Reagan's budget director destroys Romney's Bain bona fides

David Stockman was Reagan's budget director who quit over rising budget deficits.  That means he was Reaganier than Reagan when it came to fiscal discipline -- a real proto-Teabagger, if you will.  So he should have loads of credibility among the Right.  I'm posting Stockman's entire analysis of Romney's career at Bain Capital because 1) it's my blog and I can do what I want, and 2) most of Romney's electoral appeal is in his "business" experience, which Stockman, who has worked in private equity and leveraged buyouts himself, tears to shreds.

Here's Stockman's upshot:

In truth, LBOs are capitalism’s natural undertakers—vulture investors who feed on failing businesses. Due to bad policy, however, they have now become monsters of the financial midway that strip-mine cash from healthy businesses and recycle it mostly to the top 1 percent.

The waxing and waning of the artificially swollen LBO business has been perfectly correlated with the bubbles and busts emanating from the Fed—so timing is the heart of the business. [...] The credentials that Romney proffers as evidence of his business acumen, in fact, mainly show that he hung around the basket during the greatest bull market in recorded history.

Needless to say, having a trader’s facility for knowing when to hold ’em and when to fold ’em has virtually nothing to do with rectifying the massive fiscal hemorrhage and debt-burdened private economy that are the real issues before the American electorate. Indeed, the next president’s overriding task is restoring national solvency—an undertaking that will involve immense societywide pain, sacrifice, and denial and that will therefore require “fairness” as a defining principle. And that’s why heralding Romney’s record at Bain is so completely perverse. The record is actually all about the utter unfairness of windfall riches obtained under our anti-free market regime of bubble finance.

If Romney's job as President would be to load up the country with debt and unnecessary capacity, fire most of its workers, and then sell it off to somebody else while collecting big fees for himself and his friends, he would be the perfect man for the job.  But in fact, Romney's job is the exact opposite of that.  And anyway he can't pawn off the United States.  Hence Romney's experience is the exact opposite of what we need from our President!  (Matt Taibbi already made this point back in August, but without the exhaustive evidence and financial analysis that Stockman gives us.)

Mitt Romney: The Great Deformer

By David Stockman

October 15, 2012 | Daily Beast-Newsweek

Bain Capital is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise.

Nevertheless, Mitt Romney claims that his essential qualification to be president is grounded in his 15 years as head of Bain Capital, from 1984 through early 1999. According to the campaign’s narrative, it was then that he became immersed in the toils of business enterprise, learning along the way the true secrets of how to grow the economy and create jobs. The fact that Bain’s returns reputedly averaged more than 50 percent annually during this period is purportedly proof of the case—real-world validation that Romney not only was a striking business success but also has been uniquely trained and seasoned for the task of restarting the nation’s sputtering engines of capitalism.

Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.

That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise. I know this from 17 years of experience doing leveraged buyouts at one of the pioneering private-equity houses, Blackstone, and then my own firm. I know the pitfalls of private equity. The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest-profit exit possible. Occasionally, we did invest in genuine growth companies, but without cheap debt and deep tax subsidies, most deals would not make economic sense.

In truth, LBOs are capitalism’s natural undertakers—vulture investors who feed on failing businesses. Due to bad policy, however, they have now become monsters of the financial midway that strip-mine cash from healthy businesses and recycle it mostly to the top 1 percent.

The waxing and waning of the artificially swollen LBO business has been perfectly correlated with the bubbles and busts emanating from the Fed—so timing is the heart of the business. In that respect, Romney’s tenure says it all: it was almost exactly coterminous with the first great Greenspan bubble, which crested at the turn of the century and ended in the thundering stock-market crash of 2000-02. The credentials that Romney proffers as evidence of his business acumen, in fact, mainly show that he hung around the basket during the greatest bull market in recorded history.

Needless to say, having a trader’s facility for knowing when to hold ’em and when to fold ’em has virtually nothing to do with rectifying the massive fiscal hemorrhage and debt-burdened private economy that are the real issues before the American electorate. Indeed, the next president’s overriding task is restoring national solvency—an undertaking that will involve immense societywide pain, sacrifice, and denial and that will therefore require “fairness” as a defining principle. And that’s why heralding Romney’s record at Bain is so completely perverse. The record is actually all about the utter unfairness of windfall riches obtained under our anti-free market regime of bubble finance.

