The Real Romney (21 page)

In some cases, Bain Capital’s alternative strategy of buying into companies also ended in trouble. In 1993, Bain bought GST Steel, a maker of steel wire rods, and later more than doubled its $24 million investment. The company borrowed heavily to modernize plants in Kansas City and North Carolina—and to pay out dividends to Bain. But foreign competition increased and steel prices fell. GST Steel filed for bankruptcy and shut down its money-losing Kansas City plant, throwing some 750 employees out of work. Union workers there blamed Bain, then and now, for ruining the company, upending their lives, and devastating the community.

Then, in 1996, Bain invested $27 million as part of a deal with other firms to acquire Dade International, a medical diagnostics equipment firm, from its parent company, Baxter International. Bain ultimately made nearly ten times its money, getting back $230 million. But Dade wound up laying off more than 1,600 people and filed for bankruptcy protection in 2002, amid crushing debt and rising interest rates. The company, with Bain in charge, had borrowed heavily to do acquisitions, accumulating $1.6 billion in debt by 2000. The company cut benefits for some workers at the acquired firms and laid off others. When it merged with Behring Diagnostics, a German company, Dade shut down three U.S. plants. At the same time, Dade paid out $421 million to Bain Capital’s investors and investing partners.

This was one of the basic tenets of LBO investing: even with large debts to pay off and operating challenges ahead, acquired firms were often obligated to make big payouts to the investment firms that bought them. Romney said later that he regretted that dividend payments to Bain had hurt some of the companies he and his partners had bought. “It is one thing that if I had a chance to go back I would be more sensitive to,” Romney told
The New York Times
in 2007. “It is always a balance. Great care has got to be taken not to take a dividend or a distribution from a company that puts that company at risk,” he said, adding that taking a big payment from a company that later failed “would make me sick, sick at heart.”

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n that time of immense success and growing personal renown, disaster loomed. Everything Mitt Romney had worked for was at risk as the calendar turned to 1991. His reputation, his business, his political future—all of it was on the line.

Romney’s mentor, Bill Bain, and his former firm were in deep trouble. Bain and the seven other founders had come up with a plan to cash out part of their ownership stakes. To do so, they had Bain & Company take out more than $200 million in loans. The idea was to give the founders a large payout and provide partners with a substantial stake in the company. But the result was that a mountain of debt was piled on the firm at exactly the wrong time. The economy was slowing, the company’s revenues were declining, and banks were failing. It was the ultimate embarrassment: here was a company that prided itself on advising others how to prudently improve their businesses, and it was facing near-disaster by failing to follow some of the very principles it preached. Within the firm, partners saw their own earning potential slashed—all in the name of enriching the founders. The company’s existence was at risk.

The senior partners saw Romney as the best person to deal with the crisis: he had the trust of Bill Bain but had not been part of the founder group whose plan had caused all the trouble. They needed someone who could wring concessions from creditors and keep the firm together. A group of the partners went to Romney with a stark message. The consulting company was “going over a cliff,” they told him. “We need you to come in and run the organization.” Though it had been seven years since Romney had left Bain & Company, he realized that his own fate was at stake. If Bain & Company went bankrupt, it could cast such a shadow that his own Bain Capital might also collapse. Bill Bain agreed to let Romney take charge.

Once he saw the books, Romney realized that the problems were even greater than he had imagined. On the day in 1991 he took control, layoffs began. Eventually, 260 people around the world, 18 percent of the Bain & Company workforce, would lose their jobs. The salaries and benefits of many remaining employees were slashed. But that wasn’t nearly enough. Romney learned that the company had just sent a $1 million check to one of Bain & Company’s landlords. “We have bad news,” Romney’s message to the landlord said. “The check has been sent but it’s not going to clear because we’ve cancelled payment.” Romney canceled many other checks for rent payments, real estate, and to “all sorts of suppliers,” doing whatever he could to meet the payroll. Romney’s worry was not just about the financial ledger at Bain & Company. He worried that some company executives would be subject to prosecution. The Massachusetts legal code calls for up to a year in prison for a company official who willfully violates wage law. “It’s a crime in this state to employ someone knowing or having reason to know that you won’t be able to pay them at the end of the pay period,” Romney later told the conservative radio talk-show host and writer Hugh Hewitt. “It’s a crime and we were perilously close to not being able to meet payroll. So, we watched this like a hawk.” There were, he said, “some really frightening months.”

