A person who worked for
Mitt Romney at
the consulting firm
Bain and Co. in 1977 remembers him with mixed
feelings. “Mitt was … a really wonderful boss,” the former employee
says. “He was nice, he was fair, he was logical, he said what he wanted …
he was really encouraging.” But Bain and Co., the person recalls,
pushed employees to find out secret revenue and sales data on its
clients’ competitors. Romney, the person says, suggested “falsifying”
who they were to get such information, by pretending to be a graduate
student working on a project at Harvard. (The person, in fact, was a
Harvard student, at Bain for the summer, but not working on any such
projects.) “Mitt said to me something like ‘We won’t ask you to lie. I
am not going to tell you to do this, but [it is] a really good way to
get the information.’ … I would not have had anything in my analysis if I
had not pretended.
“It was a strange atmosphere. It did leave a bad taste in your mouth,” the former employee recalls.
This
unsettling account suggests
the young Romney—at that point only two
years out of Harvard Business School—
was willing to push into gray areas
when it came to business. More than three decades later, as he tried
to nail down the Republican nomination for president of the United
States, Romney’s gray areas were again an issue when
he repeatedly
resisted calls to release more details of his net worth, his tax
returns, and the large investments and assets held by him and his wife,
Ann. Finally the other Republican candidates forced him to do so, but
only highly selective disclosures were forthcoming.
Even so,
these provided a lavish smorgasbord for Romney’s critics. Particularly
jarring were the
Romneys’ many offshore accounts. As
Newt Gingrich put
it during the primary season,
“I don’t know of any American president
who has had a Swiss bank account.” But Romney has, as well as other
interests in such
tax havens as
Bermuda and the
Cayman Islands.
To
give but one example, there is a Bermuda-based entity called
Sankaty
High Yield Asset Investors Ltd., which has been described in securities
filings as “a Bermuda corporation wholly owned by W. Mitt Romney.” It
could be that Sankaty is an old vehicle with little importance, but
Romney appears to have treated it rather carefully. He set it up in
1997, then
transferred it to his wife’s newly created blind trust on
January 1, 2003, the day before he was inaugurated as Massachusetts’s
governor. The director and president of this entity is
R. Bradford Malt,
the trustee of the blind trust and
Romney’s personal lawyer.
Romney
failed to list this entity on several financial disclosures, even though
such a closely held entity
would not qualify as an “excepted investment
fund” that would not need to be on his disclosure forms. He finally
included it on his 2010 tax return. Even after examining that return, we
have no idea what is in this company, but it could be valuable, meaning
that it is possible
Romney’s wealth is even greater than previous
estimates. While the Romneys’ spokespeople insist that the couple has
paid all the taxes required by law, investments in tax havens such as
Bermuda raise many questions, because they are in
“jurisdictions where
there is virtually no tax and virtually no compliance,” as one
Miami-based offshore lawyer put it.
That’s not the only money
Romney has in tax havens. Because of his retirement deal with
Bain
Capital, his finances are still deeply entangled with the private-equity
firm that he founded and spun off from Bain and Co. in 1984.
Though he
left the firm in 1999, Romney has continued to receive large payments
from it—in early June he revealed more than $2 million in new Bain
income. The firm today has at least
138 funds organized in the Cayman
Islands, and Romney himself has personal interests in at least
12, worth
as much as $30 million, hidden behind controversial confidentiality
disclaimers. Again, the Romney campaign insists he saves no tax by using
them, but there is no way to check this.
Bain Capital is the
heart of Romney’s fortune: it was the financial engine that created it.
The mantra of his campaign is that he was a businessman who created tens
of thousands of jobs, and Bain certainly did bring useful operational
skills to many companies it bought. But his critics point to several
cases where
Bain bought companies, loaded them with debt, and paid
itself extravagant fees, thereby bankrupting the companies and
destroying tens of thousands of jobs.