RIP VAN ROMNEY

When Romney opened the doors to Bain Capital in 1984, the S&P 500 stood at 160. By the time he answered the call to duty in Salt Lake City in early 1999, it had gone parabolic and reached 1270. This meant that had a modern Rip Van Winkle bought the S&P 500 index and held it through the 15 years in question, the annual return (with dividends) would have been a spectacular 17 percent. Bain did considerably better, of course, but the reason wasn’t business acumen.

The secret was leverage, luck, inside baseball, and the peculiar asymmetrical dynamics of the leveraged gambling carried on by private-equity shops. LBO funds are invested as equity at the bottom of a company’s capital structure, which means that the lenders who provide 80 to 90 percent of the capital have no recourse to the private-equity sponsor if deals go bust. Accordingly, LBO funds can lose 1X (one times) their money on failed deals, but make 10X or even 50X on the occasional “home run.” During a period of rising markets, expanding valuation multiples, and abundant credit, the opportunity to “average up” the home runs with the 1X losses is considerable; it can generate a spectacular portfolio outcome.

In a nutshell, that’s the story of Bain Capital during Mitt Romney’s tenure. The Wall Street Journal examined 77 significant deals completed during that period based on fundraising documents from Bain, and the results are a perfect illustration of bull-market asymmetry. Overall, Bain generated an impressive $2.5 billion in investor gains on $1.1 billion in investments. But 10 of Bain’s deals accounted for 75 percent of the investor profits.

Accordingly, Bain’s returns on the overwhelming bulk of the deals—67 out of 77—were actually lower than what a passive S&P 500 indexer would have earned even without the risk of leverage or paying all the private-equity fees. Investor profits amounted to a prosaic 0.7X the original investment on these deals and, based on its average five-year holding period, the annual return would have computed to about 12 percent—well below the 17 percent average return on the S&P in this period.

By contrast, the 10 home runs generated profits of $1.8 billion on investments of only $250 million, yielding a spectacular return of 7X investment. Yet it is this handful of home runs that both make the Romney investment legend and also seal the indictment: they show that Bain Capital was a vehicle for leveraged speculation that was gifted immeasurably by the Greenspan bubble. It was a fortunate place where leverage got lucky, not a higher form of capitalist endeavor or training school for presidential aspirants.

VICTORY FROM THE JAWS OF DEFEAT

The startling fact is that four of the 10 Bain Capital home runs ended up in bankruptcy, and for an obvious reason: Bain got its money out at the top of the Greenspan boom in the late 1990s and then these companies hit the wall during the 2000-02 downturn, weighed down by the massive load of debt Bain had bequeathed them. In fact, nearly $600 million, or one third of the profits earned by the home-run companies, had been extracted from the hide of these four eventual debt zombies.

The most emblematic among them was a roll-up deal focused on down-in-the-mouth department stores and apparel chains that were falling by the wayside in small-town America due to the arrival of Wal-Mart and the big-box retailers. Bain invested $10 million in 1988 and nine years later took out 18X its money—that is, a $175 million profit.

Fittingly, Stage Stores Inc. was the last deal underwritten by the Drexel-Milken junk-bond machine before its demise. And the $300 million raised for this incipient LBO was exactly the kind of slush fund that Milken’s stable of takeover artists had used to acquire corporate castoffs and other bedraggled pots and pans that got rechristened as “growth” companies.

During the next eight years, Bain slogged it out, accumulating about 300 small Main Street storefronts under such forgettable banners as Royal Palais, Bealls, and Fashion Bar. Yet the company wasn’t making much headway. By 1996, it had paid back none of the Milken debt and was only earning $14 million—exactly what it had generated back in 1992 on half the number of stores.

In the spring of 1997, when Chairman Greenspan decided that “irrational exuberance” was not such a worrisome thing, Bain Capital decided to indulge, too. It caused Stage Stores Inc.—which was already publicly traded—to raise $300 million of new junk bonds and used the proceeds to buy a faltering 250-store chain of family clothing stores called C.R. Anthony.

