It was so kind of person or persons unknown to give 950 pages of Bain Capital records to Gawker, exposing (among other things) Mitt Romney’s financial portfolio, and tax avoidance strategies employed by Bain. BUT WHAT DOES IT ALL MEAN? It could mean a lot! Or nothing! There is so much information, and it is so complicated, so you are probably confused and maybe even angry, but do not panic, your Wonkette is here to help!
First, we must understand how private equity fund managers are paid. Hint: they do not get something as common as a “salary,” they get paid according to a structure called “2 and 20,” meaning that they “earn” a management fee of 2% of assets under management, and a 20% share in profits. Although the 2% is subjected to ordinary income taxes, the money from that 20% share in profits is treated as a long-term capital gain, so it is taxed at 15%.
But what if you are a fancy private equity fund manager and you don’t want to pay ordinary income taxes on that 2%? Managers then “waive” the 2% fee and instead ask for a portion of future profits. If it looks like there will be no future profits, they don’t get any money because it is a reflection on their leadership and management skills. Just kidding! Of course they get money, they are obscenely rich and therefore deserve money just for existing. Therefore, if it looks like there won’t be any future profits, they take a cash payment instead of waiving fees.
Is this legal?
Maybe. It’s definitely somewhat controversial among people who are not obscenely wealthy private equity chiefs and people who are obscenely wealthy but care about America and what happens when we are deprived of billions of dollars in tax revenue. Warren Buffett has argued that this 20% is really just compensation and should be taxed as such, but Blackstone cofounder and chairman Steve Schwarzman said that subjecting private equity chiefs to the same tax rates as Real Americans would be exactly the same as when Hitler invaded Poland (srsly) and of course, these are Job Creators we’re talking about so we must appease them at all costs.
A “blocker corporation” is a corporation set up somewhere like the Cayman Islands so that money can take a well-earned break after all the hard work it’s done creating so many jobs for middle class American families. Kidding, it’s a paper company set up specifically for the purpose of tax avoidance. By “paper company” we don’t mean that it sells paper, like Dunder-Mifflin, we mean that it exists only on paper and for the sole purpose of acting as buffer between the investor and the fund holding the investments. If this is still not clear, we will refer you to financial statements for a Bain Fund located offshore and held by one of these paper companies that say the fund “intends to conduct its operations so it will … not be subject to United States federal income or withholding tax …”
Surely This is Not Legal
When Job Creators do it, it’s of course legal, duh. It’s also worth nothing that this practice is not too different from how a private equity firm is structured in the first place. When a private equity firm takes over another company, they do it in such a way as to minimize risks and reap rewards: they create another shell company to be the true owner. That way, none of the partners in the equity firm have any exposure to financial losses when a company is in trouble, but they can reap the gains when it does well.
Sankaty describes itself as follows: “With approximately $19.3 billion assets under management as of 7/1/2012, Sankaty invests in a wide variety of securities and investments, including leveraged loans, high-yield bonds, distressed/stressed debt, mezzanine debt, structured products and equities.” In other words, it is a hedge fund that invests in assets that we can politely describe as “distressed” but might be more aptly referred to as “very risky.” It also invests in companies that engage in the un-Christian pursuits of gambling, cigarette sales and manufacture, and tabloid publication.
What is it for?
Its purpose is to “help Bain work out its financing troubles” so it doesn’t have to depend on banks all the time. In other words, Sankaty invests in highly leveraged companies (companies with a lot of debt) or in distressed debt (debt from entities already in default, under bankruptcy protection, or heading towards bankruptcy).
Is THIS Illegal?
Doesn’t look like it. But it should be noted that Mitt Romney has a multimillion dollar stake in Sankaty, which he received in 2002 even though he pretend-retired in 1999. Also, he claimed he couldn’t find Sankaty’s list of investments, which is either because he’s embarrassed by the fact that it shows so many losses, or concerned about its stake in gambling and cigarette companies.
What does this all mean?
Well, this depends on who you ask. Forbes’ Dan Primack is under the impression that these documents are “worthless.” (Also, he says HE saw these documents MONTHS ago but felt that publication thereof would be beneath Forbes’ readers. Ah yes. We know how very discriminating Forbes’ readers can be.) Anyway, Primack thinks that the documents are worthless because Bain is only doing what everyone else does, and if everyone is doing it, then it must be ok, so who cares and what are we even TALKING about this for?
Be that as it may, there is at least one person — a professor of law at the University of Colorado — who thinks that at least one of these business practices is illegal and wouldn’t survive an IRS audit. Of course, obscenely wealth people don’t get audited by the IRS so the joke’s on him. Or all of us. Or both.
And of course, Romney is still insisting that Bain Capital taught him skills he will very much need as president. Yes, these are all very important skills. Maybe he can set up the government as a shell corporation in the Cayman Islands and borrow against our national parks and then sell the states piece by piece to the Chinese, the Russians, and the Indians.