Come August, Romney,
with
an estimated net worth as high as $250 million (he won’t reveal the
exact amount), will be one of the
richest people ever to be nominated
for president. Given his reticence to discuss his wealth, it’s only
natural to wonder how he got it, how he invests it, and if he pays all
his taxes on it.
Ironically, it was
Mitt’s father, George Romney, who released 12 years of tax returns, in
November 1967, just ahead of his presidential campaign, thereby setting a
precedent that nearly every presidential candidate since has either
willingly or unwillingly been subject to. George, then the governor of
Michigan, explained why he was releasing so many years’ worth, saying,
“One year could be a fluke, perhaps done for show.”
But his son
declined to release any returns through one unsuccessful race for the
U.S. Senate, in 1994, one successful run for Massachusetts governor, in
2002, and an aborted bid for the Republican Party presidential
nomination, in 2008. Just before the Iowa caucus last December, Mitt
told
MSNBC, “I don’t intend to release the tax returns. I don’t,” but
finally, on January 24, 2012—after intense goading by fellow Republican
candidates Newt Gingrich and
Rick Perry—he released his 2010 tax return
and an estimate for 2011.
These, plus the mandatory financial
disclosures filed with the
Office of Government Ethics and released last
August, raise many questions. A full 55 pages in his 2010 return are
devoted to reporting his transactions with foreign entities.
“What
Romney does not get,” says Jack Blum, a veteran Washington lawyer and
offshore expert,
“is that this stuff is weird.”
The media soon
noticed Romney’s familiarity with foreign tax havens. A
$3 million Swiss
bank account appeared in the 2010 returns, then
winked out of existence
in 2011 after the trustee closed it, as if to remind us of George
Romney’s warning that one or two tax returns can provide a misleading
picture. Ed Kleinbard, a professor of tax law at the University of
Southern California, says the Swiss account “has political but not
tax-policy resonance,”
since it—like many other Romney
investments—constituted a bet against the U.S. dollar, an odd thing for a
presidential candidate to do. The Obama campaign provided a helpful
world map pointing to the tax havens Bermuda,
Luxembourg, and the Cayman
Islands, where Romney and his family have assets, each with the tagline
“Value: not disclosed in tax returns.”
Romney’s
personal tax rate is a particular point of interest. In 2010 and 2011,
Mitt and Ann paid $6.2 million in federal tax on $42.5 million in
income, for an average tax rate just shy of
15 percent,
substantially
less than what most middle-income Americans pay. Romney manages this low
rate because he takes his payments from Bain Capital as
investment
income, which is taxed at a maximum 15 percent, instead of the
35
percent he would pay on “ordinary” income, such as salaries and wages.
Many tax experts argue that the form of remuneration he receives, known
as
carried interest, is really just a fee charged by investment
managers, so it should instead be taxed at the 35 percent rate.
Lee
Sheppard, a contributing editor at the trade publication
Tax Notes,
whose often controversial articles are read widely by tax
professionals, is nonplussed that the Obama campaign has been so
listless on the issue of carried interest. “Romney is the poster boy,
the best argument, for taxing this profit share as ordinary income,”
says Sheppard.
In the face of such arguments, Romney’s defense is
that he never broke the rules: if there is a problem, it is in the
laws, not in his behavior. “I pay all the taxes that are legally
required, not a dollar more,” he said. Even so. “When you are running
for president, you might want to err on the side of overpaying your
taxes, and not chase every tax gimmick that comes down the pike,” says
Sheppard. “It kind of looks tacky.”
The assertion that he broke no laws is widely accepted. But
it is
worth asking if it is actually true. The answer, in fact, isn’t
straightforward. Romney, like the superhero who whirls and backflips
unscathed through a web of laser beams while everyone else gets zapped,
is certainly a remarkable financial acrobat. But careful analysis of his
financial and business affairs also reveals a man who, like some other
Wall Street titans, seems comfortable striding into some
fuzzy gray
zones.
The Caped Avoider!
