Friday, August 31, 2012

Greed and Debt: The True Story of Romney and Bain Capital By Matt Taibbi / Rolling Stone Magazine

Greed and Debt: The True Story of Romney and Bain Capital

How the GOP presidential candidate and his private equity firm staged an epic wealth grab, destroyed jobs – and stuck others with the bill

The great criticism of Mitt Romney, from both sides of the aisle, has always been that he doesn't stand for anything. He's a flip-flopper, they say, a lightweight, a cardboard opportunist who'll say anything to get elected.
The critics couldn't be more wrong. Mitt Romney is no tissue-paper man. He's closer to being a revolutionary, a backward-world version of Che or Trotsky, with tweezed nostrils instead of a beard, a half-Windsor instead of a leather jerkin. His legendary flip-flops aren't the lies of a bumbling opportunist – they're the confident prevarications of a man untroubled by misleading the nonbeliever in pursuit of a single, all-consuming goal. Romney has a vision, and he's trying for something big: We've just been too slow to sort out what it is, just as we've been slow to grasp the roots of the radical economic changes that have swept the country in the last generation.
The incredible untold story of the 2012 election so far is that Romney's run has been a shimmering pearl of perfect political hypocrisy, which he's somehow managed to keep hidden, even with thousands of cameras following his every move. And the drama of this rhetorical high-wire act was ratcheted up even further when Romney chose his running mate, Rep. Paul Ryan of Wisconsin – like himself, a self-righteously anal, thin-lipped, Whitest Kids U Know penny pincher who'd be honored to tell Oliver Twist there's no more soup left. By selecting Ryan, Romney, the hard-charging, chameleonic champion of a disgraced-yet-defiant Wall Street, officially succeeded in moving the battle lines in the 2012 presidential race.
Like John McCain four years before, Romney desperately needed a vice-presidential pick that would change the game. But where McCain bet on a combustive mix of clueless novelty and suburban sexual tension named Sarah Palin, Romney bet on an idea. He said as much when he unveiled his choice of Ryan, the author of a hair-raising budget-cutting plan best known for its willingness to slash the sacred cows of Medicare and Medicaid. "Paul Ryan has become an intellectual leader of the Republican Party," Romney told frenzied Republican supporters in Norfolk, Virginia, standing before the reliably jingoistic backdrop of a floating warship. "He understands the fiscal challenges facing America: our exploding deficits and crushing debt."
Debt, debt, debt. If the Republican Party had a James Carville, this is what he would have said to win Mitt over, in whatever late-night war room session led to the Ryan pick: "It's the debt, stupid." This is the way to defeat Barack Obama: to recast the race as a jeremiad against debt, something just about everybody who's ever gotten a bill in the mail hates on a primal level.
Last May, in a much-touted speech in Iowa, Romney used language that was literally inflammatory to describe America's federal borrowing. "A prairie fire of debt is sweeping across Iowa and our nation," he declared. "Every day we fail to act, that fire gets closer to the homes and children we love." Our collective debt is no ordinary problem: According to Mitt, it's going to burn our children alive.
And this is where we get to the hypocrisy at the heart of Mitt Romney. Everyone knows that he is fantastically rich, having scored great success, the legend goes, as a "turnaround specialist," a shrewd financial operator who revived moribund companies as a high-priced consultant for a storied Wall Street private equity firm. But what most voters don't know is the way Mitt Romney actually made his fortune: by borrowing vast sums of money that other people were forced to pay back. This is the plain, stark reality that has somehow eluded America's top political journalists for two consecutive presidential campaigns: Mitt Romney is one of the greatest and most irresponsible debt creators of all time. In the past few decades, in fact, Romney has piled more debt onto more unsuspecting companies, written more gigantic checks that other people have to cover, than perhaps all but a handful of people on planet Earth.
By making debt the centerpiece of his campaign, Romney was making a calculated bluff of historic dimensions – placing a massive all-in bet on the rank incompetence of the American press corps. The result has been a brilliant comedy: A man makes a $250 million fortune loading up companies with debt and then extracting million-dollar fees from those same companies, in exchange for the generous service of telling them who needs to be fired in order to finance the debt payments he saddled them with in the first place. That same man then runs for president riding an image of children roasting on flames of debt, choosing as his running mate perhaps the only politician in America more pompous and self-righteous on the subject of the evils of borrowed money than the candidate himself. If Romney pulls off this whopper, you'll have to tip your hat to him: No one in history has ever successfully run for president riding this big of a lie. It's almost enough to make you think he really is qualified for the White House.
The unlikeliness of Romney's gambit isn't simply a reflection of his own artlessly unapologetic mindset – it stands as an emblem for the resiliency of the entire sociopathic Wall Street set he represents. Four years ago, the Mitt Romneys of the world nearly destroyed the global economy with their greed, shortsightedness and – most notably – wildly irresponsible use of debt in pursuit of personal profit. The sight was so disgusting that people everywhere were ready to drop an H-bomb on Lower Manhattan and bayonet the survivors. But today that same insane greed ethos, that same belief in the lunatic pursuit of instant borrowed millions – it's dusted itself off, it's had a shave and a shoeshine, and it's back out there running for president.
Mitt Romney, it turns out, is the perfect frontman for Wall Street's greed revolution. He's not a two-bit, shifty-eyed huckster like Lloyd Blankfein. He's not a sighing, eye-rolling, arrogant jerkwad like Jamie Dimon. But Mitt believes the same things those guys believe: He's been right with them on the front lines of the financialization revolution, a decades-long campaign in which the old, simple, let's-make-stuff-and-sell-it manufacturing economy was replaced with a new, highly complex, let's-take-stuff-and-trash-it financial economy. Instead of cars and airplanes, we built swaps, CDOs and other toxic financial products. Instead of building new companies from the ground up, we took out massive bank loans and used them to acquire existing firms, liquidating every asset in sight and leaving the target companies holding the note. The new borrow-and-conquer economy was morally sanctified by an almost religious faith in the grossly euphemistic concept of "creative destruction," and amounted to a total abdication of collective responsibility by America's rich, whose new thing was making assloads of money in ever-shorter campaigns of economic conquest, sending the proceeds offshore, and shrugging as the great towns and factories their parents and grandparents built were shuttered and boarded up, crushed by a true prairie fire of debt.
Mitt Romney – a man whose own father built cars and nurtured communities, and was one of the old-school industrial anachronisms pushed aside by the new generation's wealth grab – has emerged now to sell this make-nothing, take-everything, screw-everyone ethos to the world. He's Gordon Gekko, but a new and improved version, with better PR – and a bigger goal. A takeover artist all his life, Romney is now trying to take over America itself. And if his own history is any guide, we'll all end up paying for the acquisition.
Willard "Mitt" Romney's background in many ways suggests a man who was born to be president – disgustingly rich from birth, raised in prep schools, no early exposure to minorities outside of maids, a powerful daddy to clean up his missteps, and timely exemptions from military service. In Romney's bio there are some eerie early-life similarities to other recent presidential figures. (Is America really ready for another Republican president who was a prep-school cheerleader?) And like other great presidential double-talkers such as Bill Clinton and George W. Bush, Romney has shown particular aptitude in the area of telling multiple factual versions of his own life story.
"I longed in many respects to actually be in Vietnam and be representing our country there," he claimed years after the war. To a different audience, he said, "I was not planning on signing up for the military. It was not my desire to go off and serve in Vietnam."
Like John F. Kennedy and George W. Bush, men whose way into power was smoothed by celebrity fathers but who rebelled against their parental legacy as mature politicians, Mitt Romney's career has been both a tribute to and a repudiation of his famous father. George Romney in the 1950s became CEO of American Motors Corp., made a modest fortune betting on energy efficiency in an age of gas guzzlers and ended up serving as governor of the state of Michigan only two generations removed from the Romney clan's tradition of polygamy. For Mitt, who grew up worshipping his tall, craggily handsome, politically moderate father, life was less rocky: Cranbrook prep school in suburban Detroit, followed by Stanford in the Sixties, a missionary term in which he spent two and a half years trying (as he said) to persuade the French to "give up your wine," and Harvard Business School in the Seventies. Then, faced with making a career choice, Mitt chose an odd one: Already married and a father of two, he left Harvard and eschewed both politics and the law to enter the at-the-time unsexy world of financial consulting.
"When you get out of a place like Harvard, you can do anything – at least in the old days you could," says a prominent corporate lawyer on Wall Street who is familiar with Romney's career. "But he comes out, he not only has a Harvard Business School degree, he's got a national pedigree with his name. He could have done anything – but what does he do? He says, 'I'm going to spend my life loading up distressed companies with debt.' "
Romney started off at the Boston Consulting Group, where he showed an aptitude for crunching numbers and glad-handing clients. Then, in 1977, he joined a young entrepreneur named Bill Bain at a firm called Bain & Company, where he worked for six years before being handed the reins of a new firm-within-a-firm called Bain Capital.
In Romney's version of the tale, Bain Capital – which evolved into what is today known as a private equity firm – specialized in turning around moribund companies (Romney even wrote a book called Turnaround that complements his other nauseatingly self-complimentary book, No Apology) and helped create the Staples office-supply chain. On the campaign trail, Romney relentlessly trades on his own self-perpetuated reputation as a kind of altruistic rescuer of failing enterprises, never missing an opportunity to use the word "help" or "helped" in his description of what he and Bain did for companies. He might, for instance, describe himself as having been "deeply involved in helping other businesses" or say he "helped create tens of thousands of jobs."