These 12,000-square-foot cracker-box stores sold mid-market shoes, shirts, and dresses right in Wal-Mart’s wheelhouse. In hot pursuit of “synergies,” Bain promptly rebranded these Anthony stores to the purportedly more compelling Stage and Bealls banners. While the name change did nothing to ward off the grim reaper from Bentonville, it suddenly gave Stage Stores Inc. the “growth” story that Greenspan’s bull market craved. Within five months of this ostensibly “transformative” deal and long before the results of the ritual “synergies” and “rebranding” could be determined, the company’s stock price had doubled. Bain Capital and its partner, Goldman Sachs, quickly unloaded their shares at the aforementioned 18X gain.

As a matter of plain fact, the “transformative” C.R. Anthony deal was a bull-market scam. Almost immediately, results headed south. After growing 4 percent during the year of Bain’s quick 1997 exit, same-store sales turned to a negative 3 percent in 1998 and negative 7 percent in 1999, and were still falling when Stage Stores Inc. filed for bankruptcy shortly thereafter. The company hemorrhaged $150 million of negative cash flow during 1998-99—that is, during the two years after Bain and Goldman got out of Dodge City.

Bain Capital subsequently claimed the company was “a growing, successful and consistently profitable company during the nine years we owned it” but then immediately ran into “operating problems.” That was a doozy by any other name but typical of the standard private-equity narrative that confuses speculators’ timing with real value creation on the free market. The fact is, the bad inventory and vastly overstated assets that took the company down did not suddenly materialize out of the blue during the 24 months after Bain’s exit: they were actually the result of financial-engineering games from the very beginning.

Worse still, the Stage Stores deal embodied all of the hidden leverage that had become par for the course in the era of bubble finance. When the crunch came, the company had no assets to fall back on because Bain had hocked virtually everything; it sold all the company’s credit-card receivables to a third party, and among its 650 stores it owned exactly three! By my calculation, the capitalized debt embedded in its store leases was nearly $750 million and when added to its disclosed balance-sheet debt, the company’s true debt of was $1.3 billion or a devastating 25X its peak-year free cash flow.

The bankruptcy forced the closure of about 250—or 40 percent—of the company’s stores and the loss of about 5,000 jobs. Yet the moral of the Stage Stores saga is not simply that in this instance Bain Capital was a jobs destroyer, not a jobs creator. The larger point is that it is actually a tale of Wall Street speculators toying with Main Street properties in defiance of sound finance—an anti-Schumpeterian project that used state-subsidized debt to milk cash from stores that would not have otherwise survived on the free market.

Bain’s acclaimed success with another retailer—Staples—is also not what it is touted to be. Tom Stemberg was a visionary entrepreneur who got $5 million of seed money from Bain in 1986 when it was still in the venture-capital business; the Milken-style LBO schemes came later. As it happened, Bain exited the Staples deal after only a few years with a $15 million profit, a rounding error in the scheme of things.

Stemberg made Staples a free-market success, a relentless generator of efficiency in the retail distribution of office supplies. Yet this honest capitalist efficiency, which benefited millions of customers, was achieved by a rampage of job destruction among tens of thousands of Main Street stationery and office-supplies stores and other traditional distributors. These now-defunct operations could not compete with Staples due to their high labor costs per dollar of sales—including upstream labor expense in the traditional, inefficient wholesale and distribution layers that stood behind Main Street retailers.

Ironically, the businesses and jobs that Staples eliminated were the office-supply counterparts of the cracker-box stores selling shoes, shirts, and dresses that Bain kept on artificial life-support at Stage Stores Inc. At length, Wal-Mart eliminated these jobs and replaced them with back-of–the-store automation and front-end part-timers, as did Staples, which now has 40,000 part-time employees out of its approximate 90,000 total head count. The pointless exercise of counting jobs won and lost owing to these epochal shifts on the free market is obviously irrelevant to the job of being president, but the fact that Bain made $15 million from the winner and $175 million from the loser is evidence that it did not make a fortune all on its own. It had considerable help from the Easy Button at the Fed.

