David Stockman vs. Bain Capital

Shortly after Christmas 1980, then‐​congressman Stockman came to my office at the First National Bank of Chicago to recruit me to be the OMB’s chief economist in the new Reagan administration. (I later declined, and Larry Kudlow took the job.) I was surprised at the time that we were accompanied during the interview by a journalist, William Greider. Any young congressman who thought himself worthy of a personal biographer must have deserved what Greider ultimately delivered in The Education of David Stockman — a scandalous revelation of Stockman as deeply disloyal and arrogantly ignorant about economics. (Given that he is a divinity‐​school dropout, his economic ignorance is perhaps not surprising.)

Stockman ended his stint as Reagan’s budget director in 1985 with a posh Wall Street job and a $2 million advance for his book that claimed the Reagan revolution had failed. Hugh Sidey at Time called Stockman’s assessment in the book “the triumph of arrogance.” In his review, Sidey noted:

Today, Stockman is reeling from a series of business failures and a $7.2 million fine to settle an SEC fraud case. His 25‐​room mansion in Greenwich, Conn. (at 19,963 square feet, it’s bigger than Mount Vernon and Monticello combined), went on the market for $19.5 million. So, he is peddling another “shocking” new book, doubtless as bigheaded and unintelligible as the first one. Hoping to fool people twice, he dropped this nasty chapter about Mitt Romney and Bain Capital into Newsweek, complete with the obligatory snide references to “the top 1 percent” (and to be in this elite group, you needn’t own a $19.5 million home; earning $350,000 will do it). To hear Stockman tell it, Romney’s success is “all about the utter unfairness of windfall riches.”

Stockman’s message in this Newsweek preview depicts debt as evil and classifies changes in the ownership of troubled companies as inconsistent with “honest free enterprise.” He rehashes an old list of 77 Bain Capital deals that the Wall Street Journal acquired from Deutsche Bank in January 2012. Although this is old news, Stockman pretends to find it a “startling fact” that four of the better deals ended in bankruptcy after Romney left. But he names only two: Ampad and Stage Stores. As with General Motors, bankruptcy does not mean shutting down. Ampad still makes office products under the Esselte Corp (Pendeflex) umbrella, and Stage Stores still operates hundreds of stores under such names as Peebles.

What everyone needs to know about private‐​equity firms is that they can make money only if they sell a company for more than they bought it. And they can sell a company for more than they bought it only if they have done something to increase its prospective value. Adding debt obviously reduces a company’s value — and therefore what it can be sold for — unless the debt is used to acquire assets the market expects the company to pay off. Stockman’s grumbling about Bain Capital’s (rare) use of “junk bonds” flunks freshman accounting and reeks of sour grapes. “Bain’s returns reputedly averaged more than 50 percent annually during this period, compared with 17 percent for S&P 500 stocks,” Stockman writes. In fact, Bain’s returns were even greater, averaging 50 to 80 percent, according to Stockman’s source. But these profits were ill‐​gotten, Stockman claims. “Bain’s billions of profits were not rewards for capitalist creation, they were mainly windfalls collected from gambling in markets that were rigged to rise,” he writes. “I know this from 17 years of experience doing leveraged buyouts at one of the pioneering private‐​equity houses, Blackstone, and then my own firm.”

Unlike Stockman’s defunct company, Bain did not just do “leveraged buyouts.” It also provided seed capital and management consulting to companies such as Staples. The second big difference is that Bain turned around most firms successfully, while Stockman had the opposite experience.

Anyone who believed Stockman’s gloomy 1986 book about how “Reaganomics failed,” or Greider’s book about how Stockmanomics failed, might easily have missed the 1985–1999 bull run. So did Stockman, apparently. After an uninspiring post‐​political tour as director of dubious mergers and acquisitions at the defunct Salomon Brothers investment bank (which took him on tour among money managers as a political showpiece), Stockman then failed as a wheeler‐​dealer with Blackstone.

Stockman “became known internally for hyping bad deals and arguing against investments championed by others,” Dan Primack reported in Fortune magazine. Primack explained further:

Aside from offering this personal lesson of how to fail in business despite really trying, Stockman’s only other message to Bain Capital is “You didn’t make that” — Alan Greenspan did. “Bain Capital,” Stockman says, “was a vehicle for leveraged speculation that was gifted immeasurably by the Greenspan bubble.” In the case of Staples, for example, Bain “had considerable help from the Easy Button at the Fed.”

Is Stockman saying the Fed was too easy for the entire 1985–1999 span, when Bain was outperforming all rivals? Why didn’t easy money help the others, or Stockman? Is he suggesting the boom in tech stocks had nothing to do with the birth of the Internet and smartphone industries in 1996?

In reality, the fed‐​funds rate averaged 5.75 percent from the time Greenspan became Fed chairman in 1987 through 1999, including during the 1990–1991 recession. In October 2000, Brian Wesbury and I warned of recession because the Fed was again holding rates too high for too long, as it had in 1990.

Fortunately, Newsweek promises to stop publishing by the end of the year. Unfortunately, that turns out to be too late to avoid this extra entry to their recent record as a forum for sensational, opinionated, partisan nonsense. Both Newsweek and David Stockman could have accepted their embarrassing failures with far more humility, dignity, and grace.