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The Constant Negotiator

Matt Pressberg |
July 19, 2012 | 3:43 a.m. PDT

Staff Columnist

Romney cut many lucrative deals at Bain Capital. (DonkeyHotey/Flickr)
Romney cut many lucrative deals at Bain Capital. (DonkeyHotey/Flickr)
Mitt Romney clearly has things in his tax returns he doesn't want us to see.

We already knew Willard had a Swiss bank account, money in Bermuda and the Cayman Islands, and paid a 14 percent effective tax rate on $21.7 million in 2010. This is what he was comfortable sharing with us.

Therefore, we have to assume that whatever is in the records the former Bain Capital CEO doesn't want to release, so much so that he's decided to dig in and attempt to weather a storm of criticism from leaders in both parties that seems increasingly untenable on a daily basis, has to be much worse. I, among others, suspect that the secret returns contain all kinds of shell companies, pass-throughs and other tax avoidance strategies that would be aggressive enough to form the basis of an effective political attack, even on a rich fund manager.

If true, this would be particularly unseemly coming from a guy who has campaigned on the idea that the president is somehow not all-in on America, while he’s been going out of his way to employ exotic strategies in order to give America as little of his money as possible. We should all take advantage of the tax benefits given to us, but the difference between taking the deductions we qualify for and the type of stuff I’m guessing is in Romney’s returns is the difference between redeeming a promotion to get a discount on a jacket and buying a jacket, wearing it for an event, and returning it the next day.

Mitt Romney is not stupid, which is why I can’t believe he expected to get away with this. He does have a problem with assuming a perma-boss role and talking at people instead of talking to them, but even he had to realize that calls for financial transparency in a presidential candidate can't be brushed off with a “here’s the deal” lecture.

For the simpler folks who think it’s fair to have President Obama release his college transcripts in exchange for Romney’s taxes, I would like to remind you that the personal financial history of a guy who has spent virtually his entire career in private equity and campaigns on that experience as his main selling point on fixing the economy is a little different than Barry Obama’s English literature coursework.

What is particularly damning is that compared with almost any other candidate who's run for the office, Romney’s tax returns are much more closely tied to his career and ideology. He’s not a doctor who kept some money in Bermuda nor did he earn most of his income as an author like President Obama. Rather, he was a fund manager who built his reputation on delivering dazzling returns to his investors. Practically his entire income has come from complicated deals he put together to deliver these returns.

Mitt Romney basically built Bain Capital from the ground up, executing transactions that made him and his investors fabulously wealthy. It is a truth of private equity that the real money is made in structuring the deal, and Romney was masterful in setting up structures that took advantage of weaknesses in the counterparties and/or the tax code.

The problem is that Mitt Romney got so good at getting himself and his investors the best economic deal, he likely ended up getting too sweet of a deal from the government. Now this gives off the (factual) appearance that he has been gaming the system. The negotiation expertise and single-minded devotion to driving shareholder returns that made Romney such a successful businessman is also what makes him so vulnerable on taxes.

Mitt Romney does not enjoy firing people who provide services to him because he gets a euphoric rush from being able to inflict life-changing trauma on those less fortunate than himself. That’s Donald Trump. Mitt is just a compulsive capitalist who can’t help himself from looking for the best deal, and if that involves swapping out people for cheaper replacements, that’s just part of the game.
Maximizing shareholder returns is such a self-evident virtue to Romney that he assumes it is in and of itself justification enough for almost anything. Here’s Mitt talking to National Review on Monday about his account in the Cayman Islands (The day after this interview, the conservative National Review joined the chorus calling for Romney to release his tax returns):

“The so-called offshore account in the Cayman Islands, for instance, is an account established by a U.S. firm to allow foreign investors to invest in U.S. enterprises and not be subject to taxes outside of their own jurisdiction. So in many instances, the investments in something of that nature are brought back into the United States. The world of finance is not as simple as some would have you believe.”

Mitt is talking about a scenario like this: Bain Capital buys XYZ Enterprises. Wealthy international investors (think the French Riviera and Persian Gulf set) who are affiliated with or are otherwise friends of Bain want to get in on the XYZ deal, but investing directly in XYZ exposes them to U.S. income taxes on top of whatever they face at home. This is of course unacceptable, so Bain gathers the crew together and forms a corporation domiciled in the Cayman Islands with some unpretentious name like Bain XYZ Global Investors I (“BXYZI”).

BXYZI’s sole business is to invest in XYZ Enterprises. Returns on this investment would pass directly to the free love economy of the Cayman Islands, incurring no U.S. tax liability, and then on to the individual investors around the world. As CEO of the parent company Bain Capital, Mitt Romney would certainly have an economic interest in the Cayman vehicle, which, as he is a U.S. citizen and (most reluctant) taxpayer, would show up on his tax returns.

What Mitt is describing is not illegal and is pretty much standard operating procedure for large private equity funds. There are tax professionals who make high seven-figure incomes exclusively working on composing, orchestrating and conducting exotic tax symphonies for big money firms who can easily justify hiring such an expensive team with the multiple millions of dollars they end up being able to shield from tax collectors. The Double Irish and Dutch Sandwich aren’t just anecdotes from Charlie Sheen’s European vacation—they are convoluted tax “optimization” strategies employed by liberal hero of business Steve Jobs.

Mitt’s problem is that what is normal in his financial world is unusual and viewed with suspicion outside of it. People are already skeptical of Swiss bank accounts and Cayman Islands investment funds. This perception by itself is bad enough, but adding context to your Cayman Islands entity by describing it as a way for a firm like Bain to bypass U.S. taxes while funneling profits produced by loading a company up with debt and cutting or outsourcing jobs to the likes of Saudi princes isn’t exactly the uplifting economic message Mitt wants to take to the heartland. Also a bad campaign idea: saying things like “the world of finance is not as simple as some would have you believe.”

The extended explanation of Romney’s Cayman business seems to be more damaging politically than leaving it as some mysterious Caribbean tax shelter that people chalk up to regrettable rich people behavior and move on from. I think we can assume the same basic mentality is what’s preventing the CEO candidate from opening his books.

The more voters learn about the myriad ways Romney has been able to get around tax obligations and contrast them with his sizable income earned by running a business that promoted the always politically popular tactics of firing people and outsourcing to boost returns to shareholders, the worse things look for him. He evidently feels that the heat he’s taking for not releasing the returns is worth it to avoid an enlightening national conversation about tax secrets of the elite investor class. I bet plenty of private equity and hedge fund managers are upset with Mitt for bringing their secrets out into the spotlight of a presidential race.

In the classic Bain Capital private equity model, executives like Mitt and his partners put in money alongside their outside investors when buying into a company, and financial and tax incentives are structured to encourage maximizing returns on principal by using leverage and aggressive tax planning. Mitt was boosting his business reputation by getting so good at cutting costs (particularly labor and tax), that because he couldn’t really separate how he earned the bulk of his money from the way he earned it for investors, he was backing himself into a corner by saddling his personal finances with items and transactions that would be politically difficult to explain later. He negotiated his way to the financial mountaintop, but possibly to a political free-fall.

Mitt Romney needs to release a fuller set of tax returns. This issue is not going away, and the longer he holds out, the more scrutiny will be placed on those returns when they are finally reviewed. Mitt would never buy a company with only two years of financials; he shouldn't expect America to elect a president on the same. The ultimate negotiator needs to cut our democracy a fair deal.


Reach Staff Columnist Matt Pressberg here.



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