The reality is that toward the middle of his career at Bain, Romney made a fateful strategic decision: He moved away from creating companies like Staples through venture capital schemes, and toward a business model that involved borrowing huge sums of money to take over existing firms, then extracting value from them by force. He decided, as he later put it, that "there's a lot greater risk in a startup than there is in acquiring an existing company." In the Eighties, when Romney made this move, this form of financial piracy became known as a leveraged buyout, and it achieved iconic status thanks to Gordon Gekko in Wall Street. Gekko's business strategy was essentially identical to the Romney–Bain model, only Gekko called himself a "liberator" of companies instead of a "helper."
Here's how Romney would go about "liberating" a company: A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent. When an LBO is done without the consent of the target, it's called a hostile takeover; such thrilling acts of corporate piracy were made legend in the Eighties, most notably the 1988 attack by notorious corporate raiders Kohlberg Kravis Roberts against RJR Nabisco, a deal memorialized in the book Barbarians at the Gate.
Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company's management with lucrative bonuses. Once management is on board, the rest is just math. So if the target company is worth $500 million, Bain might put down $20 million of its own cash, then borrow $350 million from an investment bank to take over a controlling stake.
But here's the catch. When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt.
Now your troubled firm – let's say you make tricycles in Alabama – has been taken over by a bunch of slick Wall Street dudes who kicked in as little as five percent as a down payment. So in addition to whatever problems you had before, Tricycle Inc. now owes Goldman or Citigroup $350 million. With all that new debt service to pay, the company's bottom line is suddenly untenable: You almost have to start firing people immediately just to get your costs down to a manageable level.
"That interest," says Lynn Turner, former chief accountant of the Securities and Exchange Commission, "just sucks the profit out of the company."
Fortunately, the geniuses at Bain who now run the place are there to help tell you whom to fire. And for the service it performs cutting your company's costs to help you pay off the massive debt that it, Bain, saddled your company with in the first place, Bain naturally charges a management fee, typically millions of dollars a year. So Tricycle Inc. now has two gigantic new burdens it never had before Bain Capital stepped into the picture: tens of millions in annual debt service, and millions more in "management fees." Since the initial acquisition of Tricycle Inc. was probably greased by promising the company's upper management lucrative bonuses, all that pain inevitably comes out of just one place: the benefits and payroll of the hourly workforce.
Once all that debt is added, one of two things can happen. The company can fire workers and slash benefits to pay off all its new obligations to Goldman Sachs and Bain, leaving it ripe to be resold by Bain at a huge profit. Or it can go bankrupt – this happens after about seven percent of all private equity buyouts – leaving behind one or more shuttered factory towns. Either way, Bain wins. By power-sucking cash value from even the most rapidly dying firms, private equity raiders like Bain almost always get their cash out before a target goes belly up.
This business model wasn't really "helping," of course – and it wasn't new. Fans of mob movies will recognize what's known as the "bust-out," in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company's credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money. Reduced to their most basic level, the leveraged buyouts engineered by Romney followed exactly the same business model. "It's the bust-out," one Wall Street trader says with a laugh. "That's all it is."
Private equity firms aren't necessarily evil by definition. There are many stories of successful turnarounds fueled by private equity, often involving multiple floundering businesses that are rolled into a single entity, eliminating duplicative overhead. Experian, the giant credit-rating tyrant, was acquired by Bain in the Nineties and went on to become an industry leader.
But there's a key difference between private equity firms and the businesses that were America's original industrial cornerstones, like the elder Romney's AMC. Everyone had a stake in the success of those old businesses, which spread prosperity by putting people to work. But even private equity's most enthusiastic adherents have difficulty explaining its benefit to society. Marc Wolpow, a former Bain colleague of Romney's, told reporters during Mitt's first Senate run that Romney erred in trying to sell his business as good for everyone. "I believed he was making a mistake by framing himself as a job creator," said Wolpow. "That was not his or Bain's or the industry's primary objective. The objective of the LBO business is maximizing returns for investors." When it comes to private equity, American workers – not to mention their families and communities – simply don't enter into the equation.
Take a typical Bain transaction involving an Indiana-based company called American Pad and Paper. Bain bought Ampad in 1992 for just $5 million, financing the rest of the deal with borrowed cash. Within three years, Ampad was paying $60 million in annual debt payments, plus an additional $7 million in management fees. A year later, Bain led Ampad to go public, cashed out about $50 million in stock for itself and its investors, charged the firm $2 million for arranging the IPO and pocketed another $5 million in "management" fees. Ampad wound up going bankrupt, and hundreds of workers lost their jobs, but Bain and Romney weren't crying: They'd made more than $100 million on a $5 million investment.
To recap: Romney, who has compared the devilish federal debt to a "nightmare" home mortgage that is "adjustable, no-money down and assigned to our children," took over Ampad with essentially no money down, saddled the firm with a nightmare debt and assigned the crushing interest payments not to Bain but to the children of Ampad's workers, who would be left holding the note long after Romney fled the scene. The mortgage analogy is so obvious, in fact, that even Romney himself has made it. He once described Bain's debt-fueled strategy as "using the equivalent of a mortgage to leverage up our investment."
Romney has always kept his distance from the real-life consequences of his profiteering. At one point during Bain's looting of Ampad, a worker named Randy Johnson sent a handwritten letter to Romney, asking him to intervene to save an Ampad factory in Marion, Indiana. In a sterling demonstration of manliness and willingness to face a difficult conversation, Romney, who had just lost his race for the Senate in Massachusetts, wrote Johnson that he was "sorry," but his lawyers had advised him not to get involved. (So much for the candidate who insists that his way is always to "fight to save every job.")
This is typical Romney, who consistently adopts a public posture of having been above the fray, with no blood on his hands from any of the deals he personally engineered. "I never actually ran one of our investments," he says in Turnaround. "That was left to management."
In reality, though, Romney was unquestionably the decider at Bain. "I insisted on having almost dictatorial powers," he bragged years after the Ampad deal. Over the years, colleagues would anonymously whisper stories about Mitt the Boss to the press, describing him as cunning, manipulative and a little bit nuts, with "an ability to identify people's insecurities and exploit them for his own benefit." One former Bain employee said that Romney would screw around with bonuses in small amounts, just to mess with people: He would give $3 million to one, $3.1 million to another and $2.9 million to a third, just to keep those below him on edge.
The private equity business in the early Nineties was dominated by a handful of takeover firms, from the spooky and politically connected Carlyle Group (a favorite subject of conspiracy-theory lit, with its connections to right-wingers like Donald Rumsfeld and George H.W. Bush) to the equally spooky Democrat-leaning assholes at the Blackstone Group. But even among such a colorful cast of characters, Bain had a reputation on Wall Street for secrecy and extreme weirdness – "the KGB of consulting." Its employees, known for their Mormonish uniform of white shirts and red power ties, were dubbed "Bainies" by other Wall Streeters, a rip on the fanatical "Moonies." The firm earned the name thanks to its idiotically adolescent Spy Kids culture, in which these glorified slumlords used code names, didn't carry business cards and even sang "company songs" to boost morale.
The seemingly religious flavor of Bain's culture smacks of the generally cultish ethos on Wall Street, in which all sorts of ethically questionable behaviors are justified as being necessary in service of the church of making money. Romney belongs to a true-believer subset within that cult, with a revolutionary's faith in the wisdom of the pure free market, in which destroying companies and sucking the value out of them for personal gain is part of the greater good, and governments should "stand aside and allow the creative destruction inherent in the free economy."
That cultlike zeal helps explains why Romney takes such a curiously unapologetic approach to his own flip-flopping. His infamous changes of stance are not little wispy ideological alterations of a few degrees here or there – they are perfect and absolute mathematical reversals, as in "I believe that abortion should be safe and legal in this country" and "I am firmly pro-life." Yet unlike other politicians, who at least recognize that saying completely contradictory things presents a political problem, Romney seems genuinely puzzled by the public's insistence that he be consistent. "I'm not going to apologize for having changed my mind," he likes to say. It's an attitude that recalls the standard defense offered by Wall Street in the wake of some of its most recent and notorious crimes: Goldman Sachs excused its lying to clients, for example, by insisting that its customers are "sophisticated investors" who should expect to be lied to. "Last time I checked," former Morgan Stanley CEO John Mack sneered after the same scandal, "we were in business to be profitable."
Within the cult of Wall Street that forged Mitt Romney, making money justifies any behavior, no matter how venal. The look on Romney's face when he refuses to apologize says it all: Hey, I'm trying to win an election. We're all grown-ups here. After the Ampad deal, Romney expressed contempt for critics who lived in "fantasy land." "This is the real world," he said, "and in the real world there is nothing wrong with companies trying to compete, trying to stay alive, trying to make money."
In the old days, making money required sharing the wealth: with assembly-line workers, with middle management, with schools and communities, with investors. Even the Gilded Age robber barons, despite their unapologetic efforts to keep workers from getting any rights at all, built America in spite of themselves, erecting railroads and oil wells and telegraph wires. And from the time the monopolists were reined in with antitrust laws through the days when men like Mitt Romney's dad exited center stage in our economy, the American social contract was pretty consistent: The rich got to stay rich, often filthy rich, but they paid taxes and a living wage and everyone else rose at least a little bit along with them.