THE $100 MILLION YELLOW PAD

American Pad and Paper was a 20-bagger—that is, $5 million was invested in 1992 for a $100 million profit, a miraculous outcome for Bain, but hardly so for the Ampad workers and shareholders left holding the bag when the company went bankrupt in 1999 with massive debt. Ampad has been the focus of competing narratives in the election, but what it truly represents is neither jobs destroyed or saved—just an exercise in LBO cash-stripping that would not occur in an honest free market where the central bank was not in the tank for Wall Street.

Ampad, owned by the giant paper conglomerate Mead Corporation, had plants in 14 states in the faintly archaic business of making notebooks, envelopes, file folders, and writing tablets—including the eponymous “yellow pad.” Not surprisingly, at a time when the Internet and paperless office were taking the world by storm, Mead discovered that Ampad was “not a good fit” and that its sale to Bain Capital was “an early step to increase productivity.” So the question recurred as to how spreadsheet-toting suits from Boston could resurrect what deeply experienced executives in Dayton, Ohio, knew to be a value-destroying sunset operation.

The answer was leveraged financial engineering—that is, the roll-up of similar pots, pans, and discards for an eventual coming-out party on Wall Street. To this end, Mead perfumed the pig on the way out the door. In conjunction with a sweeping corporate “restructuring” program, 13 manufacturing and distribution facilities were consolidated into six and a $90 million “restructuring reserve” was established to cover asset write-downs and severance costs for upwards of a thousand terminated employees.

So Bain Capital and the division’s senior management became the proud owner of a slimmed-down $100 million business that dominated the market for legal-sized yellow pads. Yet even with all of Mead’s pre-divestiture elimination of plants and jobs, Ampad’s earnings in 1991 (before interest, tax, depreciation, and amortization) amounted to the grand sum of $4.9 million.

Mead also topped up Bain’s tiny $5 million equity investment with short-term financing and generous loans to the divested executives. But despite these Band-Aids from a big company trying to rid itself of a loser, the results showed that the suits from Boston had not moved the needle at all. By 1993, earnings had inched up only to $5.1 million—meaning that after 18 months of effort, Bain had come up with only $1 million of value gain at prevailing cash-flow multiples. Accordingly, it determined that yellow pads were not enough, and in the summer of 1994 it launched a spree of acquisitions hoping that accordion-file folders and business envelopes were the way of the future! The market was held to be large—amounting to some 169 billion envelopes per year—but the snag was they sold for only 1.6 cents each. To make a difference to its profits, therefore, Ampad needed to sell 10 billion to 15 billion envelopes a year.

This turned out to not be a problem. Another group of leveraged operators had been at work for nine years consolidating the business-envelope sector under the Williamhouse umbrella and had accumulated numerous plants and properties. By 1995, the Williamhouse roll-up of envelope makers and distributors had accumulated $150 million of debt, about $250 million of sales, and a modest operating cash flow of about $16 million.

So in October 1995, Bain again rolled the dice on a “transformative” acquisition. It spent $300 million acquiring Williamhouse, assuming all its heavy debt. The purchase price at 18X operating free cash flow was on the far edge of risky, but once again the putative “synergies” proved compelling to Bain’s bankers at the Bankers Trust Company. They refinanced all of the huge Williamhouse debts and provided an additional loan of $245 million. As it happened, Bain only needed $150 million to buy Williamhouse’s stock and pay the deal fees. So it sent its bankers a case of champagne and helped itself to a $60 million dividend in compensation for prospective “synergies” from a day-old merger.

By year-end 1995, Ampad had added envelopes and accordion files to its yellow-pad portfolio, but in the process of its frenetic acquisitions, Bain had trashed the company’s balance sheet. Compared to $45 million of debt at year-end 1994, Ampad by June 2006 had 10X as much debt to service—$460 million!

It therefore desperately needed the promised giant synergies, but, alas, they were not arriving as scheduled. Ampad generated barely enough operating income during the first six months of 1996 to cover its swollen interest payments, causing it to report a negligible 5 cents per share of net income. Yet since Bain Capital had now harvested a dividend that was 12X its original investment, it was basically home free—with a call option on either operational miracles or clever marketing and accounting. Not surprisingly, Bain opted for marketing and accounting razzmatazz. In June 1996, it launched an IPO at $15 per share—or about 150X its actual annualized rate of earnings during the first half of the year.