One
might perhaps accept an explanation by Romney’s campaign spokeswoman,
Andrea Saul, that the candidate’s failure to include his Swiss account
in earlier financial disclosures was merely a “trivial inadvertent
issue.” But deeper questions do emerge.
All the assets on Mitt’s
financial disclosures are in blind trusts or retirement accounts held by
him and Ann.
Blind trusts are designed to avoid conflicts of interest
for those in public office by having politicians’ assets managed by
independent trustees. The Romneys’ blind trust was created when Mitt was
elected governor of Massachusetts. Curiously, the Romneys appointed
Bradford Malt as their trustee. It’s certainly true that
under Malt the
trusts don’t appear to be as blind as they might be: for instance, in
2010 the Romneys invested $10 million in the start-up of the Solamere
Founders Fund, co-founded by their eldest son, Tagg, and Spencer Zwick,
Romney’s onetime top campaign fund-raiser;
Solamere is now in the Ann
Romney blind trust. Malt has said he invested in Solamere without
consulting Mitt or Ann and explained he liked Solamere because of its
diversified approach and because he knew the founders and had confidence
in them.
Likewise, the Romneys were reported to have
invested at
least $1 million in Elliott Associates, L.P., a hedge fund specializing
in “distressed assets.” Elliott buys up cheap debt, often at cents on
the dollar, from lenders to deeply troubled nations such as
Congo-Brazzaville, then attacks the debtor states with lawsuits to
squeeze maximum repayment. Elliott is run by the
secretive hedge-fund
billionaire and G.O.P. super-donor Paul Singer, whom
Fortune recently dubbed Mitt Romney’s
“Hedge Fund Kingmaker.” (
Singer has given $1 million to Romney’s super-pac Restore Our Future.)
It
is hard to know the size of these investments. Romney’s financial
disclosure form lists
25 of them in an open-ended category, “Over $1
million,” including Solamere and Elliott, and they are not broken down
further. Romney hides behind a disclaimer that the fund managers
“declined to provide such information” about their underlying assets.
Many of these funds are set up in tax havens such as the Cayman Islands,
where a confidentiality law states that you can be jailed for up to
four years just for
asking about such information.
Andrea
Saul said of these investments, “Everything … was reported correctly.”
Joseph Sandler, a Democratic lawyer who has worked with candidates on
disclosures for more than two decades, is skeptical. “The law is the
law,” Sandler says. “[Romney] says, ‘Well, you know, they won’t tell
me.’ But when you run for office in the U.S. and are not prepared to
comply with disclosure requirements, you should either divest yourself
of the assets or don’t run.”
The Washington Post summarized the
opinions of experts across the political spectrum by saying Romney’s
disclosures were “the most opaque they have encountered.”
Mysteries
also arise when one looks at Romney’s individual retirement account at
Bain Capital. When Romney was there,
from 1984 to 1999, taxpayers were
allowed to put just $2,000 per year into an I.R.A., and $30,000 annually
into a different kind of plan he may have used. Given these annual
contribution ceilings, how can his I.R.A. possibly contain up to
$102
million, as his financial disclosures now suggest?
The Romneys won’t say, but Mark Maremont, writing in
The Wall Street Journal,
uncovered a likely explanation. When Bain Capital bought companies, it
would create two classes of shares, named A and L. The A shares were
risky common shares, to which they would assign a very low value. The L
shares were preferred shares, paying a high dividend but with the payoff
frozen, and most of the value was assigned to them. Bain employees
would then put the exciting A shares in their I.R.A. accounts, where
they grew tax-free. With all the risk of the deal, the A shares stood to
gain a lot or collapse. But if the deal succeeded, the springing value
could be stunning:
Bain employees saw their A shares from one
particularly fruitful deal grow 583-fold, 16 times faster than the
underlying stock.
