably the biggest impediment to a broader recovery and more than one in five homeowners owe more than their houses are worth. The new Romney plan document is all of seven pages long—one of those pages is the cover, and three pages lay out the current situation and bash Obama’s policies. That leaves a one-page executive summary that recaps the two pages that actually outline the “plan.”

That part of the plan is, shall we say, light on details. So much so that Business Insider’s Joe Weisenthal wrote (in his headline no less) that the paper “has got to be a joke.” He pointed to how Romney addressed Fannie Mae and Freddie Mac, the government sponsored enterprises that guarantee mortgages and got a nearly $190 billion bailout. The white paper says: “The Romney-Ryan plan will completely end ‘too-big-to-fail’ by reforming the GSEs. … Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country.” Got that? So Romney will reform them and do something new. How Romney will “reform” them and what will replace them isn’t specified. Republicans typically talk about ending the GSEs, so if reforming them involves something different, it could be a departure from the views of many in the party.

Other parts of the Romney plan look an awful lot like what Obama’s plan has done—much of which has had only a limited impact. Romney wants to “responsibly” sell the 200,000 vacant homes that the GSEs picked up when borrowers defaulted and faced foreclosure. He explains that the government can do this by “returning these homes to private hands and renting them out.” The GSEs already began in February with a pilot to sell 2,500 homes and recently sold the first part of that portfolio.

Romney also wants to make it easier for struggling borrowers to get foreclosure alternatives such as short sales, deeds in lieu of foreclosure, and modifications. As we’ve reported before, promoting these alternatives has been the Obama administration’s primary anti foreclosure tool—and that approach has had limited success. For example, a recent academic analysis found the administrations’ efforts will increase the number of loan modifications that banks make by only about 0.7 percent. That’s because the big banks that service mortgages have done a lousy job of implementing the program. Interestingly, the Romney plan briefly mentions support for “shared appreciation” modifications, in which servicers write down the principal of a mortgage and then get a cut of any price increase when a homeowner eventually sells the home. The Obama administration started supporting principal reduction this summer, but this would be quite a departure from the stance of many Republicans, who say that principal reduction encourages people to default purposely on their loans.

In perhaps the most marked difference from Obama, Romney calls for the repeal of Dodd-Frank and to replace it with “sensible” regulation that will “eliminate the regulatory uncertainty that is paralyzing lenders.” What those regulations will be, or how they’ll protect consumers while opening up more private lending, isn’t clear.

Taken together, perhaps it’s not surprising Romney buried the release on a Friday afternoon after posting the headline-grabbing tax documents.

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Mitt Romney's Private Equity Nightmare

The Randy Johnson-Ampad video has landed, and that could be bad news for Mitt Romney.

Back in February, we profiled Johnson and gave Bloomberg Businessweek readers a heads-up that he would star in an Obama campaign assault on Romney’s past as a private equity mogul and the Republican’s claims that his years at Bain Capital were devoted to job creation.

Well, the assault began last week with an ad about a former Bain-owned steel company called GST, and today the Obama team sent Johnson into the fray with a video about another ex-Bain property, office-supply manufacturer Ampad, a name that’ll be rocketing around YouTube and the political blogs.

The theme of this attack is familiar: Romney has claimed that during the time he ran Bain Capital in the 1980s and 1990s, the financial firm created tens of thousands of jobs. On occasion, the candidate has even boasted that his financial engineering added 100,000 jobs—a claim that, to put it politely, he has never adequately documented (as my Bloomberg News colleague Lisa Lerer explains here). To the contrary, according to the Obama campaign, Bain under Romney destroyed a lot of jobs when it took over struggling companies, like Ampad, squeezed “efficiencies” out of them (via factory closings and layoffs), and then watched them tumble into bankruptcy.

Randy Johnson, a plainspoken union organizer who once worked for Ampad in Marion, Ind., embodies the blue-collar case against private equity, Romney-style. As we reported in February:

Back in 1992, Bain acquired a manufacturer called American Pad & Paper, or Ampad. Bain then used Ampad as a vehicle to buy and restructure similar companies. Following standard “roll-up” strategy, Bain closed factories and laid off workers in anticipation of selling off a leaner, more profitable company via an initial public stock offering.

Two years into the roll up, Bain had Ampad acquire an office supplies plant in Marion, Ind., a manufacturing town 70 miles northeast of Indianapolis. At the time, Johnson worked the night shift making hanging files. “We come back from the July 4th holiday, and this is what we find posted,” Johnson says, producing from the Romney box a one-page notice: “As of 3 p.m. today, July 5, 1994, your employment with SCM Office Supplies Inc. will end.” Most of the 258 employees were allowed to reapply for jobs at reduced wages and benefits. Johnson’s pay fell 22 percent, he says, from $10.05 an hour to $7.88. Dismayed to see their old union contract torn up, the Marion workers negotiated with Ampad management for several months, then called a risky strike. In early 1995, Ampad called the union’s bluff, closed the plant, and laid off the remaining workers.