The roadshow had an altogether different spin, however. The IPO boasted “pro forma” financials—that is, not actual sales and profits but “would have been” results. Thus, 1995 pro forma sales of $620 million reflected the full-year impact of its acquisitions—implying that Ampad was a born-again “growth” company. Compared to its actual sales of only $100 million in 1991, it had purportedly been growing at 53 percent annually. The fact that 90 percent of this growth was due to debt-funded acquisitions was presumably to be overlooked.

The magic wand, however, came in the pro forma “adjustments” to earnings. The company had actually reported 1995 operating earnings of a scant $1.5 million and a net loss after interest and taxes, but in a five-page bridge table that was a wonder to behold, the offering prospectus detailed several dozen pro forma adjustments that envisaged the newly minted amalgamation of companies—Ampad-Williamhouse-Globe-Weis-Niagara—as a gusher of profits. Its interest costs had tripled, but thanks to “synergies,” cost savings, and future operating improvements, the $1.5 million of actual 1995 earnings were to be viewed—through the lens of pro forma magic—as $57 million of operating income.

This $57 million result included a lot of chickens that had not yet hatched. For example, $8.5 million of higher operating income was to be from the Niagara Envelope acquisition that had not actually finalized as of the IPO prospectus. Likewise, a savings of $4.5 million was cited from closing Williamhouse’s New York City headquarters, even though rent and severance costs several times greater were buried in purchase accounting and would be paid for years to come.

Yet by July 1996, the Greenspan stock-market bubble had a good head of steam. This meant that Ampad had no trouble selling nearly $250 million of stock based on a prospectus riddled with pro forma adjustments to the point of incomprehensibility, and a growth story that strained credulity. Bain Capital was able to sell to credulous IPO punters another $50 million of its stock, bringing its return to over $100 million and the fabled 20-bagger. Meanwhile, the hedge-fund speculators pumped the company’s stock to a peak of $26 per share by late summer of 1996, making all the more evident that the Ampad deal was really about speculative mania on Wall Street, not a revival of “Old Yeller” from the bits and pieces of a dying industry.

The company’s combined debt and equity was then being valued at $1.1 billion—or a fantastic 35X the $30 million of operating free cash flow (EBITDA less capital expenditure) that Ampad actually posted during 1997. However, within weeks of the IPO and a profits warning, the fast money smelled the rat and followed Bain in scampering off the listing ship. Margins were being squeezed by the superstores faster than the promised synergies could be realized. By early 1999, the stock was delisted and when the company was finally liquidated in bankruptcy shortly thereafter, secured lenders recovered about $100 million and other creditors got zero—that is, the company was worth about 10 percent of its peak valuation.

Once again, the moral of the story is about the ill effects of bad public policy, not just that smarter speculators like Bain bagged the slower-witted. To be sure, private-equity sponsors usually don’t make huge profits on busted deals. I lost a bundle when my auto-supplier investment went bankrupt, and was prosecuted for fraud to boot. But the government eventually dropped the charges entirely because in the end it was a case of way too much leverage and bad timing in the midst of an auto-industry collapse that took down GM, Chrysler, and nearly every major supplier too.

The lesson is that LBOs are just another legal (and risky) way for speculators to make money, but they are dangerous because when they fail, they leave needless economic disruption and job losses in their wake. That’s why LBOs would be rare in an honest free market—it’s only cheap debt, interest deductions, and ludicrously low capital-gains taxes that artifically fuel them.

The larger point is that Romney’s personal experience in the nation’s financial casinos is no mark against his character or competence. I’ve made money and lost it and know what it is like to be judged. But that experience doesn’t translate into answers on the great public issues before the nation, either. The Romney campaign’s feckless narrative that private equity generates real economic efficiency and societal wealth is dead wrong.