The Romneys won’t tell us how, or even if, they
assigned super-low values to the A shares, but there are a couple of
ways to do it. One is to use standard options models to price the
shares—
then feed inappropriate assumptions into those models. Romney
could alternatively have used a model called
liquidation valuation,
which Kleinbard says would have been
“completely inappropriate.” Without
seeing the assumptions used on Romney’s tax returns from the years when
those lowball A shares were squirted into his I.R.A., we cannot know
how he did it. Whatever methods he used, however,
the valuations were,
according to Andrew Smith, of Houlihan Capital in Chicago,
“pushing the
envelope.” (Andrea Saul retorts, “Why should successful investments be
criticized?”)
Mitt’s and Ann’s I.R.A.’s have also been receiving
profit interest from (mostly Cayman Island–based) Bain Capital funds
that were set up long after he had left the company, in 1999. For
example, the 2010 return reveals a profits interest in a Cayman-based
fund called Bain Capital Partners (AM) X LP, which was transferred to
the Ann D. Romney trust in October 2010. An attachment to the return
says the Ann D. Romney trust is “performing services” to the
partnership, which is boilerplate language for these kinds of filings.
Her blind trust could receive lightly taxed income from Bain Capital for
years to come, well into the presidential term her husband hopes to
win.
But administrative guidance says you can do this kind of
thing only if the compensation is in recognition of past services you
have provided.
“This should not mean retired from the mother ship 10
years out and getting profits you had nothing to do with,” Sheppard
says, adding that Romney can get away with it because of excessive
“administrative indulgences” that have allowed
a “perversion of the law
in favor of a small class of overcompensated investment managers.”
Romney’s
I.R.A. also appears to have invested in so-called
blocker corporations
in the Cayman Islands and elsewhere. U.S. pension funds, foundations,
and even I.R.A.’s routinely use offshore blocker corporations to avoid
something called the
Unrelated Business Income Tax, which was designed
to keep nonprofits from competing with ordinary companies in areas
outside their core purpose:
if you invest directly you get hit with the
tax, but if you invest in a blocker, which then invests in the U.S.
business, you escape it. Romney’s I.R.A. appears to have employed this
lawful escape route, and his campaign has used language suggesting that
it has. But that would mean
the Romney camp’s claim that Mitt’s tax
consequences of investing via the Cayman Islands is “the very same” as
it would have been had he invested directly at home is simply not true.
(Romney spokesperson Andrea Saul says Romney “gets the same benefit
anyone would get from an I.R.A.,” but she did not respond to questions
on whether his I.R.A. had used blockers or avoided taxes by investing
via tax havens.)
A Deutsche Bank analysis
of 68 Bain deals Romney was involved in calculated an internal rate of
return—
a standard private-equity benchmark—at a staggering
88 percent
annually (though after fees and inflation, investor performance may have
been little more than half that).
It is substantially on this stellar
record that Romney is now running for president. His work at Bain was
unquestionably good for himself and for Bain, but was it also good for
the businesses he acquired, for their workers, and for the economy, as
he claims?
A report by Bain and Co. itself, looking at the period
from 2002 to 2007, concluded that there is
“little evidence that
private equity owners, overall, added value” to the companies they took
over: nearly all their returns are explained by broad economic growth,
rising stock markets, and leverage. Josh Kosman, who researched the
subject of private equity for his book
The Buyout of America,
singles out Bain Capital in particular. “They take pride in pushing the
leverage envelope
[i.e., use of borrowed money, which magnifies returns,
while off-loading the risks onto others] more than their peers,” he
says. “I have heard that from limited partners in Bain’s funds. I have
heard that from bankers who lend money to finance their leveraged
buyouts. Bain always prided itself on ‘We’ll push leverage more than the
others.’ They brag about that, behind closed doors.”
Dade Behring is a
cause célèbre for
Romney’s and Bain’s critics, and it illustrates the leverage problem
clearly. In 1994, Bain bought
Dade International, a medical-diagnostics
company, then added the medical-diagnostics division of
DuPont in 1996
and a German medical-testing company called
Behring in 1997. Former Dade
president Bob Brightfelt says the operation started well: the Bain
managers were “pretty smart guys,” he recalls, and they did well cutting
out overlap, and exploiting synergies.
