Photo: Courtesy of CNN
By now there’s been a lot of discussion in the media about the Vanity Fair and Associated Press exposés of Romney’s and his wife’s offshore bank accounts, to the limited extent that information about them is publicly available.Romney is now likening overseas bank accounts and shell/money-laundering corporations to investing in real overseas companies—as if investments in overseas companies guarantee profit rather than loss in the same way that Bain and its executives usually were guaranteed profits, through financial-transaction fees and “consulting” fees they arranged for themselves irrespective of whether the acquisitioned company made money or instead collapsed under the weight of the debt Bain forced it to incur, in large part, in order to pay Bain those fees. And as if personal profits from overseas investments aren’t taxable here in the United States unless those profits are stored in bank accounts elsewhere.
Romney’s refusal to disclose enough specifics about these foreign bank accounts, where the money actually came from and under what circumstances, and how it has been invested gives new meaning to the term “private equity,” at least in Romney’s case. And this refusal, too, has been and will continue to be widely discussed.
But there’s one aspect of the investigative reports that I think has not been given enough attention and analysis: that Romney’s IRA account from his 15 years as CEO of Bain Capital—a period of time when annual IRA investments could be no more than $2,000—now has assets of more than $100 million.
The Vanity Fair article quotes an expert that the author consulted as saying he believes that they only way that this could have happened would be if Romney significantly undervalued the actual value of the assets he was placing into that account.
Paul Krugman in his New York Times column on Monday discussed the IRA and said there were conceivable legal ways to accomplish this but, because of the secrecy, no way for the public to know whether these wealth was accumulated legally or not.
Krugman didn’t discuss how this could have happened legally, so I’m wondering: what kinds of investments would have to have been for this money to have so wildly metastasized? Apple stock? If so, how much Apple stock? Precious-metal funds? A quiet Louvre heist?
But there’s another issue concerning Romney’s and Bain’s peculiar brand of investment—this one involving the real definition of private equity, not the pun one I used in the title of this post—that also hasn’t received enough media attention: the difference between Bain-style private equity and Silicon Valley-style venture capital.
That difference being the one I alluded to above regarding the investor’s forcing the invested-in company to borrow large sums from banks and use some of the borrowed money or some of its profits to pay huge fees to the investor. Or, in Bain’s case, apparently, not to all the investors, just to the investment company itself and to its executives—thus eliminating, for them, the usual risk inherent in capitalist investment. You know; the risk so vaunted by uber-capitalist-advocates like Romney. Not to mention Romney himself.
Slate writer Will Oremus has an article there today in which he argues that the real difference between the federal government as an angel investor in startups such as Solyndra and private venture capitalists is that the former can only recoup its investment, while the latter can make substantial—sometimes huge—profits.
But venture capitalists, unlike Bain and its executives, also can lose all or some of their investment, just as the government can.
So, in a comment to Oremus’s article, I made a suggestion to the federal government and to venture capitalists. What the federal government and venture capital firms should do, I said, is arrange for the startup company to borrow huge amounts of money from banks and then use most of that borrowed money to pay the government or venture capital firm huge “financial transaction” and “consulting” fees, so that if the startup fails, the government or venture capital firm still makes off like a bandit. Even if they don’t deposit the proceeds in a Cayman Islands bank account in order to avoid taxes and even if the value really would be below legal amounts deposited into an IRA account.
Just as there’s a difference between Silicon Valley-type venture capitalism and Bain-style private equity—something that Obama should point out—there’s a difference between making off like a bandit and being one.
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