But under Romney's business model, leveraging other people's debt means you can carve out big profits for yourself and leave everyone else holding the bag. Despite what Romney claims, the rate of return he provided for Bain's investors over the years wasn't all that great. Romney biographer and Wall Street Journal reporter Brett Arends, who analyzed Bain's performance between 1984 and 1998, concludes that the firm's returns were likely less than 30 percent per year, which happened to track more or less with the stock market's average during that time. "That's how much money you could have made by issuing company bonds and then spending the money picking stocks out of the paper at random," Arends observes. So for all the destruction Romney wreaked on Middle America in the name of "trying to make money," investors could have just plunked their money into traditional stocks and gotten pretty much the same returns.
The only ones who profited in a big way from all the job-killing debt that Romney leveraged were Mitt and his buddies at Bain, along with Wall Street firms like Goldman and Citigroup. Barry Ritholtz, author of Bailout Nation, says the criticisms of Bain about layoffs and meanness miss a more important point, which is that the firm's profit-producing record is absurdly mediocre, especially when set against all the trouble and pain its business model causes. "Bain's fundamental flaw, at least according to the math," Ritholtz writes, "is that they took lots of risk, use immense leverage and charged enormous fees, for performance that was more or less the same as [stock] indexing."
'I'm not a Romney guy, because I'm not a Bain guy," says Lenny Patnode, in an Irish pub in the factory town of Pittsfield, Massachusetts. "But I'm not an Obama guy, either. Just so you know."
I feel bad even asking Patnode about Romney. Big and burly, with white hair and the thick forearms of a man who's stocked a shelf or two in his lifetime, he seems to belong to an era before things like leveraged debt even existed. For 38 years, Patnode worked for a company called KB Toys in Pittsfield. He was the longest-serving employee in the company's history, opening some of the firm's first mall stores, making some of its canniest product buys ("Tamagotchi pets," he says, beaming, "and Tech-Decks, too"), traveling all over the world to help build an empire that at its peak included 1,300 stores. "There were times when I worked seven days a week, 16 hours a day," he says. "I opened three stores in two months once."
Then in 2000, right before Romney gave up his ownership stake in Bain Capital, the firm targeted KB Toys. The debacle that followed serves as a prime example of the conflict between the old model of American business, built from the ground up with sweat and industry know-how, and the new globalist model, the Romney model, which uses leverage as a weapon of high-speed conquest.
In a typical private-equity fragging, Bain put up a mere $18 million to acquire KB Toys and got big banks to finance the remaining $302 million it needed. Less than a year and a half after the purchase, Bain decided to give itself a gift known as a "dividend recapitalization." The firm induced KB Toys to redeem $121 million in stock and take out more than $66 million in bank loans – $83 million of which went directly into the pockets of Bain's owners and investors, including Romney. "The dividend recap is like borrowing someone else's credit card to take out a cash advance, and then leaving them to pay it off," says Heather Slavkin Corzo, who monitors private equity takeovers as the senior legal policy adviser for the AFL-CIO.
Bain ended up earning a return of at least 370 percent on the deal, while KB Toys fell into bankruptcy, saddled with millions in debt. KB's former parent company, Big Lots, alleged in bankruptcy court that Bain's "unjustified" return on the dividend recap was actually "900 percent in a mere 16 months." Patnode, by contrast, was fired in December 2008, after almost four decades on the job. Like other employees, he didn't get a single day's severance.
I ask Slavkin Corzo what Bain's justification was for the giant dividend recapitalization in the KB Toys acquisition. The question throws her, as though she's surprised anyone would ask for a reason a company like Bain would loot a firm like KB Toys. "It wasn't like, 'Yay, we did a good job, we get a dividend,'" she says with a laugh. "It was like, 'We can do this, so we will.' "
At the time of the KB Toys deal, Romney was a Bain investor and owner, making him a mere beneficiary of the raping and pillaging, rather than its direct organizer. Moreover, KB's demise was hastened by a host of genuine market forces, including competition from video games and cellphones. But there's absolutely no way to look at what Bain did at KB and see anything but a cash grab – one that followed the business model laid out by Romney. Rather than cutting costs and tightening belts, Bain added $300 million in debt to the firm's bottom line while taking out more than $120 million in cash – an outright looting that creditors later described in a lawsuit as "breaking open the piggy bank." What's more, Bain smoothed the deal in typical fashion by giving huge bonuses to the company's top managers as the firm headed toward bankruptcy. CEO Michael Glazer got an incredible $18.4 million, while CFO Robert Feldman received $4.8 million and senior VP Thomas Alfonsi took home $3.3 million.
And what did Bain bring to the table in return for its massive, outsize payout? KB Toys had built a small empire by targeting middle-class buyers with value-priced products. It succeeded mainly because the firm's leaders had a great instinct for what they were making and selling. These were people who had been in the specialty toy business since 1922; collectively, they had millions of man-hours of knowledge about how the industry works and how toy customers behave. KB's president in the Eighties, the late Saul Rubenstein, used to carry around a giant computer printout of the company's inventory, and would fall asleep reading it on the weekends, the pages clasped to his chest. "He knew the name and number of all those toys," his widow, Shirley, says proudly. "He loved toys."
Bain's experience in the toy industry, by contrast, was precisely bupkus. They didn't know a damn thing about the business they had taken over – and they never cared to learn. The firm's entire contribution was $18 million in cash and a huge mound of borrowed money that gave it the power to pull the levers. "The people who came in after – they were never toy people," says Shirley Rubenstein. To make matters worse, former employees say, Bain deluged them with requests for paperwork and reports, forcing them to worry more about the whims of their new bosses than the demands of their customers. "We took our eye off the ball," Patnode says. "And if you take your eye off the ball, you strike out."
In the end, Bain never bothered to come up with a plan for how KB Toys could meet the 21st-century challenges of video games and cellphone gadgets that were the company's ostensible downfall. And that's where Romney's self-touted reputation as a turnaround specialist is a myth. In the Bain model, the actual turnaround isn't necessary. It's just a cover story. It's nice for the private equity firm if it happens, because it makes the acquired company more attractive for resale or an IPO. But it's mostly irrelevant to the success of the takeover model, where huge cash returns are extracted whether the captured firm thrives or not.
"The thing about it is, nobody gets hurt," says Patnode. "Except the people who worked here."
Romney was a prime mover in the radical social and political transformation that was cooked up by Wall Street beginning in the 1980s. In fact, you can trace the whole history of the modern age of financialization just by following the highly specific corner of the economic universe inhabited by the leveraged buyout business, where Mitt Romney thrived. If you look at the number of leveraged buyouts dating back two or three decades, you see a clear pattern: Takeovers rose sharply with each of Wall Street's great easy-money schemes, then plummeted just as sharply after each of those scams crashed and burned, leaving the rest of us with the bill.
In the Eighties, when Romney and Bain were cutting their teeth in the LBO business, the primary magic trick involved the junk bonds pioneered by convicted felon Mike Milken, which allowed firms like Bain to find easy financing for takeovers by using wildly overpriced distressed corporate bonds as collateral. Junk bonds gave the Gordon Gekkos of the world sudden primacy over old-school industrial titans like the Fords and the Rockefellers: For the first time, the ability to make deals became more valuable than the ability to make stuff, and the ability to instantly engineer billions in illusory financing trumped the comparatively slow process of making and selling products for gradual returns.
Romney was right in the middle of this radical change. In fact, according to The Boston Globe – whose in-depth reporting on Romney and Bain has spanned three decades – one of Romney's first LBO deals, and one of his most profitable, involved Mike Milken himself. Bain put down $10 million in cash, got $300 million in financing from Milken and bought a pair of department-store chains, Bealls Brothers and Palais Royal. In what should by now be a familiar outcome, the two chains – which Bain merged into a single outfit called Stage Stores – filed for bankruptcy protection in 2000 under the weight of more than $444 million in debt. As always, Bain took no responsibility for the company's demise. (If you search the public record, you will not find a single instance of Mitt Romney taking responsibility for a company's failure.) Instead, Bain blamed Stage's collapse on "operating problems" that took place three years after Bain cashed out, finishing with a $175 million return on its initial investment of $10 million.
But here's the interesting twist: Romney made the Bealls-Palais deal just as the federal government was launching charges of massive manipulation and insider trading against Milken and his firm, Drexel Burnham Lambert. After what must have been a lengthy and agonizing period of moral soul-searching, however, Romney decided not to kill the deal, despite its shady financing. "We did not say, 'Oh, my goodness, Drexel has been accused of something, not been found guilty,' " Romney told reporters years after the deal. "Should we basically stop the transaction and blow the whole thing up?"
In an even more incredible disregard for basic morality, Romney forged ahead with the deal even though Milken's case was being heard by a federal district judge named Milton Pollack, whose wife, Moselle, happened to be the chairwoman of none other than Palais Royal. In short, one of Romney's first takeover deals was financed by dirty money – and one of the corporate chiefs about to receive a big payout from Bain was married to the judge hearing the case. Although the SEC took no formal action, it issued a sharp criticism, complaining that Romney was allowing Milken's money to have a possible influence over "the administration of justice."