Ever since, Johnson has been haunting Romney with the memory of Ampad. The union man helped defeat the former buyout executive during his very first run for political office—an unsuccessful bid to unseat the late Senator Ted Kennedy in 1994. Now Johnson is back, and he makes a formidable foe. He tells his story affectingly and makes what sounds like a simple, straightforward argument.

As we noted when we looked deeply into the Ampad story with Johnson as our guide, that company’s demise is far from a simple morality tale, however. The office supply industry was struggling and consolidating by the time Bain got into the game. As so often happens with a brutal private equity makeover, workers lost jobs they may well have lost anyway, with or without the assistance of the financial engineers. This is the weakness in the Obama campaign’s one-sided and, in a sense, unfair broadside against private equity.

On the other hand, as Randy Johnson astutely observed in our profile, Romney has brought this problem on himself:

“None of what happened in Marion in the 1990s would be very interesting,” Johnson notes, “if Mitt Romney had not built his entire political career on the claim that he’s a job creator.”

We also interviewed Marc Wolpow, a former Romney colleague at Bain, who defended the buyout business as promoting American competitiveness. The main goal at buyout firms, however, is never maximizing employment, Wolpow told us. It’s maximizing returns for investors. “The facts,” Wolpow said, “tend to get lost in the political spin.”

Oh, and there’s one other thing. The optics of Bain and Romney taking millions in profits away from a deal like Ampad, while workers like Johnson lose their modestly paid jobs, just seems … well, unfair. That’s the message the Obama campaign wants to convey.

Barrett is a senior writer for Bloomberg Businessweek.

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Taking a Whack at Romney's Private Equity Past

Even before Mitt Romney was the presumptive Republican nominee, President Barack Obama’s political advisers made it clear that their reelection effort would center on attacking Romney’s tenure as head of Bain Capital. Now we know what they had in mind. On May 14 the campaign rolled out a brutal ad depicting Romney as a rapacious figure of greed whose firm bought, and then bankrupted, GST Steel in Kansas City, Mo. Airing in several swing states, it features a laid-off steelworker calling Romney “a vampire.” A day later, another attack: Priorities USA Action, the pro-Obama super PAC legally forbidden from coordinating with the campaign, launched its own nearly identical ad painting Romney as the sinister capitalist destroyer of … GST Steel.

This ugly portrayal of Romney and private equity first took shape in the GOP primaries, when Newt Gingrich and Rick Perry labeled their rival a “vulture capitalist.” Obama will amplify this message, backed by what’s likely to be the richest campaign in U.S. history. In the next few weeks alone, the president’s team plans to spend some $25 million on ads, hoping to cement this impression of Romney before Memorial Day, when many voters tune out for the summer. “We expected that the general election would bring new attention to private equity,” says Ken Spain, vice president of public affairs and communications for the Private Equity Growth Capital Council, the industry’s Washington lobbying group. “But what is lost in the politically charged debate is the fact that the private equity industry has pumped hundreds of billions of dollars into the U.S. economy, supporting and strengthening tens of thousands of businesses in all 50 states.”

Spain is right to be concerned. Romney won’t be the only one damaged by this onslaught, because most voters won’t distinguish attacks on Romney’s private equity career from attacks on private equity generally. One byproduct of the presidential campaign is bound to be that many Americans will come away with a deeply negative impression of the industry. Despite the enormous wealth of top private equity executives, it can’t possibly match the level of spending of a presidential campaign expected to raise $1 billion.

One false impression in business circles is that Romney, the private equity manager par excellence, will come to their rescue, deploying his campaign’s resources to defend his old industry. That’s not likely to happen. “A campaign’s objective is to protect your candidate at all times and at all costs,” says Steve Schmidt, who ran John McCain’s 2008 presidential campaign. “The art of throwing allies under the bus in pursuit of political victory is a time-honored tradition in American politics, and to the extent that the private equity industry is an impediment to that goal, they’ll go undefended.”

Sure enough, the Romney campaign’s initial response to the ads hasn’t been to defend Bain, but to establish that their candidate left the company two years before GST Steel declared bankruptcy. Later, Romney’s team released an ad of its own, highlighting another, more successful Bain portfolio company, Steel Dynamics (STLD). The ad conspicuously avoids mentioning the term “private equity.” Instead, it says Romney headed a “private sector leadership team.”

That leaves the task of defending private equity to its Washington trade group. Earlier this month, the PEGCC unveiled an ad that seeks to rebut the negative portrayal of the industry by explaining in simple, rosy terms what it actually does. But only a fraction of the people exposed to Obama’s ads will see this one, because the industry lacks the resources of a presidential campaign. Spain emphasized that the group’s aim is “to educate key audiences such as those in the media and policy makers.” He wouldn’t say where the ad would air or how much money would be put behind it. To date, the Campaign Media Analysis Group, a firm that tracks political advertising, has not registered a single broadcast television ad from the PEGCC—an indication of how badly the industry is being outspent.