Romney pitted creditors against one another and beseeched banks to go easy on loan repayments, or everyone would lose. At one point, on a Saturday in Bain Capital’s office, Romney and a couple of his partners met with a banker from Goldman Sachs to try to persuade the Wall Street giant to help restructure the consulting firm’s debt. The banker, known for his sharp-elbowed style in his dealings with troubled companies, sat across the table from Romney. The discussion grew increasingly heated. As Romney made his pitch, the Goldman banker said, “Shut up,” and told him that Bain & Company’s best hope was to file for bankruptcy protection, according to a Bain partner. Romney rose to his feet, and the other partners in the room thought he might launch across the table and hit the banker; they had rarely seen him so angry.

As far as Romney was concerned, bankruptcy was not an option. He would embrace that idea when it came to reorganizing other failing companies, given his belief in the creative destruction of capitalism. But if Bain & Company went bankrupt, hundreds of jobs would be lost and Romney’s effort would be seen as a failure. That left him to deal with a cascade of troubles: checks were at risk of bouncing, loans couldn’t be paid, and bankers were balking at Romney’s plan. He began demanding concessions from almost everyone owed something by Bain & Company. He convinced the Federal Deposit Insurance Corporation, which insures bank deposits, to forgive roughly $10 million of $38 million in loans owed to the failed Bank of New England
.
Several major lenders agreed to take 80 cents on the dollar rather than risk default. If Romney hadn’t come up with the rescue plan, his aides later said, the losses to the FDIC and other institutions would have been much greater.

He was toughest when it came to negotiating with the partners at Bain & Company. He told the founding partners they had to give up about $100 million, or half the money they’d been planning to take out of the firm. “He was willing to make very tough decisions that had to be made and force them on people,” said former Bain & Company partner Harry Strachan. Then, one autumn Saturday, Romney summoned about forty partners from Bain & Company to an urgent meeting. He had a take-it-or-leave-it offer: agree to pay cuts and promise to stay with the company for a year, and he would do everything he could to fix the firm. If everyone stayed at a lower salary but joined together, he felt confident that revenues would rebound and they would soon be earning more than ever. Romney said he would leave the room for thirty minutes to let the partners think about it. He knew that many could easily go to other firms for higher pay. He told the partners that anyone who rejected his plan should leave before he returned to the room. Only one person left.

Much of what Romney did to save the company was never made public. But in the end the breaks on loans, the layoffs, financial concessions from partners, and other measures helped Bain & Company save enough money to stay afloat and eventually thrive again. It was the very definition of the kind of “turnaround” for which Romney would claim expertise. Given the embarrassing circumstances of how the company nearly failed, the story of the rescue of Bain & Company has not fit neatly into Romney’s campaign narrative. But it was one of his most impressive displays of executive talent and toughness; in some ways, it was his finest hour at Bain. “If Bain & Company went bankrupt, nobody would ever have taken us seriously,” former Bain Capital partner Geoffrey Rehnert said. “They would’ve been known as the clowns who charged a lot in consulting fees and went bankrupt.”

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hortly after Romney returned to full-time work at Bain Capital, he faced a new crisis that tested his toughened management skills. He was serving on the board of Damon Corp., a medical testing firm based in Needham, Massachusetts, as a result of a $4 million Bain Capital investment he had approved back in 1989. Bain Capital held an 8 percent stake in the company. Initially, the deal had seemed to go as Romney had envisioned. He had helped take Damon public in 1991, and the company had paid down some of its debt from the buyout and sold off unwanted businesses. In August 1993, Bain helped sell the company to Corning and nearly tripled its money. Romney personally reaped $473,000. The day after the merger was completed, Damon’s Needham plant was shut down, and 115 people were laid off.