After Milken and his junk bond scheme crashed in the late Eighties, Romney and other takeover artists moved on to Wall Street's next get-rich-quick scheme: the tech-Internet stock bubble. By 1997 and 1998, there were nearly $400 billion in leveraged buyouts a year, as easy money once again gave these financial piracy firms the ammunition they needed to raid companies like KB Toys. Firms like Bain even have a colorful pirate name for the pools of takeover money they raise in advance from pension funds, university endowments and other institutional investors. "They call it dry powder," says Slavkin Corzo, the union adviser.
After the Internet bubble burst and private equity started cashing in on Wall Street's mortgage scam, LBO deals ballooned to almost $900 billion in 2006. Once again, storied companies with long histories and deep regional ties were descended upon by Bain and other pirates, saddled with hundreds of millions in debt, forced to pay huge management fees and "dividend recapitalizations," and ridden into bankruptcy amid waves of layoffs. Established firms like Del Monte, Hertz and Dollar General were all taken over in a "prairie fire of debt" – one even more destructive than the government borrowing that Romney is flogging on the campaign trial. When Hertz was conquered in 2005 by a trio of private equity firms, including the Carlyle Group, the interest payments on its debt soared by a monstrous 80 percent, forcing the company to eliminate a third of its 32,000 jobs.
In 2010, a year after the last round of Hertz layoffs, Carlyle teamed up with Bain to take $500 million out of another takeover target: the parent company of Dunkin' Donuts and Baskin-Robbins. Dunkin' had to take out a $1.25 billion loan to pay a dividend to its new private equity owners. So think of this the next time you go to Dunkin' Donuts for a cup of coffee: A small cup of joe costs about $1.69 in most outlets, which means that for years to come, Dunkin' Donuts will have to sell about 2,011,834 small coffees every month – about $3.4 million – just to meet the interest payments on the loan it took out to pay Bain and Carlyle their little one-time dividend. And that doesn't include the principal on the loan, or the additional millions in debt that Dunkin' has to pay every year to get out from under the $2.4 billion in debt it's now saddled with after having the privilege of being taken over – with borrowed money – by the firm that Romney built.
If you haven't heard much about how takeover deals like Dunkin' and KB Toys work, that's because Mitt Romney and his private equity brethren don't want you to. The new owners of American industry are the polar opposites of the Milton Hersheys and Andrew Carnegies who built this country, commercial titans who longed to leave visible legacies of their accomplishments, erecting hospitals and schools and libraries, sometimes leaving behind thriving towns that bore their names.
The men of the private equity generation want no such thing. "We try to hide religiously," explained Steven Feinberg, the CEO of a takeover firm called Cerberus Capital Management that recently drove one of its targets into bankruptcy after saddling it with $2.3 billion in debt. "If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person," Feinberg told shareholders in 2007. "We will kill him. The jail sentence will be worth it."
Which brings us to another aspect of Romney's business career that has largely been hidden from voters: His personal fortune would not have been possible without the direct assistance of the U.S. government. The taxpayer-funded subsidies that Romney has received go well beyond the humdrum, backdoor, welfare-sucking that all supposedly self-made free marketeers inevitably indulge in. Not that Romney hasn't done just fine at milking the government when it suits his purposes, the most obvious instance being the incredible $1.5 billion in aid he siphoned out of the U.S. Treasury as head of the 2002 Winter Olympics in Salt Lake – a sum greater than all federal spending for the previous seven U.S. Olympic games combined. Romney, the supposed fiscal conservative, blew through an average of $625,000 in taxpayer money per athlete – an astounding increase of 5,582 percent over the $11,000 average at the 1984 games in Los Angeles. In 1993, right as he was preparing to run for the Senate, Romney also engineered a government deal worth at least $10 million for Bain's consulting firm, when it was teetering on the edge of bankruptcy. (See "The Federal Bailout That Saved Romney," page 52.)
But the way Romney most directly owes his success to the government is through the structure of the tax code. The entire business of leveraged buyouts wouldn't be possible without a provision in the federal code that allows companies like Bain to deduct the interest on the debt they use to acquire and loot their targets. This is the same universally beloved tax deduction you can use to write off your mortgage interest payments, so tampering with it is considered political suicide – it's been called the "third rail of tax reform." So the Romney who routinely rails against the national debt as some kind of child-killing "mortgage" is the same man who spent decades exploiting a tax deduction specifically designed for mortgage holders in order to bilk every dollar he could out of U.S. businesses before burning them to the ground.
Because minus that tax break, Romney's debt-based takeovers would have been unsustainably expensive. Before Lynn Turner became chief accountant of the SEC, where he reviewed filings on takeover deals, he crunched the numbers on leveraged buyouts as an accountant at a Big Four auditing firm. "In the majority of these deals," Turner says, "the tax deduction has a big enough impact on the bottom line that the takeover wouldn't work without it."
Thanks to the tax deduction, in other words, the government actually incentivizes the kind of leverage-based takeovers that Romney built his fortune on. Romney the businessman built his career on two things that Romney the candidate decries: massive debt and dumb federal giveaways. "I don't know what Romney would be doing but for debt and its tax-advantaged position in the tax code," says a prominent Wall Street lawyer, "but he wouldn't be fabulously wealthy."
Adding to the hypocrisy, the money that Romney personally pocketed on Bain's takeover deals was usually taxed not as income, but either as capital gains or as "carried interest," both of which are capped at a maximum rate of 15 percent. In addition, reporters have uncovered plenty of evidence that Romney takes full advantage of offshore tax havens: He has an interest in at least 12 Bain funds, worth a total of $30 million, that are based in the Cayman Islands; he has reportedly used a squirrelly tax shelter known as a "blocker corporation" that cheats taxpayers out of some $100 million a year; and his wife, Ann, had a Swiss bank account worth $3 million. As a private equity pirate, Romney pays less than half the tax rate of most American executives – less, even, than teachers, firefighters, cops and nurses. Asked about the fact that he paid a tax rate of only 13.9 percent on income of $21.7 million in 2010, Romney responded testily that the massive windfall he enjoys from exploiting the tax code is "entirely legal and fair."
Essentially, Romney got rich in a business that couldn't exist without a perverse tax break, and he got to keep double his earnings because of another loophole – a pair of bureaucratic accidents that have not only teamed up to threaten us with a Mitt Romney presidency but that make future Romneys far more likely. "Those two tax rules distort the economics of private equity investments, making them much more lucrative than they should be," says Rebecca Wilkins, senior counsel at the Center for Tax Justice. "So we get more of that activity than the market would support on its own."
Listen to Mitt Romney speak, and see if you can notice what's missing. This is a man who grew up in Michigan, went to college in California, walked door to door through the streets of southern France as a missionary and was a governor of Massachusetts, the home of perhaps the most instantly recognizable, heavily accented English this side of Edinburgh. Yet not a trace of any of these places is detectable in Romney's diction. None of the people in any of those places bled in and left a mark on the man.
Romney is a man from nowhere. In his post-regional attitude, he shares something with his campaign opponent, Barack Obama, whose background is a similarly jumbled pastiche of regionally nonspecific non-identity. But in the way he bounced around the world as a half-orphaned child, Obama was more like an involuntary passenger in the demographic revolution reshaping the planet than one of its leaders.
Romney, on the other hand, is a perfect representative of one side of the ominous cultural divide that will define the next generation, not just here in America but all over the world. Forget about the Southern strategy, blue versus red, swing states and swing voters – all of those political clich├ęs are quaint relics of a less threatening era that is now part of our past, or soon will be. The next conflict defining us all is much more unnerving.
That conflict will be between people who live somewhere, and people who live nowhere. It will be between people who consider themselves citizens of actual countries, to which they have patriotic allegiance, and people to whom nations are meaningless, who live in a stateless global archipelago of privilege – a collection of private schools, tax havens and gated residential communities with little or no connection to the outside world.
Mitt Romney isn't blue or red. He's an archipelago man. That's a big reason that voters have been slow to warm up to him. From LBJ to Bill Clinton to George W. Bush to Sarah Palin, Americans like their politicians to sound like they're from somewhere, to be human symbols of our love affair with small towns, the girl next door, the little pink houses of Mellencamp myth. Most of those mythical American towns grew up around factories – think chocolate bars from Hershey, baseball bats from Louisville, cereals from Battle Creek. Deep down, what scares voters in both parties the most is the thought that these unique and vital places are vanishing or eroding – overrun by immigrants or the forces of globalism or both, with giant Walmarts descending like spaceships to replace the corner grocer, the family barber and the local hardware store, and 1,000 cable channels replacing the school dance and the gossip at the local diner.
Obama ran on "change" in 2008, but Mitt Romney represents a far more real and seismic shift in the American landscape. Romney is the frontman and apostle of an economic revolution, in which transactions are manufactured instead of products, wealth is generated without accompanying prosperity, and Cayman Islands partnerships are lovingly erected and nurtured while American communities fall apart. The entire purpose of the business model that Romney helped pioneer is to move money into the archipelago from the places outside it, using massive amounts of taxpayer-subsidized debt to enrich a handful of billionaires. It's a vision of society that's crazy, vicious and almost unbelievably selfish, yet it's running for president, and it has a chance of winning. Perhaps that change is coming whether we like it or not. Perhaps Mitt Romney is the best man to manage the transition. But it seems a little early to vote for that kind of wholesale surrender.

