March 7, 2021

DealBook: U.S. Debt? Bain Might Leverage It

Mitt Romney campaigning in Hudson, N.H., on Jan. 9. He has criticized high levels of federal debt, but private equity firms able to borrow at current low rates would almost certainly be taking advantage.Jim Wilson/The New York TimesMitt Romney campaigning in Hudson, N.H., on Jan. 9. He has criticized high levels of federal debt, but private equity firms able to borrow at current low rates would almost certainly be taking advantage.

Imagine how Mitt Romney would campaign if he actually ran as a private equity executive, dangerous though that may be in this era of the Tea Party and Occupy Wall Street.

Aggressively attacked by a super PAC supporting Newt Gingrich, Mr. Romney stands accused of being a rapacious capitalist intent on destroying jobs for personal gain. Mr. Romney has responded: Au contraire! He argues that his work at Bain Capital, one of the earliest and most successful private equity firms, created jobs by making companies more efficient and successful.

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Many people on Wall Street are befuddled. After all, a private equity firm creating jobs is like Adam Sandler winning an Academy Award — it would be nice if it happened, but it sure wasn’t the goal.

The goal, of course, is high returns.

If Mr. Romney were really running as a private equity executive, how would he view what his campaign regards as one of the nation’s most pressing issues, the national debt?

Right at the top of his campaign’s home page, Mr. Romney proclaims, “We have a moral responsibility not to spend more than we take in.” The United States’ debt is such a problem, it’s like an addiction: “The first step toward recovery is admitting we have a problem and refusing to allow any more irresponsible borrowing,” his site says.

It’s almost as if Mr. Romney never worked in — what’s that other phrase for private equity? — oh yes, a leveraged buyout firm. Leverage as in debt, debt and more debt. Debt amplifies the returns of L.B.O. firms. Indeed, they often saddle companies with extra debt precisely so that their investors can cash out faster, a technique Bain deployed under Mr. Romney’s watch.

L.B.O. firms certainly never think of debt as immoral. When the borrowing is good, private equity is going to grab the money. When Mr. Romney rails against debt, he is running away from his entire career in business.

So what about the federal government? The 10-year Treasury bond rate is 1.87 percent. Since inflation is higher than that, real rates are actually below zero, meaning that a lender to the United States government will get back less money in 10 years than it started with.

That’s right: When the government borrows, its lenders actually lose money. Yet foreigners and Americans, institutions and individuals alike are extraordinarily willing to shovel money at the United States government right now.

Are there private equity executives anywhere in the world who would counsel their companies not to borrow at such extremely low rates? I haven’t had the privilege of meeting one. Their mantra is, borrow now, for tomorrow the Mayans might turn out to be right. Few indeed are the companies that could borrow that cheaply and not make some kind of return on essentially free money.

“If debt is available to you historically cheaply, it almost always makes sense to take it,” said Shivan Govindan, a private equity executive for the Resource Financial Institutions Group. “Your capital strategy isn’t something ideological. You are going to optimize it for the best mix.”

So, by the logic of private equity, the United States government should borrow much more right now.

But what about the unsustainability of our debt? If a company has out-of-control costs and is spiraling toward default, it should not borrow more. True, but no company that is truly headed toward imminent default can borrow as cheaply as the American government.

If the United States government is headed toward bankruptcy, lenders are surely not acting that way. Maybe those people are making a good decision; maybe they are deluded. It doesn’t matter to the borrower.

Of course, an issue for the United States, as for a company, is whether it could put the money to good use.

“Surely, government investments would have a real return in a 10-year period higher than zero, even with waste and corruption,” said Paul L. Kasriel, an economist for Northern Trust. “This means that these investments will boost future real G.D.P. growth, which will boost future tax revenues to service the increased debt.”

There will be bridges and roads that we must fix over the next decade. We could put more young people in college, improve elementary school education, train veterans so they can find good jobs or finance exploration of alternative fuels. People will quibble — or maybe, in our polarized culture, fight tooth and nail — over the choices, but most could think of something that would be a good investment.

On a deeper level, the debate over private equity raises questions about using the metaphor of America as a business. That kind of thinking can reduce society to the sum of its revenues and profits, ignoring that much of what we do to provide for the common defense and promote the general welfare cannot or should not be measured, especially in economic terms. We take care of our elderly because it is the right thing to do, not because we expect a return on investment. Shouldn’t society promote and protect freedom and human rights? Even when there are times when doing so may be expensive or uneconomical?

There are moral issues that confront our country. Debt isn’t one of them.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: Follow him on Twitter (@Eisingerj).

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Despite Ban, Protests Continue Before Spanish Vote

MADRID — Tens of thousands of demonstrators across Spain continued sit-ins and other protests against the established political parties on Saturday. They did so in defiance of a ban against such protests and ahead of regional and municipal elections on Sunday.

About 28,000 people, most of them young, spent Friday night in Puerta del Sol, a main square in downtown Madrid, the police said. They stayed even as the protest ban went into effect at midnight under rules that bring an official end to campaigning before the election in 13 of Spain’s 17 regions and in more than 8,000 municipalities.

Fueling the demonstrators’ anger is the perceived failure by politicians to alleviate the hardships imposed on a struggling population. The unemployment rate in Spain is 21 percent.

Beyond economic complaints, the protesters’ demands include improving the judiciary, ending political corruption and overhauling Spain’s electoral structure, notably by ending the system in which candidates are selected internally by the parties before an election rather than chosen directly by voters.

The protests, which started May 15, have spread gradually across Spain. Spaniards overseas have also held some protests in front of their embassies to show their support for an alternative campaign that has almost eclipsed that of the established parties.

Although some of the protest groups have called for people to vote for smaller and alternative parties, or to cast a blank ballot, the movement could lead to a decline in voter turnout on Sunday. In the elections four years ago, 63 percent of eligible voters cast ballots.

Sunday’s election is expected to result in a countrywide sweep by the Popular Party, the main center-right opposition, at the expense of the governing Socialists, whose popularity has plummeted because of the economic crisis. The most recent opinion polls suggest that the Socialist Party may lose in regions and municipalities where it has been in power since Spain’s return to democracy in the late 1970s, notably Castilla-La Mancha.

Whatever the outcome, Prime Minister José Luis Rodríguez Zapatero announced in April that he would not seek a third term, paving the way for the selection of a new Socialist leader before the general election, which is expected in March 2012.

As the campaign ban came into force at midnight, many of the Madrid protesters stuck tape across their mouths to signal that they would continue the demonstration, even if ordered to be silent. “The voice of the people can never be illegal,” read some of the banners, while others argued, “We are not against the system but the system is against us.”

Still, the government suggested that it would not order the police to use force to break up any protests and sit-ins in Madrid and elsewhere over the weekend, especially given that protests this week have not generated any violence. Interior Minister Alfredo Pérez Rubalcaba, speaking during a visit to the Murcia region, said that “the police are there to solve problems and not create new ones.”

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