Then
brutal cost cutting
began. Bain cut R&D spending to an average of 8 percent of sales, a
little more than half what its competitors were doing. Cindy Hewitt,
Dade’s human-resources manager, remembers how the firm closed a Puerto
Rico plant in 1998,
a year after harvesting $7.1 million in local tax
breaks aimed at job creation, and relocated some staff to Miami, then
the company’s most profitable plant. Based on reassurances she had
received from her superiors, she told those uprooting themselves from
Puerto Rico that their jobs in Miami were safe for now—but then Bain
closed the Miami plant.
“Whether you want to call it misled, or lied, or
manipulated, I do not believe they provided full information about what
discussions were under way,” she says. “I would never want to be part
of even unintentionally treating people so poorly.”
Bain engaged
in startling penny-pinching with the laid-off employees.
Their contracts
stipulated that if they left early they would have to pay back the
costs of relocating to Miami—but in spite of all that Dade had done to
them, it refused to release the employees from this clause. “They said
they would go after them for that money if they left before Bain was
finished with them,” Hewitt recalls. Not only that, but the
company
declined to give workers their severance pay in lump sums to help them
fund their return home.
In 1999, generous pensions were converted
into less generous benefits,
wages were cut, and more staff members
were laid off. Some employees contacted Norman Stein, then the director
of the pension-counseling clinic at the University of Alabama law
school, with a view to challenging the conversions. Stein says the
employees were “extraordinarily nervous,” so fearful, in fact, that they
refused to let lawyers even make copies of pension documents. “I have
been dealing with pensions issues for over 25 years and I never saw
anything like this,” recalls Stein. The spooked employees did not go to
court. Stein says that, while breaking pension contracts like this was
not unheard of, the practice at that time was “questionable,” adding
that Dade may have saved $10 to $40 million from converting its
pensions.
The beauty—or
savagery—of leverage is that it can
magnify any and all cash-flow boosts, such as this one. Take $10 to $40
million squeezed from a pension pot, then use that to create new, rosier
financial projections to borrow several times that amount, and then pay
yourself a big special dividend from the borrowed funds, many times the
size of the pension savings. That is just what Bain Capital did: the
same month it converted the pensions, it created new financial
projections as a basis to
borrow an extra $421 million—from which Bain,
its co-investor
Goldman Sachs, and top Dade management
extracted $365
million in dividends. According to Kosman,
“Bain and Goldman—after
putting down only $85 million … made out like bandits—a $280 million
profit.” Dade’s
debt rose to more than $870 million. Romney had left
operational management of Bain that year, though his disclosures show
that
he owned 16.5 percent of the Bain partnership responsible for the
Dade investment until at least 2001.
Quite soon, however, a
fragile Dade faced adverse conditions in the currency markets, and it
had to start in effect cannibalizing itself, cutting into the core of
its business.
It filed for bankruptcy in August 2002 and Bain Capital
departed. When Dade emerged from bankruptcy,
its new owners invested in
long-term R&D, and it flourished again.
Nor was this an
isolated incident: Kosman lists
five other “formerly healthy”
companies—
Stage Stores, Ampad, GS Technologies, Details, and
KB
Toys—
Bain helped drive into bankruptcy, while making big profits.
(
Despite numerous entreaties from Vanity Fair to Bain Capital to
address on the record points in this article with which it might
disagree, the firm refused to do so and instead provided this statement:
“When politics overwhelm fact, some will distort or cherry-pick our
record and launch unfounded allegations and insinuations. The truth and
the full record show that Bain Capital operates with high standards of
integrity and excellence in compliance with all laws. Any suggestion to
the contrary is baseless.”)
Tax Haven U.S.A.