Sunday, August 19, 2012

The Party of Great Moral Frauds By Thomas J. DiLorenzo July 10, 2012 "Information Clearing House"

The Party of Great Moral Frauds

By Thomas J. DiLorenzo  
"Information Clearing House" July 10, 2012 

July 10, 2012 "Information Clearing House" -- For the past century and a half the Republican Party has gratuitously labeled itself as "The Party of Great Moral Ideas." The Party of Great Moral Frauds is more like it. The party began as the party of mercantilism, corporate welfare, protectionist tariffs, constitutional subterfuge, central banking, and imperialism. Its 1860 presidential platform promised not to disturb Southern slavery; its first president supported the Fugitive Slave Act and the proposed "Corwin Amendment" to the Constitution that would have prohibited the federal government from ever interfering with Southern slavery; the party committed treason by "levying war upon the states" (the precise definition of treason in the Constitution) and murdering hundreds of thousands of fellow citizens in order to destroy the voluntary union of the states that was established by the founding fathers. It refused to do what Britain, Spain, France, the Dutch, Denmark, Sweden, and the Northern states in the U.S. had done about slavery and end it peacefully. Instead, it used the slaves as pawns in a war that was about consolidating all political power in Washington, D.C. in general, and in the hands of the Republican Party in particular.
Three months after the War to Prevent Southern Independence ended the Republican Party commenced a twenty-five year war of genocide against the Plains Indians, killing as many as 60,000 of them, including thousands of women and children, and putting the rest in concentration camps. It did this, according to General Sherman who orchestrated this horribly immoral crusade, to "make way for the railroads" that were being heavily subsidized by the Republican Party. It also plundered the conquered South with exorbitant taxes and the legalized theft of vast tracts of property by party hacks for a decade after the war (so-called "reconstruction"), while doing virtually nothing for the freed slaves. It did nothing while as many as 1 million former slaves died of disease shortly after the war in the worst public health disaster in American history.
The Grant administrations were most known for the colossal corruption associated with the building of the government-subsidized transcontinental railroads that was finally made public during the Credit Mobilier scandal.

The Republican Party has always been about disguising a lust for economic plunder with phony ideas about "freedom," "Christianity," "equality," "civilization,"and other nice-sounding words. The War to Prevent Southern Independence allowed it to finally usher in the Hamiltonian "American System" of high protectionist tariffs for the benefit of Northern manufacturers at the expense of everyone else; a nationalized money supply with its Legal Tender and National Currency Acts; and vast amounts of corporate welfare, starting with the government-subsidized railroad corporations. It created the internal revenue system, invented dozens of new taxes, created the military/industrial complex, ran up historically high levels of debt, and destroyed the founders’ system of federalism or states’ rights as a check on centralized governmental power.

The war of genocide against the Plains Indians was a way of socializing the cost of building the government-subsidized railroads. Having succeeded in eradicating the Indians, the Republican Party next turned to tiny little countries like Cuba and the Philippines to plunder under the usual phony excuse of spreading "freedom" and "the American way" around the globe. The Republican Party claimed to embrace the message of Reverend Josiah Strong’s 1885 book, Our Country, which proclaimed a supposedly sacred American duty to "civilize and Christianize inferior peoples." They portrayed themselves as one big gang of Mother Theresas, selflessly sacrificing endlessly for the benefit of strangers in foreign lands.

A particularly galling example of this spectacular hypocrisy and dishonesty is the conquest of the Kingdom of Hawaii. By the early 1890s American businessmen had been in Hawaii for many years as corporate sugar and pineapple growers. Encouraged by the Republican Party’s aggressive and imperialistic foreign policy, they sought to get the Party to overthrow the government of Hawaii and make it an American province under their political control. They wanted to turn it into the perfect Hamiltonian corporate welfare state, in other words. As described by Gregg Jones in Honor in the Dust: Theodore Roosevelt, War in the Philippines, and the Rise and Fall of America’s Imperial Dream (p. 23):
On January 14, [1893] Hawaii’s Queen Liliuokalani attempted to curb the power of U.S. commercial interests in the kingdom’s legislature by promulgating a new constitution. A thirteen-member coalition of Americans called the Committee of Safety angrily resisted. Two members, Judge Sanford Dole and businessman Lorrin Thurston, met secretly with U.S. envoy John Stevens and plotted to overthrow the monarchy. The committee’s armed militia promptly seized key buildings, triggering the landing of American troops. The group set up an ad hoc government headed by Dole . . .
The "Committee of Safety" employed a paramilitary organization called the "Honolulu Rifles" who were allied with its puppet political party in Hawaii known as the "Missionary Party." (Sanford Dole was the son of New England Yankee missionaries who migrated to Hawaii from Maine). The Honolulu Rifles forced the king of Hawaii to sign a new constitution that was known as the "bayonet constitution" because the King was literally threatened with being gutted by bayonets unless he signed the document, "Godfather" style. The new constitution disenfranchised all Asians (considered part of an "inferior race" by the Republican business elite) and most everyone else except for affluent landowners, most of whom were Americans and their business associates. It imposed Sanford Dole as puppet president. His cousin James Dole shortly thereafter founded the Dole Fruit Company which prospers to this day.
But before the Republican Party could get the U.S. Congress and the president to formally annex Hawaii, Democrat Grover Cleveland took office (in March of 1893) and killed their proposal, condemning "the lawless landing of the United States force at Honolulu." Grover Cleveland was the last Jeffersonian president of the United States and the last good Democrat. This, however, led to the political rise of the bloviating idiot and Master Race theorist Theodore Roosevelt (TR), the favorite president of today’s neo-conservatives. "It’s difficult to write a bad book about Theodore Roosevelt," neocon Charles Kessler of the Claremont Institute wrote in that organization’s book review tabloid in 1998. To fellow neocons William Kristol and David Brooks, Kessler wrote approvingly, TR "figures as a patron saint of American nationalism and energetic government."
In October of 1895 TR proclaimed to the Republican Club of Massachusetts that "I feel that it was a crime not only against the United States, but against the white race, that we did not annex Hawaii three years ago" (Jones, p. 24). He said this in response to the complaints made by his close friend and fellow Republican, Henry Cabot Lodge, that the Spanish and British empires had been conquering "all the waste places of the earth" and Americans were missing out on the fun since they were not yet sufficiently imperialistic.
As president, TR perfected the Republican Party’s policy of economic plunder through imperialism disguised by humanitarian rhetoric. He denounced the Jeffersonian-minded advocates of peace as "senile," "idiots," and "unhung traitors" (Green, p. 162). As discussed in Jim Powell’s excellent book, Bully Boy: The Truth About Theodore Roosevelt’s Legacy, TR essentially declared the U.S. government to be the world’s policeman; warned against what he called "the menace of peace"; and targeted for war Cuba, Hawaii, Venezuela, China, the Philippines, Panama, Chile, the Dominican Republic, Nicaragua, and Canada. None of these military interventions or planned interventions had anything to do with national defense. "He asserted that the United States must intervene . . . when a nation failed to behave," wrote Powell. "All the great master races have been fighting races," Teddy Roosevelt the master race theorist proclaimed. It was in this way, writes Powell, that Teddy Roosevelt reinvigorated the "Party of Lincoln." I was Lincoln’s secretary of state William Seward, Powell reminds us, who wanted the U.S. to intervene if not conquer Canada,, Mexico, parts of Asia, the Caribbean, Cuba, Haiti, Culebra, French Guiana, Peurto Rico, and St. Batholomew.
U.S. Marine Corps Major General Smedley Butler knew what he was talking about when he wrote in his famous monograph, War is a Racket, that "War is a racket. It always has been."
Thomas J. DiLorenzo is professor of economics at Loyola College in Maryland.
This article was originally published at LewRockwell!/Circlewider   My Twitter Account (Coalition for the Abolition of Safer Cities Initiative) (This is a link to the 191 Pg. human rights report.) (Peoples Lobby for Economic Justice)


