Sunday, January 15, 2012

Mitt Romney's Character Flaw

No one has questioned Mitt Romney’s moral character. Everyone is persuaded that Romney has the perfect marriage and the perfect family.

No one has any reason to doubt the appearance of a happy, loving marriage and a solid family life.

Yet, for someone whose moral credentials are beyond impeccable, Romney still provokes misgivings among Republicans.

Some people may find it difficult to grasp but there’s a great deal more to moral character than sexual behavior.

Lust is but one of the deadly sins. It isn’t even the deadliest. Pride stands out as the deadliest of the deadly sins and one would be hard put to ignore the fact that one holier-than-thou candidate, namely Rick Santorum, is running his campaign on vanity.

Of late Newt Gingrich has been trying to put Mitt Romney’s moral character into question by depicting him as a heartless and ruthless corporate raider, a man whose avarice—another of the deadly sins—caused him to destroy companies and lives in order to enrich himself and his partners.

As of now the attack has proven rather flaccid indeed. It has elicited many counterarguments to the effect that private equity investing is intrinsic to the capitalist system. It has made Gingrich appear to be the enemy of capitalism, not a good position for a Republican to occupy.

Most of those who have misgivings about Mitt Romney have had great difficulty articulating them. The Gingrich attack on Bain Capital has not helped them to do so.

Admittedly, the Gingrich campaign needed a visually compelling and dramatically engaging picture of Romney’s avarice. Unfortunately, its supporters have undermined their own cause with exaggerations and misrepresentations.

By now most Romney supporters have gotten beyond the flip-flopper charge. It is not a crime to change your mind. It is not a character flaw to become more conservative as you grow older. Many conservative voters have had some doubts, but now, facing the seemingly inevitable choice between Romney and Obama, they are more than happy to put their misgivings in a lock box.

And yet, there’s flip-flopping and there’s flip-flopping. If a candidate has changed his mind, that’s one thing. If he is dissimulating his position in order to trick you into supporting him, only to reveal after he is nominated or elected that he intends to govern differently, that is quite something else.

The former represents a change of heart or mind. The latter involves an old game called bait-and-switch.

Among those who are most discomfited by a Romney candidacy I suspect that the real reason is that they feel somehow that they are being played. Thus, that they are going to be seduced by a mirage only to be abandoned later on.

Investigative journalist William Cohan raised the issue yesterday in the Washington Post.

Before he was a journalist Cohan was an investment banker. In that role he directed auctions where distressed companies were sold to private equity investors. Among the private equity firms he dealt with was Bain Capital.

Cohan did not deal directly with Mitt Romney, but he had dealings with senior Bain officials at a time when Romney was running the company.

It is worth noting that private equity investors do not swoop into a community to buy up a company and throw everyone out to work. They buy the companies at auctions conducted by investment bankers.

Cohan does not question the value of private equity investments. He does not question the creative destruction that inheres in capitalism.

He brings a much harsher charge against Mitt Romney. From his dealings with Bain executives Cohan concluded that Mitt Romney could not be trusted, that Mitt Romney was not a man of his word. Being untrustworthy is not one of the seven deadly sins. 

Apparently, the conduct of Bain executives during Romney's tenure was so reprehensible that eventually the investment bankers refused to allow them to bid on distressed company assets.

Experience told Cohan and his colleagues that Mitt Romney was not the kind of man you wanted to do business with.

If he is right, then Romney’s flip-flops are really a sign of a fundamental character flaw. If that is true, it would give substance to the misgivings so many people have about Mitt Romney.

You know from personal experience that you are not likely to feel warmth and affection toward someone you cannot trust. Perhaps we are indulging a bit of moral reverse engineering, but Cohan’s charge, if true, would explain the emotional reaction to Romney. 

Since he is reporting about his own personal experience, his account has added credibility. If it is being distorted then surely a large group of investment bankers will soon come forth to defend the honor and good name of Mitt Romney.

Understanding the bait-and-switch is difficult. Cohan tries to explain it in detail, so I will quote extensively from his description. As you read it keep in mind that the two stage process of auctioning off companies might correspond to the two stage process whereby a party selects a candidate for office and the candidate presents himself for the general election. Or else it might correspond to the two stage process of running for office and governing.

Cohan begins by explaining the way private equity works. He emphasizes that Bain was unique among private equity firms in its dishonorable behavior:  “Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching Wall Street bankers to get its hands on the companies that provided the raw material for its financial alchemy. Other private-equity firms I worked with extensively over the years — Forstmann Little, KKR, TPG and the Carlyle Group, among them — never dared attempt the audacious strategy that Bain partners employed with great alacrity and little shame. Call it the real Bain way.”