A $165 MILLION SCORE ON EXPERIAN

In September 1996, Bain Capital and some partners bought Experian, the consumer-credit-reporting division of TRW Inc., for $1.1 billion. But Bain ponied up only $88 million in equity along with a similar amount from partners; all the rest of the funding came from junk bonds and bank loans. Seven weeks later, they sold it to a British conglomerate for $1.7 billion, producing a $600 million profit for all the investors on their slim layer of equity capital and after not even enduring the inconvenience of unpacking their briefcases.

Quite obviously Bain generated zero value before it flipped the property. So the fact that it scalped a sudden and spectacular $165 million windfall has nothing to do with investment skill or even trading prowess. Instead, the Experian Corp.’s $600 million valuation gain in just 50 days was an inside job. That explains how a division put on the auction block by one of the nation’s most prominent dealmakers, CEO Joseph Gorman, could have been so badly mispriced in the initial sale to Bain Capital and its partners—that is, how they got it for just 65 percent of what the property fetched only months later. In fact, the original auction had been run by Bear Stearns—and it became evident in March 2008 that Bear Stearns had never been in the client-service business; it had been in the brass-knuckled trading business, where it used its balance sheet to underwrite and trade immensely profitable “risk assets.” Not surprisingly, the private-equity houses were the premier source of profits for its trading and capital-markets desks—so its “investment bankers” needed little encouragement about where to steer corporate-divestiture deals.

In that endeavor, they got plenty of help from the inside management of spun-off divisions, which were usually marketed as a “key asset” of the business and eager to participate in the prospective LBO. Thus, Experian’s CEO, D. Van Skilling, and his lieutenants reaped millions from this Wall Street-orchestrated windfall before they had even been issued new business cards. Oblivious to the irony, however, Skilling defended Bain’s instant $165 million profit by insisting to Business Insider “there was never a hint of financial chicanery at all.” He had that upside down. The deal was pure chicanery, but not because the private-equity investors were underhanded. It was because they were artificially enabled by the central banking and taxing branches of the state—the true source of this kind of rent-a-company speculation.

THE WESLEY-JESSEN HOME RUN

Wesley-Jessen was a small specialist firm that did reasonably well in cosmetic eye-color lenses and toric lenses to correct astigmatism. In mid-1995, when Schering-Plough Corp. put it on the block, Bain Capital invested $6 million and reaped a $300 million profit for itself by 1999—making nearly 50X its investment in the same number of months. On an apples-to-apples basis, however, the company’s operating income rose by only 2X during the same period, by my calculations. The rest of the gain was due to massive leverage, the Greenspan bubble, and accounting moves that can fairly be called myopic.

Bain employed a hoary old dodge—having its accountants write off every dime of plant, equipment, and intangible know-how, reassigning roughly $40 million to the inventory accounts, and then charging it to income in the immediate two or three quarters. This trick eliminated all future depreciation, thereby magically adding $14 million to the pro forma operating income on Wesley-Jessen’s $100 million of sales. Investors were promptly told to ignore the resulting losses, of course, since these inventory charges were “non-recurring”! In fact, savings from pre-deal “restructuring” actions by the seller, plus the accounting magic, generated $24 million of freshly minted “operating income” before Bain’s turnaround squad even showed up at the company’s headquarters. The alleged “turnaround” of Wesley-Jessen was thus largely an artifact of Bain’s PR machine.

In the fourth quarter of 1996, the company borrowed $70 million to acquire a competitor, Barnes-Hind, from Pilkington plc. Before the ink was dry on the merger contract, Bain filed an IPO prospectus. While Barnes-Hind had an operating loss of $17 million the year before the merger, its results for that period were improved by $23 million owing to Bain’s pro forma adjustments—creating the appearance of another dramatic turnaround.

During the 12 months ending at the merger date, the combined companies had actually incurred a net loss of $27 million, but it vanished with the help of $50 million in pre-tax adjustments for merger accounting and prospective savings. So its pro forma earnings took on a decisively improved aura; it would have booked a $14 million profit, or about $0.73 per share.

Not surprisingly, the stock market eagerly scooped up $45 million of new shares at $15, or 20X these gussied-up earnings, just in time for the Fed to begin a new round of goosing in March 1997. And that proved propitious for Bain. Almost to the day on which its 180-day IPO lockup expired, it sold its first batch of shares in a secondary offering in a now red-hot stock market at a red-hot price that was up 60 percent from the IPO.