How Nonprofits Spend Millions on Elections and Call it Public Welfare by Kim Barker ProPublica, Aug. 19, 2012

How Nonprofits Spend Millions on Elections and Call it Public Welfare   by Kim Barker ProPublica, Aug. 19, 2012

Matt Brooks describes the mission of the Republican Jewish Coalition as educating the Jewish community about critical domestic and foreign policy issues.
But the well-dressed crowd that gathered in May for a luncheon on the 24th floor of a New York law firm easily could have figured that the group had a different purpose: Helping Mitt Romney win the presidency.
Brooks, the group's executive director, showed the 100 or so attendees two coalition-funded ads taking aim at President Barack Obama. Then Brooks made a pitch for a $6.5 million plan to help Romney in battleground states, reminding guests that their donations would not be publicly disclosed by the tax-exempt group.
"Contributions to the RJC are not reported," Brooks told the people sitting around a horseshoe-shaped table. "We don't make our donors' names available. We can take corporate money, personal money, cash, shekels, whatever you got."
The Republican Jewish Coalition and similar organizations enjoy tax-exempt status in exchange for promoting social welfare. In this election, the most expensive in U.S. history, they also have emerged as the primary conduit for anonymous big-money contributions.
Forget super PACs, their much-hyped cousins, which can take unlimited contributions but must name their donors. More money is being spent on TV advertising in the presidential race by social welfare nonprofits, known as 501(c)(4)s for their section of the tax code, than by any other type of independent group.
As of Aug. 8, they had spent more than $71 million on ads mentioning a candidate for president, according to estimates by Kantar Media's Campaign Media Analysis Group, or CMAG. Super PACs have spent an estimated $56 million.
Congress created the legal framework for 501(c)(4) nonprofits nearly a century ago. To receive the tax exemption, groups were supposed to be "operated exclusively for the promotion of social welfare." The IRS later opened the door to some forms of political activity by interpreting the statute to mean groups had to be "primarily" engaged in enhancing social welfare. But neither the tax code nor regulators set out how this would be measured.
In recent years, Democrats and Republicans alike have seized on that seemingly innocuous wording to create the darkest corner of American political fundraising.
An investigation by ProPublica, drawing on documents filed with the Internal Revenue Service and the Federal Election Commission, offers the most detailed picture to date of how 501(c)(4) groups have used their tax status for purposes likely never intended.
Our examination shows that dozens of these groups do little or nothing to justify the subsidies they receive from taxpayers. Instead, they are pouring much of their resources, directly or indirectly, into political races at the local, state and federal level.
The 2010 election functioned, effectively, as a dry run, providing a blueprint for what social welfare groups are doing on a larger scale today. Records on what is happening in the 2012 campaign will not be available until well after the election.
For this story, ProPublica reviewed thousands of pages of filings for 106 nonprofits active during the 2010 election cycle, tracking what portion of their funds went into politics. We watched TV ads bought by these groups, looked at documents from other nonprofits that gave them money, and interviewed dozens of campaign finance experts and political strategists.
We found that some groups said they would not engage in politics when they applied for IRS recognition of their tax-exempt status. But later filings showed they spent millions on just such activities.
On the very day in 2008 that the American Future Fund mailed its application to the IRS, checking the box for "no" on whether it planned to participate in politics, it uploaded an ad to YouTube praising a Republican senator. The group reported more than $8 million in political spending in 2010.
We also found that social welfare groups used a range of tactics to underreport their political activities to the IRS, a critical measure in determining whether they are entitled to remain tax-exempt.
Many groups told the IRS they spent far less on politics than they reported to federal election officials. Some classified expenditures that clearly praised or criticized candidates for office as "lobbying," "education" or "issue advocacy" on their tax returns.
One group, the Center for Individual Freedom, told election officials that it spent $2.5 million on ads in 2010, when it paid for commercials criticizing Democrats in 10 districts. But it reported to the IRS that it spent nothing to directly or indirectly influence elections, calling those same ads "education" or "legislative activities."
In several instances, nonprofits funneled much of their money to other 501(c)(4)s , which experts say is a way to meet, or appear to meet, IRS requirements for promoting social welfare. Yet records show the recipients of those grants spent much of their money on political activities, whether ads or voter-registration drives.
For example, almost 70 percent of America's Families First's 2010 expenditures went to grants to five social welfare nonprofits. Four spent money on ads supporting Democrats or criticizing Republicans, including one group that put almost half of its expenditures into political ads.
No one from the Center for Individual Freedom or the American Future Fund responded to phone calls and emails from ProPublica asking for comment. In a written statement, America's Families First said its primary purpose was "issue advocacy" but did not answer specific questions about grants.
Campaign-finance watchdogs say the IRS has not clarified rules for social welfare groups or enforced them vigorously.
"The tax laws are being ripped off and the public is being denied information to which they are entitled — namely, who is financing ads that are being run to influence their votes," said Fred Wertheimer, the president of Democracy 21, a watchdog group that has filed repeated complaints about 501(c)(4)s to regulators.
The IRS declined to answer questions from ProPublica for this story. The agency said in its annual work plan that it would look at "serious allegations of impermissible political intervention" by social welfare groups.
Marcus Owens, who was the director of the IRS' exempt organizations division for 10 years, pointed out that chasing political nonprofits isn't the agency's primary function, nor one for which it is staffed. One measure of this: Between 2001 and 2011, the IRS recognized more than 14,000 501(c)(4)s and turned down 56 applications.
One reason the IRS struggles is that it can't match the speed of politics. By the time some groups submitted tax returns spelling out the millions they put into the 2010 election, they had stopped operating, or disbanded and reformed under new names, ProPublica found.
The most politically active social welfare groups — former Minnesota Republican Sen. Norm Coleman's American Action Network and GOP strategist Karl Rove's Crossroads GPS — only filed tax returns covering fall 2010 in the spring of this year.
The Republican Jewish Coalition, though formed in 1985, in many ways epitomizes the new breed of political-minded social welfare nonprofits.
The group's initial IRS application said it would not engage in politics, yet its 2010 tax return says it gave almost $3.8 million to other groups for political activities.
Separately, the Republican Jewish Coalition told the FEC it spent more than $1.1 million on political ads, money that wasn't reported to the IRS. Together, the grants and the political advertising made up almost 40 percent of the total expenditures of the group, which is chaired by GOP super donor and casino magnate Sheldon Adelson.
"Our efforts and our expenditures are well within our primary purpose test requirements," Brooks said in an interview. "Everything we do is strictly within the legal guidelines."
Recent Rulings Embolden Nonprofits
Social welfare nonprofits have emerged as a prime vehicle for political money for several reasons.
Like super PACs, they can rake in unlimited contributions, support and oppose candidates, and buy ads right up until Election Day. But unlike super PACs, they don't have to disclose their donors.
Although individuals cannot deduct contributions to social welfare nonprofits on their taxes, companies may be able to write off donations as business expenses as long as they aren't earmarked for lobbying or political ads.
Many social welfare nonprofits became more active in politics after a series of recent court rulings, including the Supreme Court's Citizens United decision in January 2010, reshaped the rules of campaign finance.
Previously, laws had barred nonprofits from accepting donations from corporations or unions for political purposes and had mostly restricted 501(c)(4)s to generic "issue" ads that stopped short of calling on people to vote for or against candidates.
Citizens United dismantled this system. In a 5-4 decision, the high court said corporations and unions enjoyed the free speech rights of any individual. They could spend directly on political ads or give unlimited amounts of money to nonprofits for political activities. Over the next two years, contributions to existing social welfare nonprofits skyrocketed and new ones geared specifically toward elections were formed.
"It really sounded the starting gun for the creation of nonprofits that were strictly political in nature," said Sheila Krumholz, executive director of the Center for Responsive Politics, a nonpartisan research group that tracks money in politics.
Some new-style social welfare nonprofits share staff members and offices with super PACs. Their goals are intertwined: Crossroads GPS, or Crossroads Grassroots Policy Strategies, and its sister super PAC, American Crossroads, for example, announced that together they hoped to spend $200 million on the presidential election. Political operatives often hold key positions: The vice president of policy at Crossroads GPS oversaw the development and passage of the Republican platform in 2008.