The first round of an auction eliminates the pretenders and settles on the private equity firms that are offering the highest bids. In that round Bain tended to offer the highest price. 

Once it had eliminated the competition, Bain began lowering its offer in the next round.

Cohan writes: “I never negotiated directly with Romney; he was too high-level for any interaction with me. Rather, I dealt often with other Bain senior partners, who were very much in his mold. In my experience, Bain Capital did all that it could to game the system by consistently offering the highest prices during the early rounds of bidding — only to try to low-ball the price after it had weeded out competitors.”

He continues: “By bidding high early, Bain would win a coveted spot in the later rounds of the auction, when greater information about the company for sale is shared and the number of competitors is reduced. (A banker and his client generally allow only the potential buyers with the highest bids into the later rounds; after all, you can’t have an endless procession of Savile Row-suited businessmen traipsing through a manufacturing plant if you want to keep a possible sale under wraps.)”

Cohan adds:  “In my experience — which I heard echoed often by my colleagues around Wall Street — Bain would seek to be the highest bidder at the end of the formal process in order to be the firm selected to negotiate alone with the seller, putting itself in the exclusive, competition-free zone. Then, when all other competitors had been essentially vanquished and the purchase contract was under negotiation, Bain would suddenly begin finding all sorts of warts, bruises and faults with the company being sold. Soon enough, that near-final Bain bid — the one that got the firm into its exclusive negotiating position — would begin to fall, often significantly.”

Consider a candidate who says everything his party wants to hear during the nominating process, only to change his mind once he has become the nominee.

Or else, consider a president who promises one thing while he is running for office but who then, once he takes office, claims that he has discovered new information that prevents him from keeping his word to those who elected him.

Recall the time when George H. W. Bush reneged on his No-new-taxes pledge.

In the world of private equity, the final stage of the auction looks like this: “At such a late date, of course, the seller is more than a little pregnant with the buyer. Attempting to pivot and find a new buyer — which knew it had not been selected in the first place, but was now being called back — would be devastating to the carefully constructed process designed to generate the highest price. Once Bain’s real thoughts about the price were revealed, the seller either had to suck it up and accept the lower price, or negotiate with a new buyer, but with far less leverage.”
Cohan correctly states that it is a character issue: “Bain’s behavior also reveals something about the values it brings to bear in a process that requires honor and character to work properly. If a firm’s word is not worth the paper it is printed on, then its reputation for bad behavior will impair its ability to function in an honorable and productive way.”

In conclusion, Cohan applies his insight into Romney’s character to the current election: “This win-at-any-cost approach makes me wonder how a President Romney would negotiate with Congress, or with China, or with anyone else — and what a promise, pledge or endorsement from him would actually mean.

“Would a President Romney, along with a Republican Congress, cut taxes for the wealthy even more than he has pledged to do? Would he not try to balance the federal budget, even though he has said he would? Would he protect defense spending, as he has indicated he would?

“I have no idea how Romney might behave in office. I do believe, however, that when he was running Bain Capital, his word was not his bond.”

It is difficult, perhaps impossible, for a political ad to look at the issue of a candidate’s trustworthiness, but Cohan has provided us with a look at Mitt Romney's business practices that makes everyone’s qualms about him seem perfectly rational.


Teemu said...

From WaPo
"By the end of my days on Wall Street in 2004, I found the real Bain way so counterproductive that I no longer included Bain Capital on my buyer’s lists of private-equity firms for a company I was selling."

Mitt Romney was CEO of Bain Capital from 1984 to 1998. So if Bain Capital was being so unfair during Romney's years, why did it took until 2004 to take Bain Capital of his buyer's list? That guy has quite a nice collection of books to sell, maybe he saw how many presidential candidates used the primaries to promote themselves, get some publicity and sell books, that he wanted to join the fun.

Stuart Schneiderman said...

Thank you for the thoughtful comments. Cohan is an investigative journalist. Since he spent many years as an investment banker I doubt that he is consumed by a desire to sell more books. Besides, he also has a professional reputation as a journalist to protect. If he is simply putting out a hit piece, it will be easy enough for other bankers who were involved in the auction process to step forward and clarify the situation or even debunk his views.

Dai Alanye said...