It was later revealed that during Romney’s tenure on the board, federal investigators had been looking into whether the company had defrauded Medicare by overbilling for blood tests. Indeed, the same month that Damon was acquired, it received subpoenas from the federal government regarding an investigation of the matter. Romney said he had first learned about allegations of overbilling by a rival firm in December 1992 and been moved to insist that the board hire an outside attorney to investigate Damon’s billing practices. Romney said that the board had taken “corrective action” and investors had “received a good return on their investment because we were able to blow the whistle.”

As the details of the federal case were made public, however, Romney’s version appeared questionable. He later faced criticism from his political opponents about whether he had really played any role in uncovering the fraud—and whether he could have reported the overbilling practices to authorities earlier. In 1996, Damon pleaded guilty to criminally defrauding Medicare and Medicaid of $25 million and paid $119 million in fines, the most at that time for a health care fraud case. United States Attorney Donald Stern of Massachusetts, who handled the case, called it “corporate greed run amok.” Four company executives would be charged with conspiring to defraud Medicare; one received a three-month jail sentence. Prosecutors said a former Damon employee had blown the whistle on the billing practices. And the government credited Corning, not Romney or his fellow Damon directors, with cleaning up the situation.

The matter received little notice until a decade later, when Romney was in pursuit of the Massachusetts governorship. His Democratic opponent, Shannon O’Brien, accused him of lax oversight at Damon and failing to report the fraud. “There is a mess in corporate America, and its name is Mitt Romney,” she said during a debate with him. But although some of the fraud occurred during Romney’s time on Damon’s board, he and other board members were never implicated in the case. The Damon case raised a recurring question about corporate governance: how much responsibility does a board member have for what happens at a company he helps oversee? In his comments about Damon, Romney seemed at times to hold two views of the matter, both of them to his benefit. On the one hand, he said he hadn’t known what was going on at Damon; on the other, he said he’d helped to put a stop to practices later found to be fraudulent. One thing that looked good at Damon was the bottom line for Bain. In the end, it was a profitable deal for both the firm and Romney, however tainted by legal troubles and layoffs it may have been.

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omney excelled at courting investors to put millions of dollars into his funds. He was a shrewd analyst of proposed ventures. But he was never an expert at finding new deals. Indeed, he brought few investment proposals to the table, and when he did, they often flopped. One day, for example, Romney arrived at work with what he thought was a great idea. It came from a friend, Reed Wilcox, whose background was almost uncannily like Romney’s: Wilcox, a Mormon, had both law and business degrees from Harvard, was a Brigham Young University alumnus, had worked at Boston Consulting Group, and would later do missionary work in France. Now Wilcox was with a company that had developed a technology that enabled photographs of children to be used to create dolls that looked like them. The two-foot-high, $150 dolls became popular and were featured in magazines. Romney authorized a $2.1 million investment from Bain Capital in 1996, and he personally loaned money for the operation. The company, called Lifelike, had manufacturing operations in Colorado and Hong Kong. But sales dropped when the economy sputtered in 2001; and by 2003 there were production and quality problems, and hundreds of consumers complained to Colorado’s attorney general that they hadn’t received their dolls in time for Christmas 2003. By early 2004, Lifelike was bankrupt. It owed nearly $2 million to its Hong Kong manufacturer and hundreds of thousands of dollars more to advertising agencies and other creditors. In May of that year, a judge approved an auction of the company’s assets, which went for $1.1 million. Bain lost its money. Lifelike became a deal Bain partners wanted to forget; they shook their heads when asked about it and erased mention of it from the company’s web site.