Political expenditures by groups that do not disclose their donors — a category that includes trade associations like the U.S. Chamber of Commerce as well as social welfare nonprofits — have jumped dramatically in recent years. In 2006, groups that didn't report their donors made up less than 2 percent of outside spending, excluding party committees, research by the Center for Responsive Politics shows. By 2010, that had grown to more than 40 percent.
Most of the money spent by social welfare groups in 2010 came from conservative groups, a pattern holding true so far this year. As of Aug. 8, CMAG estimates show, liberal groups accounted for only $1.6 million of the total spent by such organizations on TV ads for the presidential race. By contrast, the two leading conservative 501(c)(4)s, Crossroads GPS and Americans for Prosperity, founded by conservative billionaire brothers David and Charles Koch, had spent about $60 million.
Even as the role of social welfare nonprofits in politics has expanded, the IRS has not clarified how much time and resources they can legally devote to political activities — or what it means to be "primarily" engaged in promoting what the agency terms the "common good and general welfare of the people of the community."
Some groups have interpreted the rules to mean they can spend up to 49 percent of their money on political ads. The IRS has never set a hard limit. The agency has struggled to revoke or deny tax exemptions to groups because of political activity, sometimes having its decisions reversed by courts.
Many established social welfare nonprofits, such as the Sierra Club or the National Right to Life Committee, spend only a fraction of their money on political ads. But a few groups have devoted most of their expenditures to ads that have an undeniable political component, ProPublica found.
A group called Economy Forward spent $173,470 on ads in March 2010 praising Senate Majority Leader Harry Reid, the Nevada Democrat, according to a transcript of the ad and public filings with eight TV stations in Nevada. That's almost 99 percent of the total the group told the IRS it spent that year. The group did not respond to repeated requests for comment.
More than three-quarters of the money the American Action Network — former Republican Sen. Coleman's group — told the IRS it spent in its 2010 tax year was for political ads. In an email, American Action Network spokesman Dan Conston said the group complied with all laws and government regulations.
"The IRS seems to blink if you push them on this, which is what groups like the American Action Network and Crossroads GPS are probably betting on," said Lloyd Hitoshi Mayer, an associate dean and law professor at Notre Dame University who specializes in the intersection of tax and political law.
Groups Say "No" to Politics; Tax Returns Say Otherwise
When groups apply to the IRS for recognition as tax-exempt, they must spell out their plans. They also must swear under penalty of perjury that they believe what they say is true.
Politics is one litmus test the agency uses to determine whether a group has a legitimate social welfare purpose and warrants a tax exemption, experts say. Question 15 on the application asks, "Has the organization spent or does it plan to spend any money attempting to influence the selection, nomination, election, or appointment of any person to any Federal, state, or local public office or to an office in a political organization?"
ProPublica compared applications from 58 501(c)(4)s with tax returns they filed later. We found 24 groups that initially said "no" to politics then filed tax returns showing they had done the opposite.
Even before mailing its application to the IRS saying it would not spend money on elections, the Alliance for America's Future was running TV ads supporting Republican candidates for governor in Nevada and Florida. It also had given $133,000 to two political committees directed by Mary Cheney, the daughter of the former vice president. No one from the Alliance for America's Future returned calls for comment.
Another group, the Revere America Association, launched with the help of former Republican New York Gov. George Pataki, told the IRS in May 2010 that it wouldn't spend money to influence elections. But in its 2010 tax return, Revere America said it spent about $2.5 million on political ads.
Marianne Zuk, the group's president, did not return calls or emails about the discrepancy. In a brief interview in December, she said the group was "in the process of winding down." Zuk said a new social welfare nonprofit, Partnership for America, had taken over Revere America's activities.
Some nonprofits provided other information in their applications that didn't line up with what they said in later filings.
America's Families First told the IRS in late 2009 that it would spend 50 percent of its time on its website and emails, 30 percent on conferences and 20 percent on grants.
There's no sign America's Families First sponsored any conferences, however. The group's website consists of a photograph of a family holding hands and a single paragraph of text. Its tax return does not specify how much time the group spent on grants, but most of its expenditures were grants to other liberal groups.
Although America's Families First's IRS application said the group would "be funded by contributions from individuals only," tax records show much of its money came from other sources.
The group received $2 million from the Pharmaceutical Research and Manufacturers of America, or PhRMA, the pharmaceutical industry's main trade group, and an additional $3.15 million from the National Education Association teachers union weeks before the election. The contributions became public in late 2011, when PhRMA and the NEA disclosed them.
America's Families First's leadership includes Greg Speed, now the treasurer for Priorities USA Action, the super PAC devoted to re-electing Obama.
In a written statement, a spokeswoman for America's Families First said the group's application for IRS recognition broadly sketched out its planned activities. "As with all plans, they evolve, we adjusted our execution of activities and fundraising to reflect the changing environment and landscape," she wrote in an email.
Social welfare nonprofits can operate without IRS recognition, although most seek it. Having the agency's approval helps with fundraising and can help insulate groups against sanctions or back taxes later, experts say.
Three groups that spent money on politics in 2010 — Crossroads GPS, Arkansans for Common Sense and the CVFC 501c4, which appears to be related to Combat Veterans for Congress — have applied for IRS recognition but have yet to receive it.
In some cases, however, the IRS first learns about social welfare nonprofits when they file tax returns — by which time they may be inactive or defunct.
Five nonprofits that spent money on politics in 2010 confirmed they never applied for IRS recognition. Another seven groups said on tax returns that they had no application pending; the IRS had no record of recognizing them.
One of the groups never even filed the required tax return. America's Future Fund, a Louisiana 501(c)(4) incorporated in June 2009 by lawyer Bryan Jeansonne, spent more than $100,000 in October 2010 sending political mailers to Nevada voters. The following February, it dissolved.
In an email, Jeansonne acknowledged the group had not submitted the tax filing, saying its accountant had said it was unnecessary. He did not respond to follow-up questions.
Spending Reported to IRS, FEC Often Doesn't Match
Under state and federal laws, social welfare nonprofits must tell election authorities when they pay for independent expenditures, which are ads, mailings and phone calls that directly ask for people to vote for or against a candidate.
They also must report spending on electioneering communications — ads that mention candidates and run just before elections but are less explicit, using language like, "Call Candidate X. Tell him to stop killing jobs."
ProPublica identified 103 groups that reported such spending to state and federal election officials in 2010. But in tax filings covering the same period, at least 30 of these groups told the IRS they spent no money to influence elections, either directly or indirectly.
The Women's Voices Women Vote Action Fund, for example, told the FEC it spent $250,000 on ads calling for people to vote for a Democrat for Senate in Maine, but it told the IRS it spent nothing on politics. Asked about the disparity, an official with the nonprofit said it was an inadvertent error and the group would amend its tax return.
Other groups reported less spending to the IRS than they acknowledged to election officials. Americans for Tax Reform told the IRS it spent about $1.86 million on campaign activity, less than half of the $4.2 million it told the FEC it spent on ads supporting Republicans and opposing Democrats. The group did not respond to calls or emails asking for comment.
One possible reason for such differences is that the FEC has specific guidelines for what constitutes a political ad, while the IRS goes case by case, looking at the content of ads, when they ran, and how they relate to groups' other spending. In tax filings, groups are asked to report both direct and indirect political spending.
Yet many social welfare groups have interpreted the IRS guidelines to mean they can report what the FEC considers to be electioneering communications as "education," "lobbying" or "issue advocacy" on tax filings.
Consider the American Action Network, which reported spending $25.7 million on its 2010 tax return.
The group told the IRS the bulk of that money, $17 million, went for lobbying and only $5 million went to political activity. But that same year, it told the FEC it spent more than $19 million on ads.
Conston, the American Action Network's spokesman, declined to explain the discrepancy, saying that the group had complied with all applicable laws.
Details in FEC filings offer some additional clues. The American Action Network reported $4 million in independent expenditures for 2010. Those ads clearly should be reported to the IRS as political spending, experts say. The group also reported $15.4 million in electioneering communications to the FEC — the only category on its 2010 tax form large enough to cover this amount is lobbying.