Wesley-Jessen had not then filed financial statements with even $1 of GAAP (generally accepted accounting principles) net income. But when Bain’s underwriters wired the proceeds in August 1997 the selling price was $23.50 per share. That’s 52X the $0.43 per share it had paid for the stock 25 months earlier. At the end of the day, massive leverage, fancy accounting, and bubble finance, not entrepreneurial prowess, were the source of Bain’s 50-bagger.

THE ITALIAN JOB

In November 1997, Bain Capital pulled off a veritable capitalist heist in the socialist redoubts of the Italian Yellow Pages. On a $17 million investment in the Italian phone book, it took out a profit of $375 million. This was not only a 22-bagger; for Mitt Romney, it was the ultimate in no-sweat riches. According to the company’s CEO, Romney’s sole involvement was a cameo appearance during a due-diligence session: “He came into the room, asked a couple of very sharp questions immediately, shook hands and left.” Twenty-eight months later, in February 2000, Romney’s former colleagues at Bain located him during his tour of duty in Salt Lake City, where they wired his share of the winnings: a reputed $50 million.

Bain and a syndicate of private-equity houses were originally brought in as a stalking horse to validate the government’s “privatization” machinations. At the time, the key Italian Treasury official was one Mario Draghi (now president of the European Central Bank). His assignment was to get the nation’s huge deficit down to a Maastricht Treaty–compliant 3 percent, and he elected to do so by means of a rent-a-balance-sheet ploy of the type then in favor. The short story is that Bain and the other investors paid 5X the company’s operating income for their shares, and were paid 100X operating income to leave when local circumstances obviated the need for the rental deal. That preposterous multiple expansion accounted for virtually all of Bain’s 22-bagger.

In the interim, the dotcom bubble reached it fevered peak—so Italy’s lumbering phone-book publisher had puffed itself up as a fleet-footed Internet company, claiming to be the next AOL. In the fog of 1999’s worldwide financial bubbles, a group of corporate raiders who did not have two nickels to rub together then got control of Italy’s storied typewriter maker, Olivetti, and parleyed massive borrowings through that vehicle into control of the Italian phone company. Now hoist atop a stupendous house of cards, the raiders next went after Italy’s gussied-up Yellow Pages, paying $24 billion—or 180X net income—for a business that was slithering into the sunset. In fact, it is currently worth perhaps 1 percent of Bain’s exit price through a deal that top-ticked Greenspan’s NASDAQ bubble in February 2000. Never have a group of private-equity men laughed more heartily on the way to the bank.

The Bain Capital investments here reviewed accounted for $1.4 billion or 60 percent of the fund’s profits over 15 years, by my calculations. Four of them ended in bankruptcy; one was an inside job and fast flip; one was essentially a massive M&A brokerage fee; and the seventh and largest gain—the Italian Job—amounted to a veritable freak of financial nature.

In short, this is a record about a dangerous form of leveraged gambling that has been enabled by the failed central banking and taxing policies of the state. That it should be offered as evidence that Mitt Romney is a deeply experienced capitalist entrepreneur and job creator is surely a testament to the financial deformations of our times.

Reagan budget director on U.S. 'crony capitalism' -- MUST READ!

Do you need Reagan's zombie to rise from the grave and tell us the hard truth, or is the guy who ran his fiscal policy in the 80s good enough?

DAVID STOCKMAN:  Well look, I think the financial industry, over the two or three year run up to 2010 spent something like $600 million. Just the financial industry, the banks, the Wall Street houses and some hedge funds and others. Insurance companies. $600 million in campaign contributions or lobbying.

That is so disproportionate, because the average American today is struggling to make ends meet. Probably working extra hours in order, just to keep up with the cost of living, which is being driven up unfortunately by the Fed.

They don't have time to weigh into the political equation against the daily, hourly lobbying and pressuring and, you know, influencing of the process. So it's asymmetrical. And how do we solve that?  I think we can only solve it by -- and it'll take a constitutional amendment, so I don't say this lightly.  But I think we have to eliminate all contributions above $100 and get corporations out of politics entirely.

