Rich Guys: A Close-Up View
A week ago, the political news was about tax returns, negative ads, visions of capitalism, and so on. Naturally it has been elsewhere for the past few days, and soon the Olympics will begin. (That U.S. presidential elections effectively take a summer time-out, while TV audiences are preoccupied with swimming and so on, is probably a blessing. But when you think about it, it's strange.) When the Games are over and the conventions begin, we'll be back to those themes.
By the way, I know this reader's background well enough to believe his story. It's worth following to the end:
I've been involved for many years with a family business worth considerably more than what Romney has disclosed in his federal forms, first on the board, then on the committee to sell the company. I got some sense of Romney's financial world when the board sat down with our high-priced investment bankers in the sale process.
At 40, I was the youngest by 20 years on our side of the table, the rest being folks who had given their whole adult lives to patiently building up the company. When the bankers came in, there was one guy my age, the senior banker, and the rest looked like they were barely out of college.
I was instantly struck by a sense that I was back in the locker room before a [big college game]. The smell was the same-- testosterone and a swaggering sense of competitiveness. These were just like guys I'd played with in college, except they couldn't give up or hadn't outgrown having to win at all costs, and they were wearing $1,000 suits, not sports gear. I got the sense that they would have had a hard time letting their kids win at a board game.
Throughout the process, the bankers tried to sell the founders on various tax avoidance strategies, essentially using a complicated process where separate entities were set up, and loans were employed to allow the sellers to defer the large capital gains tax that would be due on the sale. A sort of legal maneuver of having your cake and eating it too, where the family could receive money for their interests, but do so in such a way that for tax purposes they hadn't really sold. And, of course, the bank was more than happy to manage all the money for the family.
The bankers also tried to sell us on letting their bank use what's called "stapled finance", where their bank, in addition to advising the seller, would also provide financing for the buyers. The founder asked how they could be on both sides of the transaction. They said, don't worry, we have a Chinese wall, which will ensure that we can do both.
After a quick consult, we told them we just wanted them to sell the company for us. The proposed financial engineering was too confusing, didn't smell right, and, after all, there was a big gain built up over decades, and taxes were due. In the end, the bank tried to gouge more fees out of us and then they moved on to another deal.
Looking back, it seems plain that Romney would have gone for the tax avoidance scheme. After all, he's a product of the financial world where value is supposedly unlocked by messing around with the process, restructuring or repackaging things in a way that makes the company look better, but also allows connected folks to get a payoff. But the folks who had built the company made a different choice. To be sure, they used trust structures over the years, but there clearly was a limit to how far they would go to avoid taxes. (Of the three branches of the family, two are strong Democrats, one a Republican.)
I don't think that Americans begrudge rich folks, particularly those who start and build companies. But it's harder to warm up to someone who gained wealth by manipulating what the labor of others has built, and getting the lions share of the profit. And doing this over and over. I think this largely explains why the Romney campaign doesn't want to release any more tax returns.
Certainly it's easy for folks on the left to buttonhole any rich folks as being as out of touch, tax scheming, selfish, tax avoiding jerks. But I think that Romney actually represents a particular kind of wealth that's arisen from the success in the world of private equity/high finance.
In a sense this is not new -- it's been a generation since Tom Wolfe portrayed "Masters of the Universe" in Bonfire of the Vanities, and generations before that had their counterparts. But the reader's portrayal is important in clarifying the difference between building businesses, which is a long-term undertaking and the entire basis of the economy, and shrewdly re-arranging their assets for short-term financial-market or tax-advantage purposes. That's enough for now.