The
term “
financialization” describes two interlocking processes:
a
disproportionate growth in a country’s deregulated financial sector,
relative to the rest of the economy, and the rising importance of
financial activities with a focus on financial returns among industrial
and other non-financial corporations, often at the expense of real
innovation and productivity.
Some see the rising influence of finance and financial models in epochal terms. Author of
Financialization and the U.S. Economy
Özgür Orhangazi summarizes academic literature that sees
financialization “as one of the indicators of the decline of the
hegemonic power”: imperial Venice, Genoa, Holland, and Britain all
saw their power rise on the back of productive industrial capitalism,
followed by domination by the financial sector, which eventually began
to cannibalize the productive sector in pursuit of financial returns—
a
process that ended in weakness and collapse.
Little noticed in
the academic discussions of financialization is the role of
offshore tax
havens,
one of the big reasons the financial sector has become so
powerful. In 1966, Michael Hudson, a young Chase Manhattan
balance-of-payments economist, was in a company elevator when he was
handed a memo by a former State Department operative. The memo came from
the U.S. government, and Hudson was tasked with figuring out how much
foreign money the U.S. might attract. “They were saying, ‘We want to
replace Switzerland,’ ” Hudson explains.
“All this money will come here
if we make this the criminal center of the world. We wanted foreign
criminal money, which was patriotic, but not American criminal money.”
In
the years since then, almost unknown to most Americans,
the United
States has turned itself into a giant tax haven for foreigners, just as
the memo suggested.
Federal and state tax laws have been deliberately
shaped to give foreigners special tax exemptions unavailable to
Americans, plus financial secrecy and exemptions from regulatory
restraints. “We have criticized offshore tax havens for their secrecy
and lack of transparency,” said Senator Carl Levin. “But
look what is
going on in our own backyard.”
In this grand scenario, tax havens
such as the Caymans serve as feeders of foreign savings into
Tax Haven
U.S.A. from abroad, providing foreign investors with additional ways to
skip around tax, disclosure, and regulatory requirements that they might
trigger if they invested directly.
The money sucked into Tax
Haven U.S.A., often via the “feeder” tax havens, is frequently
tax-evading and other criminal foreign money, in the spirit of Hudson’s
1966 memo, and
it is predominantly channeled not into productive
investment but into real estate and financial business.
One
cannot properly understand Wall Street’s size and power without
appreciating the central role of offshore tax havens. There is
absolutely no evidence that Bain has done anything illegal, but
private
equity is one channel for this secrecy-shrouded foreign money to enter
the United States, and a filing for Mitt Romney’s first $37 million Bain
Capital Fund, of 1984, provides a rare window into this. One foreign
investor, of $2 million, was
the newspaper tycoon, tax evader, and
fraudster Robert Maxwell, who fell from his yacht, and drowned, off of
the Canary Islands in 1991 in strange circumstances, after looting his
company’s pension fund. The Bain filing also names
Eduardo Poma, a
member of one of the
“14 families” oligarchy that has
controlled most of
El Salvador’s wealth for decades; oddly, Poma is listed as sharing a
Miami address with two anonymous companies that
invested $1.5 million
between them. The filings also show a
Geneva-based trustee overseeing a
trust that invested $2.5 million, a Bahamas corporation that put in $3
million, and three corporations in the tax haven of Panama, historically
a favored destination for Latin-American dirty money—“one of the
filthiest money-laundering sinks in the world,” as a U.S. Customs
official once put it.
Bain Capital has said it did everything required by the U.S.
government to check that the investors were not associated with unsavory
interests. U.S. law doesn’t require Bain to enforce the tax laws of its
investors’ home countries, but the presence of Swiss trustees, Bahamas
trusts, and Panama corporations would raise red flags with any tax
authority.
Many Americans might react with a shrug to the idea of
shady foreign money such as Robert Maxwell’s being invested here. But,
says Rebecca Wilkins, of the Washington, D.C.–based nonprofit Citizens
for Tax Justice, “It is shocking that a presidential candidate should
think that is O.K.”