In describing Rick Santorum as "holier-than-thou" you are misusing the term. I've been interested in Santorum's political career for many years, and don't know of any occasion when he's held himself up as a moral paragon for others to emulate. It's quite possible he believes himself to be better than many others -- that's how I feel about myself, and almost certainly how you feel about yourself, based on the fact that you consider yourself justified in not only offering critical opinions on your blog but make a living advising others how to behave. On the other hand, Santorum is quite willing to state his beliefs in no uncertain terms, and perhaps that bothers you.

Beyond that, I'm quite certain that Romney panders to the electorate at all times, and that many insightful Republicans sense this dishonesty, thereby refusing to accept him before all other candidates have been eliminated. But the "dishonest bidder" image strikes me as merely someone who's learned how to game the system, and I find it impossible to believe that Bain was the only investor to figure this out. You might want to consider the behavior of people who purchase private homes, few of whom are above finagling to obtain the absolute lowest price. Realtors have a saying about this: Buyers are liars.

Stuart Schneiderman said...

I regret my glib remark. What I meant was that Santorum promotes himself as the most strictly social conservative candidate. Considering how badly he lost his last election in PA. I don't see that he has any other real rationale.

I am not at all bothered by Santorum's willingness to state his beliefs. He has every right to do so. I do not believe that he has any chance at all of being the nominee, so I would suggest that there is something unrealistic about his pursuit of the nomination.

I would add that my offering advice as a consultant or coach has nothing to do with being POTUS.

If Romney, as you say, learned how to game the system-- which is what Cohan was asserting-- then this is not necessarily such a good thing. I hope I do not sound too naive but the financial system is not based on what people can get away with; it is based on certain levels of trust established between people of good character.

I am sure that much of the financial services industry still operates on the basis of character and handshakes, yet the regulatory environment and the litigious society we live in has taught some of those who participate in that industry to game the system.

I would agree with Cohan that such bait-and-switch tactics are best dealt with by bankers who refuse to include certain parties in their auctions... thus effecting a free market solution.

As you suggest something similar happened with the mortgage business when the government got involve in it. People were allowed to lie about their income and the regulators told the banks to ignore it. Regulators forced banks to make bad loans to buyers. Both the banks and the buyers were happy to game the system.

RKV said...

In the real world Stuart, we often have to pick between less than desirable choices, with less than perfect information, and in a timeframe that prohibits searching for better alternatives, or even finding ways to minimize the damage that our choice will inevitably cause. That said, compared to Hussein, picking Mitt is easy. He's not my guy, but if that's what the choice comes down to I can hold my nose and vote for Mitt with a clean conscience. And spend the next four years holding his feet to the fire, because I know he has a problem with core values, as in lacking them. Still, having a short supply of the right values is superior to having a large supply of the wrong values - as is the case with the resident.

"I hope I do not sound too naive but the financial system is not based on what people can get away with; it is based on certain levels of trust established between people of good character." You are indeed naive. Think just for a minute about socialism security - millions of Americans have been corrupted into the belief that it is OK to take someone else's money without giving value in return. Two generations of our countrymen sold their children into slavery.

There is no free lunch Stuart. And ANYONE who tries to tell you so is out to defraud you, and if you believe them you are complicit.

Stuart Schneiderman said...

You are assuming that the nominating process is over. You are probably right. There seems little chance that Romney can be beaten.

I was not making the same assumption.

As it happens Romney has "won" the nomination by saying all the things that conservatives want to hear. It has helped his cause that conservatives are divided against themselves and have not been able to unite behind one candidate.

As you say, he does not seem to lack core values and therefore conservatives will be trying to hold his feet to the fire.

Now, the Cohan article pictured a company that tended, in his experience, to say one thing during the first round of an auction and another thing when it was the sole remaining suitor.

The picture had some eerie parallels to the current nominating process, and thus was well worth mentioning.

Aside from the consummate importance of ridding the nation of BHO, repealing his legacy is certainly a very important goal.

As Andrew McCarthy said a few days ago on the National Review site, Romney is the candidate who is least capable of leading the fight against Obamacare. If he can repeal it with an executive order, there would be no need to worry, but he can't, so there is.

As for my own naivete, I would mention that Cohan's column suggests that in his experience other private equity firms did not do business the Bain way.

If you would like the relevant analogy not all politicians lack core values. Some politicians actually do keep their word to the American people.

You seem to agree that Romney's lack of core values means that he is more likely than most to go back on his word. That's the point I was making.

Right now the debate about Bain is wrapped up in a debate about capitalism. Cohan's article tried to present the issue in different terms. Perhaps the current state of the race has made it that any criticism of Romney sounds like it's coming from the left.

In this case it's not.