The cost of this demonization could be steep. According to the PEGCC, public and private pensions supply 42 percent of the capital for private equity investments. “Public pension funds don’t want questions being raised about their investment strategy,” says Heather Slavkin, senior legal and policy adviser for the office of investment at the AFL-CIO. “Hearing terrible stuff about what private equity does will force the trustees to reconsider their allocations.”

And beyond investors, private equity’s business model could soon come under scrutiny. Congress will take up tax reform as early as December, with an eye toward raising more revenue. In addition to the carried-interest deduction, two more provisions dear to the industry will be reexamined. One is the ability to shelter profits offshore. The other is the tax code’s favorable treatment of corporate debt—the very foundation of private equity. Right now, 100 percent of such debt is deductible, one reason for the industry’s huge profits. A bipartisan Senate bill would limit this deduction to 75 percent, which would raise revenue to reduce the federal deficit, but squeeze private equity profits and force firms and their investors to put more of their own resources on the line.

Getting that through Congress will become easier if Americans come to view private equity managers as a scourge of the middle class. Some of these breaks would be tough enough to defend in the best of circumstances. They could be impossible to defend under the worst.

The bottom line: The Obama campaign plans to spend $25 million depicting Romney as a rapacious vulture capitalist. Private equity is likely to go undefended.

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Mitt Romney's Tax Savings

Photograph by Rick Friedman/CORBIS

By David J. Lynch, Lisa Lerer and Sabrina Willmer

When Mitt Romney conceded on Jan. 17 that he pays a tax rate of about 15 percent—far less than millions of wage earners whose votes he’s trying to win—he deflected criticism by employing what might be called the Ordinary Rich Guy Defense: Like a lot of people who are wealthy enough not to work, Romney said his income “comes overwhelmingly from investments made in the past.” That’s not quite the whole story. What he left out is that, because of the way he made his money, he is eligible to take advantage of a special tax provision that even some of his richest friends would envy.

Private equity executives such as Romney, who spent 15 years running Bain Capital, arrange to receive much of their compensation in the form of “carried interest.” This enables them to treat what would be work income for most people, taxed at rates up to 35 percent, as capital gains, taxed at just 15 percent. “It’s a method of converting one’s labor into capital gains in a way that’s unusual outside the investment management industry,” says Victor Fleischer, an associate law professor at the University of Colorado at Boulder whose 2007 paper on the topic helped spur calls in Congress to change the law. “Ordinary people wouldn’t be able to do this.”

For months, Romney dodged questions about his effective tax rate. “I paid the taxes required under the law,” he said on Jan. 11. That only increased curiosity. On Jan. 17, Romney conceded his effective rate was “probably” close to 15 percent. Though he retired from Bain in February 1999, Romney negotiated a settlement that has allowed him to continue benefiting from the firm’s lucrative private equity funds and to invest alongside them in so-called co-investment vehicles, both of which generate income taxed at the 15 percent rate. The tax code’s treatment of income from partnerships in private equity, hedge funds, and real estate development means that some of the richest people in the country are taxed as if they made the wages of a bus driver or health aide. Last year three founders of the Washington-based Carlyle Group each earned $275,000 in salary. But they took home $134 million apiece in distributions from their funds, according to a Securities and Exchange Commission filing, making them eligible to pay low rates on much of their compensation.

Private equity firms gather large sums from pension funds, universities, and wealthy individuals, and typically use the money to acquire privately held companies or subpar units of public companies. After improving the companies’ performance, often while working in hands-on management roles or serving on the board of directors, they sell their acquisitions to other investors or take them public. The tax code treats those gains as if the private equity partners were risking their own money—like average Americans who invest in mutual funds—instead of counting it as salary for running or advising the companies they acquire. In most cases, the private equity firms put up only a sliver of the fund’s capital.

In May 2004, Bain circulated a private-placement memorandum to investors for “Bain Capital Fund VIII.” Marked confidential, the document boasted that Bain had completed more than 200 deals as of March 2004. The firm’s first six funds had realized an 82 percent return, according to the document. In all, 274 investors signed on to the fund, including Romney and his wife, Ann, and pension funds for Texas teachers and Pennsylvania state employees.

The VIII fund, registered in the Cayman Islands, shows how special tax provisions allowed Romney to accumulate wealth both while running Bain and in the 13 years since he left the firm. The Romneys received more than $1 million from the fund in 2010, according to his most recent financial-disclosure form. Though Bain put up just 0.1 percent of the $3.5 billion fund’s capital, it drew 30 percent of the profits once investors were repaid their initial investment, better than the industry standard of 20 percent and a reflection of the firm’s stellar track record. The fund’s investment successes included the parent company of Dunkin’ Donuts, which paid investors a $500 million dividend after a successful November 2010 refinancing. A month later, the initial public offering of FleetCor Technologies in Norcross, Ga., brought in an additional $61 million.

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