DionRabouin.com (sort of)

How Bankruptcy Made Romney, Trump and Others Even Wealthier

Posted in Articles by dionrabouin on May 31, 2012

(Written for Loop21.com)

 

If you want to understand what Mitt Romney’s company Bain Capital does, it might help you to watch the 2002 comedy “Barbershop,” starring Ice Cube and Cedric the Entertainer. There’s a character in “Barbershop” who perfectly illustrates Bain Capital’s business model and his name is Lester Wallace. In case you don’t remember, Lester Wallace is a “business man from the street” that Ice Cube’s character, Calvin Palmer, gets a $20,000 loan from in the film.

Mitt Romney was a lot like Lester Wallace and Bain Capital operates a lot like Lester Wallace’s company. In “Barbershop,” Calvin is given $20,000 by Mr. Wallace in exchange for a controlling stake in his business. Calvin has the opportunity to repay that loan (within 24 hours and at 100 percent interest) or he can forfeit his business to the esteemed business man from the street who will run it as he sees fit. In this case, Mr. Wallace would run the business as he saw fit by turning the barbershop into a strip club.

Like Lester Wallace, Mitt Romney’s Bain Capital bought a large amount of stock in businesses that gave them a controlling stake. The businesses were allowed them to repay the company (often at less than 100 percent interest and with more time than 24 hours to pay it back) or they would have to allow Bain to run the business as they saw fit. In this case, running the business usually meant firing most of the workforce, adding more debt and then declaring bankruptcy. Then Bain and its investors would sneak away with millions and millions of dollars.

This isn’t a new concept. Buying a bad asset, firing the staff, filing for bankruptcy and riding off into the night with a fat sack of cash has been the blueprint for American capital success for years. Donald Trump perfected the art early in his career. Four of The Donald’s companies have filed for bankruptcy and he walked away without so much as a dent to his reputation or his massive bank account.

Trump talked proudly about how he has used bankruptcy to make himself richer and his companies stronger to Forbes magazine just last year. He even noted that many “great entrepreneurs” have used bankruptcy to restructure debt, free up capital and improve their businesses.

“I’ve cut debt – by the way, this isn’t me personally, it’s a company,” Trump said in the April 2011 article. “Basically I’ve used the laws of the country to my advantage and to other people’s advantage just as Leon Black has, Carl Icahn, Henry Kravis has, just as many, many others on top of the business world have.”

Bankruptcy is a device that wealthy people and corporations use to their advantage (the other three men, Black, Icahn and Henry Kravis, are all billionaires who have also filed for bankruptcy).

Filing for chapter 11 or chapter 7 does hurt your credit, but it also amounts to a full, or at least sizeable, forgiveness of the money you owe. Your creditors have to back off and you get to start over. It’s not the ideal solution, but it’s usually better to have a bankruptcy on your credit report than it is to have years of unpaid debts, repossessions and more bad loans.

Unfortunately for small business owners like Calvin Palmer, most people don’t realize what a great asset bankruptcy can be. But that’s how Bain Capital, Lester Wallace and other “private equity” firms stay in business and why business is so good.

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