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This note is a rebuttal of sorts to the September 2012 Rolling Stone article by Matt Taibbi entitled, Greed

and Debt: The True Story of Mitt Romney and Bain Capital. With the Presidential election just days away, it feels important to put my message out there, even if I only reach a few people. Please feel free to respond directly if youd like. My email address is Thanks. Kevin Cullen, Pelham Manor, NY.
I have been in the corporate lending business and have made many loans to portfolio companies of private equity firms like the ones mentioned by Matt Taibbis article. While I can certainly understand Taibbis perspective and the perspective of anyone who may have been negatively impacted by excessive leverage at any one of their portfolio companies, I can also tell you that most successful private equity-led LBOs (defined by absolute returns to equity investors) arent based on the sort of financial engineering that has garnered some firms some bad press in recent years. The real home run investments are those based on value creation through operational improvements and by assembling and incentivizing strong management teams to build companies that will be profitable (and increase in value) over a long-term investment horizon. Do private equity firms sometimes walk away from portfolio companies when they realize their investment is worthless? Sure. Do I blame them? Not at all they are simply fulfilling their fiduciary duty to act in the best interests of their limited partnership investors (many of whom are working-class Americans- teachers, firefighters, and other public employees via the pension funds that support their well-deserved retirements). The lexicon of value creation in corporate world consolidation of fragmented industries, synergies, outsourcing, off-shoring, redundancy elimination, automation is the same regardless of whether there is a private equity firm involved or not. While some of these do focus on generating new revenues streams, unfortunately, most of these strategies involve creating more efficient companies, and reducing costs by eliminating jobs. This creative destruction sure doesnt sound very nice but it is simply Adam Smiths invisible hand or economic Darwinism at work, a phenomenon that is played out every day in our free market economy where there is competition for scarce resources. Strong companies with a sustainable competitive advantage will survive and thrive; those that lack a sustainable competitive advantage go bankrupt or are acquired by stronger companies. I think all economists will agree that this culling process happens with or without private equity firms private equity firms simply accelerate the pace of change/evolution. Finally, I think it is important to point out that the best private equity firms, like the best non-sponsor owned firms, not only cut costs but also invest in (and create jobs relating to) the highestpotential ideas for creating core value. In terms of placing blame for the dire economic circumstances that the US faces today, as a registered Republican it seems easy for me to point a finger at Obamas policies but, in truth, I think it is equally easy to blame the Bush administration for creating the mess that Obama inherited. That said, I think it is far more complicated than any individual administration, policy/program or law (i.e., NAFTA, Obamacare, TARP, Dodd-Frank, Repeal of Glass-Steagall), government agency (i.e., Fannie and Freddie), corporation (i.e., Lehman, AIG, Countrywide, Goldman Sachs) or person - theres a lot of blame to go around. As a country, weve been spending far too much for far too long on foreign wars we couldnt afford, on entitlements, public and municipal pensions that arent sustainable and on housing and student loan finance that may ultimately bankrupt our country. As consumers, many stretched to buy homes at inflated prices, financing the purchase price with far too much debt and many others have depleted their home equity built over time by borrowing under home equity lines of credit to buy the latest flat screen TV, as an example. The other thing to point to, which isnt anyones fault per se, is that todays workforce supports an ever larger number of retirees per workforce participant. This trend has worsened as people are living longer but will continue to get worse as wave after wave of Baby Boomers continues to retire (the first Baby Boomers, who represents roughly a quarter of the US population, turned 65 in January of 2011).

Though I probably read the Cliff Notes version of this book back in school, I recently noted in an online reference to the concept of Slowly, then all at once, which is how Ernest Hemingway explains going broke in his classic novel The Sun Also Rises. Thats exactly what is happening in our country were slowly going bankrupt and it could be one day soon when investors stop buying our vaunted treasury debt (at which point well literally be bankrupt, pretty quickly). At some point soon (and sooner than most think), were going to have to let our economy (and spending) settle at some sort of equilibrium by renegotiating our obligations/promises to a number of internal/domestic constituents. It isnt surprising that we dont see that idea on the Democrat or Republican platform because it isnt a popular stance, but thats the reality folks. This mini-rant must sound like I am really down on the prospects of United States as a whole. Nothing could be further from the truth. While the national debt seems high, relative to GDP, it has been higher in the not-too-distant past. Following World War II, the ratio Debt to GDP reached 117.5% compared to the current ratio of just over 100%. So weve been here before. The difference this time is that in the period following WWII, our manufacturing capacity was intact - unlike the rest of the worlds industrial base, which laid in ruins and gave the United States a virtual monopoly on production and supply of the goods needed to rebuild. This set the stage for unprecedented growth in GDP through the early 1950s. Obviously our GDP growth prospects today arent quite as robust, so growing into the debt wont be as easy, but it the only rationale approach one need only look at the results of recent austerity measures and higher taxes imposed on the economies of Greece and Spain to see that they are counterproductive to the goal of becoming solvent as a country. The good news for our growth prospects is that the relative benefit of off-shoring (moving production overseas to cut labor costs) has largely disappeared due to wage growth in overseas markets, a fact which is fueling a rebirth in US manufacturing. This shift, together with the unrelenting pursuit of technological innovation is triggering yet another rebirth of the American dream. Evidence shows that companies in the United States have never been healthier from a balance sheet standpoint with most having repaid a significant amount of debt since 2008 and have unprecedented amounts of cash sitting on their balance sheets gathering dust. By-in-large, most companies have deftly reduced their cost-structures to better withstand the great recession (hence the continued elevated levels of unemployment) and are well-positioned to expand and capitalize on their current strength. Now the only challenge remains is to create an environment where we can convince corporations to open their purse strings and spend that cash to increase capacity, to make acquisitions, hire additional workers and to otherwise invest for the future. Once (or if) that happens, we could be in for another boom, the likes of which we havent seen since the 1950s or not. In terms of the Obama versus Romney question, I think our choice really comes down to answering a simply question. Who has the business acumen, leadership and backbone to deal with our challenges, fiscal and otherwise? I think the answer is clear but, like I said, its complicated.