The Huffington Post, May 2, 2012
See article on original website
It's standard practice during the election campaign for presidential candidates to publish an autobiographical account of their rise to stardom or their philosophy of life and politics. However, in keeping with his commitment to innovative business practices, it seems that Mitt Romney has outsourced this task to Ed Conard, one of his former partners at Bain Capital.
In fairness, it is not clear to what extent Romney shares the views of his former partner, but Conard surely understands that his book will get attention because of his proximity to the presumptive Republican nominee. And, on the off chance that Conard does think like the man who likes to be able to fire people, this book should be taken seriously.
There is much in this book to infuriate those who don't get their kicks from firing people. To start, Conard has a tale of the housing bubble and the ensuing crash that places all the blame on government efforts to promote homeownership.
Making this case requires serious abuse of the facts. In arguing that the banks did not know that they were passing along fraudulent mortgages, Conard asks why they would hold so many mortgages on their own books if they knew they were trash. The obvious answer is that they couldn't sell them. This was the whole point of the collaterized debt obligations and later the second generation collaterized debt obligations. The goal was to hide the garbage.
This was like a game of musical chairs. At some point the music stops and someone is left holding the trash. It wasn't by choice that Lehman, Citigroup, and the rest were still holding tens or hundreds of billions of dollars of junk mortgages in 2008. They just couldn't find enough suckers.
Conard is no more successful in trying to turn reality on its head and make Fannie and Freddie the main promulgators of junk mortgages in the peak years of the bubble. He cites data that show the exact opposite. The vast majority of the junk mortgages were securitized by Citigroup, Morgan Stanley and the other investment banks.
Conard is either being dishonest with his readers here or has some serious cognitive problems.
Another novel feature of Conard's book is his contention that there have been substantial gains in wages over the last three decades. The fact that wages for most workers have barely outpaced inflation has been well-documented (see here and here for example). Conard does a neat two-step around this basic fact by showing substantial wage gains for African American men and women and white men and women.
There are some problems with his numbers, but the implication is that as our labor force gets less white and more female we should expect wages to fall. In other words, if the wage distribution was exactly the same, but we replaced all the white men with African American women, then Conard would be touting huge wage gains for the workforce. It's great to see groups that have been the victims of discrimination making progress (in reality, the gains have not been much), but this does not substitute for economy-wide wage growth.
But the real meat of Conard's piece is the glorification of those who have gotten incredibly rich, like him. Conard's celebration of the rich and his airbrushing of what they did to get there is sufficiently out of touch with reality to be scary.
Did Conard really miss the story of Fabrice Tourre (a.k.a. "Fabulous Fab") the Goldman Sachs mortgage trader who put together collaterized debt obligations that were designed to fail and then hawked them off on unsuspecting clients? Does he not know about the flash traders who make fortunes by designing sophisticated programs that allow them to front-run major trades? (This means that they can detect major trades and jump in ahead, thereby capturing some of the profit.) How about the clever character who invented "dead peasant" insurance policies? These are insurance policies that corporations buy on their line workers, usually without their knowledge, making the company the beneficiary. The purpose is to allow the company to time its earnings and minimize its tax obligations.
The financial sector is chock full of people who have made great fortunes on gimmicks that have no obvious social value but allow their inventors to gain at the expense of others. And, the financial sector is not the only place where the big money often comes from economic rents rather than genuine innovations.
Does anyone who has ever used a Microsoft product think that Bill Gates became the world's richest person because of the quality of the software he produces? Microsoft gained its preeminence because of Bill Gates' sharp elbows. Clearly Gates is a highly motivated and intelligent person, but society did not benefit from his success at propelling his inferior software to market dominance.
How much has the pharmaceutical industry profited from using its political power to get Congress to give it ever longer and stronger patent monopolies? We now spend almost $300 billion a year on prescription drugs that would cost us around $30 billion in a free market. The $270 billion a year difference is about five times the size of the Bush tax cuts to wealthy.
There is no problem identifying other sectors of the economy where the big bucks are gained through rent-seeking and manipulation of the political process. (This is the topic of my free book, The End of Loser Liberalism: Making Markets Progressive.) In fact, Conard and Romney's own industry provides an excellent example of using political power to promote private wealth.
One of the major ways that private equity companies make money is by taking advantage of the tax deductibility of interest. Private equity companies typically load the firms they buy with as much debt as possible. This is because the interest payments on debt are tax deductible and they don't really care if the company ends up going bankrupt. They expect a substantial portion of their firms to go into bankruptcy.
The result is that much of the profits pocketed by Conard and Romney are simply the lower taxes due to the fact that interest payments are tax deductible for corporations, whereas dividend payments are not. But this is not their only gaming of the system.
Both Conard and Romney were in a position to pocket tens of millions of dollars from the hedge fund managers' subsidy, also known as the carried interest tax deduction. This tax break allows incredibly wealthy people like Conard and Romney to pay only the 15 percent capital gains tax on the bulk of their earnings. Essentially, the argument is that because they are paid on a commission, like realtors and shoe sales people, hedge and private equity fund managers should have their earnings treated as capital gains. This argument has no obvious logic, but the beneficiaries have enormous political power, which explains why the special treatment of carried interest survives.
In short, Conard portrays a fantasy world. We are not fighting over capitalism versus socialism. The battle is over the crony capitalism of which both he and Romney have been major beneficiaries. We'll leave it to his shrink to determine whether the problem is that Conard is deluded or dishonest, but the rest of us should view this book as a serious warning about the world view of his business partner.