Many of the electioneering communication ads are no longer accessible online. ProPublica found nine that remain public. These cost more than $4.4 million, FEC records show.
Most criticized Democrats in vulnerable districts for supporting then-House Majority Leader Nancy Pelosi or health care reform. One focused on Nevada Rep. Dina Titus, showing a woman talking to a friend on Skype about the Democratic congresswoman.
"Apparently, convicted rapists can get Viagra paid for by the new health bill," the woman said. Later, she added, "I mean, Viagra for rapists? With my tax dollars? And Congresswoman Titus voted for it."
At ProPublica's request, Ellen Aprill, a law professor and the John E. Anderson chair in tax law at Loyola Law School in Los Angeles, reviewed the ads to assess whether they fit the IRS definition of political spending.
Criticizing particular lawmakers or candidates makes it likely that the IRS would see such ads as attempts to influence elections, rather than as issue advocacy or lobbying, Aprill said.
"Not simply saying this is bad legislation, but these people hurt you — with the implication, 'Don't send them back to Congress,'" she said.
Even in cases in which it seems clear that nonprofits have not met reporting requirements for political spending, groups sometimes stop operating before regulators can take action.
The Commission on Hope, Growth and Opportunity paid for a series of ads in 2010 that cost an estimated $2.3 million, according to CMAG.
One portrayed a cartoon dance line featuring Obama, Pelosi and an interchangeable Democrat, depending on where the ad ran. "Folks in Washington are living it up," it said. The ad urged viewers to "join" the Republican challenger.
Still, the group reported no spending to the FEC. In its 2010 tax return, it said it put at least $4.6 million — 96 percent of its total expenditures — into advertising, yet insisted it spent nothing to influence elections.
The Commission on Hope, Growth and Opportunity now appears dormant. Calls and emails to the group went unanswered.
"They are, of course, the best example of one of the problems with this: You can go into business and violate the law and then go out of business," said Melanie Sloan, the executive director of the Citizens for Responsibility and Ethics in Washington, which filed complaints against the group with the IRS and FEC. "And what's ever going to happen about that? There's no consequence."
Grants to Other Nonprofits Flow Into Politics
One way 501(c)(4) groups appear to fulfill their social welfare obligation is by making grants to other groups that share their tax status. Yet since the recipients also funnel money into politics, it's possible the grant money is ultimately spent on ads or other election-related activities.
According to its tax return, the nonprofit CitizenLink gave a grant of $120,000 to the Susan B. Anthony List to "assist with purchase of TV promotional spots & election help." CitizenLink did not count this money as political spending, the return said. The Susan B. Anthony List then used the money to help buy ads criticizing two Democrats for betraying voters by supporting health care reform, according to FEC reports. (The ads credited CitizenLink for helping pay for them.)
Another group, CSS Action Fund, gave a grant of $175,865 to Economy Forward for "promoting health care reform." Economy Forward spent almost all of this on ads promoting Sen. Harry Reid's help for the economy; health care reform wasn't mentioned.
Sometimes, ProPublica found, money passed back and forth between pairs or clusters of nonprofits with similar political agendas. It's not clear if the IRS compares tax filings and observes these patterns.
According to tax returns for 2010, the WMC Issues Mobilization Council gave $865,000 to the American Justice Partnership, which in turn gave $205,000 to the WMC Issues Mobilization Council. Both groups backed conservative causes and candidates.
The Republican Jewish Coalition reported making grants to Crossroads GPS and the American Action Network in 2010, giving each group $4 million. Both groups returned the favor, reporting grants to the Republican Jewish Coalition in their 2010 tax years. Crossroads GPS gave the coalition $250,000, while the American Action Network chipped in $200,000.
Some nonprofits claim to stay out of politics but funnel money to other nonprofits that spend heavily on elections.
The Center to Protect Patient Rights, a group led by GOP strategist Sean Noble, reported on its 2010 tax return that it spent no money on politics.
As the Center for Responsive Politics first reported, however, almost three-quarters of the group's income — a total of more than $44 million — went to other social welfare groups that were politically active, such as the American Future Fund and the 60 Plus Association.
Brooks, the Republican Jewish Coalition's executive director, said grants to other groups should "absolutely count" toward meeting a group's primary social welfare purpose. "It's not obscuring the source of the money because it's fully reported and disclosed," he said. "We happily support other organizations that share our goals and our work."
Jonathan Collegio, a spokesman for Crossroads GPS, said forming a network of like-minded groups was the only way to change policy. He said Crossroads GPS sent the Republican Jewish Coalition a contribution because it "had a great program of work."
Some experts, however, compared the transactions to Russian nesting dolls, with each layer opening to reveal another, equally inscrutable one underneath. Even if a social welfare nonprofit had to reveal the donors behind an ad, it would be another nonprofit. There would be no way to trace the money to the original source.
For instance, the Independent Women's Voice and Citizens for the Republic, two nonprofits that made disclosures to the FEC about political ads purchased in 2010, identified a new social welfare group, The Annual Fund, as a major contributor.
And where did The Annual Fund get its money? Mostly from yet another social welfare nonprofit, the Wellspring Committee, run by the wife of The Annual Fund's founder.
Efforts for More Transparency Fall Short
The new breed of political nonprofits may operate differently from traditional social welfare organizations, but some say they serve a vital purpose in an era of increasingly bitter political partisanship.
Dan Backer, a lawyer who represents several conservative nonprofits, pointed to the Obama team's decision to single out donors like the Koch brothers.
"You have the president of the United States attacking donors," Backer said. "A lot of them have been named in person by the president as bad people. That's horrifying."
Openly taking controversial political positions can be bad for business. Some Democrats and gay-rights groups called for a boycott of Target in 2010 after the company donated $150,000 to a fund supporting a Republican candidate for governor in Minnesota who opposed gay marriage. Company officials swiftly apologized.
So far, efforts to impose limits on social welfare groups or demand more transparency from them have mostly failed.
Last summer, after coming under criticism, the IRS abandoned efforts to force five major donors to pay gift tax on contributions to social welfare nonprofits heavily involved in politics. This essentially gave the green light to donors worried about whether their donations could be taxed.
Bills to strengthen disclosure requirements have failed in the House and the Senate. The Supreme Court opted against reconsidering Citizens United in June.
In July, responding to a court ruling, the FEC said social welfare groups would have to identify major donors to electioneering communications. But groups are already finding work-arounds, coming up with different types of ads or making sure the only donors they have to disclose are other nonprofits.
Watchdogs say they are frustrated that neither the IRS nor the FEC has been willing to enforce or even clarify the rules that exist to force transparency.
"I'm relatively pessimistic right now," said Karl Sandstrom, a former FEC vice chairman who's now with the Perkins Coie law firm. "We have agencies that are in some cases silent, in some cases divided and in some cases as slow as they can possibly be."
The IRS appears to be shifting its attention toward whether 501(c)(4)s benefit a segment of society, not the public as a whole, another requirement for such groups. In the past 18 months, the IRS rejected the applications of at least four groups and revoked the tax-exempt status of one small Democratic nonprofit and its affiliates for this reason. In most of these cases, the agency concluded the groups were run "primarily for the benefit of a political party and a private group of individuals."
Owens, the former head of the IRS nonprofit division who is now a lawyer at Caplin & Drysdale, said agents are probably examining other social welfare nonprofits using that framework, asking whether a group like Crossroads GPS benefits the community at large or a subset of politicians.
"Crossroads says its issue is free enterprise," he said. "That's their argument: They're really not carrying water for the Republicans. They're carrying water for free enterprise. It will be interesting to see if they make that argument stick. I think it'll be tough."
The IRS also has yet to make a decision on Crossroads GPS' request for recognition of its tax-exempt status, which news reports say was filed in September 2010. Owens and others speculate that the IRS may be looking hard at the group.
Collegio, the spokesman for Crossroads GPS, said in an email that "without an IRS statement on the matter it is wholly irresponsible and unproductive to speculate."
Most experts do not expect the campaign finance landscape to change much before November, leaving social welfare nonprofits and their anonymous backers ample opportunity to influence who wins.
"The candidates and office holders will know where this money came from," said Paul S. Ryan, senior counsel for the Campaign Legal Center. "The political players who are soliciting these funds and are benefiting from the expenditure of these funds will know where the money came from. The only ones in the dark will be American voters."!/Circlewider   My Twitter Account (Coalition for the Abolition of Safer Cities Initiative) (This is a link to the 191 Pg. human rights report.) (Peoples Lobby for Economic Justice)