Almost everything wrong with our politics comes back to campaign finance.  Solve that, and it will solve a thousand problems in a snap.  Then we will have a real battle of ideas in politics, not a battle of wallets.

David Stockman on Crony Capitalism

March 9, 2012 | Moyers & Company

Back in the first Gilded Age following the Civil War, with its huge concentration of wealth at the top and abject misery at the bottom, Boies Penrose was a United States Senator from Pennsylvania bought and paid for by the railroad tycoons and oil barons.

They could count on him to deliver the goods. "I believe in the division of labor," he told his wealthy paymasters. "You send us to Congress; we pass laws under which you make money…and out of your profits you further contribute to our campaign fund to send us back again to pass more laws to enable you to make more money."

Boies Penrose would be right at home in politics today. Crony capitalism – using government to deliver favors to your pals in the business world -- is alive and well. The rest of us pay for it. We pay for it at the grocery store because of sweetheart deals in Congress for the dairy industry and sugar lobby. We pay for it at drug store because politicians rented by giant pharmaceutical firms block competition. We pay for it in lowered returns on pension plans bailed out banks speculate with taxpayer money. We pay with the loss of jobs because of trade deals bought and paid for by multinational companies. We pay in tax rates higher than those of the billionaires who fund the SuperPacs. And we pay in the loss of political equality, because one person, one vote means very little when those we elect do the bidding of donors instead of voters.

We're deep now into what will be the most expensive election in our history, much of it funded by crony capitalists. So let's hear from two people who have closely watched how cozy ties between Wall Street and Washington are perverting capitalism and subverting democracy. First, David Stockman.

In the 1970s, he was a young Republican congressman from Michigan and an early proponent of supply-side economics -- some call it trickle down.

You know the theory; if you cut taxes on the wealthy, while cutting government, the economy will take off, money trickling down and creating millions of jobs.

It was the centerpiece of Ronald Reagan's 1980 campaign for president.

RONALD REAGAN: There is enough fat in the government in Washington that if it was rendered and made into soap, it would wash the world.

BILL MOYERS: Once in the Oval Office, President Reagan made David Stockman his budget director.

DAVID STOCKMAN: When President Reagan gave me this job he pointed to that budget which is some thousands and thousands of pages long, and he said go through it from top to bottom with a fine tooth comb and unless you can find a persuasive demonstration why funds must be spent, cut those budgets.

BILL MOYERS: Stockman helped Reagan usher in the largest tax cut in U.S. history, a cut that mainly favored the rich. But things didn't go exactly as they planned them. The economy sagged, and in 1982 and '84, Reagan and Stockman agreed to tax increases.

In 1985 Stockman left government and wrote a book critical of his own years in power: The Triumph of Politics: The Inside Story of the Reagan Revolution. He then took his economic expertise to Wall Street and became an investment banker. Thirty years later, he's writing a new book, with the working title The Triumph of Crony Capitalism.

I sat down with him to talk about how politics and high finance have turned our economy into a private club for members only.

What do you mean by crony capitalism?

DAVID STOCKMAN: Crony capitalism is about the aggressive and proactive use of political resources, lobbying, campaign contributions, influence-peddling of one type or another to gain something from the governmental process that wouldn't otherwise be achievable in the market. And as the time has progressed over the last two or three decades, I think it's gotten much worse. Money dominates politics.

And as a result, we have neither capitalism or democracy. We have some kind of --

BILL MOYERS: What do we have?

DAVID STOCKMAN: We have crony capitalism, which is the worst. It's not a free market. There isn't risk taking in the sense that if you succeed, you keep your rewards, if you fail, you accept the consequences. Look what the bailout was in 2008.

There was clearly reckless, speculative behavior going on for years on Wall Street. And then when the consequence finally came, the Treasury stepped in and the Fed stepped in. Everything was bailed out and the game was restarted. And I think that was a huge mistake.

BILL MOYERS: You write, quote, "During a few weeks in September and October 2008, American political democracy was fatally corrupted by a resounding display of expediency and raw power. