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Thursday, January 12, 2012

Romney Took Care Of His Investors

The past few weeks have seen Republican frontrunner Mitt Romney take a lot of criticism for the structure of his deals while with Bain Capital.  The criticism is misplaced: Romney did his job, and did it well.

I used to represent private-equity firms, and sometimes their "targets" or "portfolio companies" in which they invested or managed.  I know the structure of these deals and the associated responsibilities. 

Above all else, when one is running a private equity fund and using other investors' money to either make or manage investments to work for a return on investment, there is a responsibility to the investors.  It is clear that Romney fulfilled his fiduciary duties to his private-equity investors in Bain.  He is being criticized, for meeting his responsibilities.  It was his job to work these deals and inspect and manage the companies in which other people's money was invested, and to get the best deal and best return on investment for his investors.

The structure of some deals has been criticized.  And perhaps the terms of some deals could be considered to have been "too tough" on the target companies.  But those companies entered those transactions freely and agreed to those terms.  That is the nature of the beast; you want our money, here are the rules.  These were mostly very troubled companies, but many of them had a choice among suitors.  They could choose whose money to take, which terms to accept.  No one put a gun to these companies' figurative heads and told them they absolutely had to take that Bain Capital money.

Incidentally, had the federal government simply taken this approach when it gave out billions of dollars to financial institutions in the Troubled Assets Relief Program (the TARP bailout), we would likely have had a real economic recovery by now, healthier financial institutions and much, much less debt -- and perhaps an entire return on "investment" to the taxpayer -- being incurred.  (Our national debt is $15.2 trillion, soon to grow when the debt cap is lifted at President Obama's request.)

With TARP, I would have inserted one paragraph -- maybe a few paragraphs -- more carefully limiting what the banks could do with the TARP funds. This is simple and very customary. Its absence in the original TARP agreement was glaring, obvious, and just had to be intentional -- this was no innocent oversight made in haste. It was a signal that the banks would be bailed out and have few real limits on themselves. The clue was there in October 2008. 

My principle would have been real simple: you want TARP funds, here are the rules. You spend it on new loans and creating a reserve for existing loans including some toxic loans, and here are the limits on all employee and executive compensation. The limits are conditions -- requirements -- to the deal. 

I used to do these contracts all the time.  And unlike many of the sloppy boilerplate contracts you see today that are passed off as high-quality legal work by the large law firms charging $500 per hour for second-rate work, I used to draft these contracts from scratch and often off the top of my head. Original work, real analysis, real thought into the consequences.

Now, Romney got strong and exacting terms for his Bain Capital investors.  That was his mandate. Call him a strong negotiator, or at the very least, someone able to capitalize on a target company's distressed situation. 

Is it "nice"?  Not necessarily, but to make that judgment you must ignore the risk the investors take, and must assume or already know that the investors have gotten their investment back and aren't taking a risk anymore, since it's hard to say that an investor whose investment is still at risk of total loss isn't being nice.  And think what would have happened to many of those target companies if they didn't take the Bain Capital money?  Many might have had to lay off much of their workforce, or close altogether.  How nice would that have been?

Whether its Herman Cain or Mitt Romney -- or Ross Perot two decades ago -- the allure of the businessman in politics is the comfort that he (or she) has experience in negotiating tough terms when needed.  This is crucial when negotiating with the other branches of government, with domestic counterparties like unions and regulated industries, and especially with foreign governments.  It seems the criticism of Mitt Romney (and implicitly, of any other businessman in politics) is a criticism of a core competency, an essential skill for the job of President.  The criticism couldn't be more misplaced.

Eric Dixon is a 1994 graduate of Yale Law School and has practiced law in New York for 17 years.  Mr. Dixon has extensive corporate transactional and securities experience including corporate investigations and due diligence, and now consults on various government investigative matters, legal and regulatory compliance and election law issues.  Mr. Dixon may be reached at

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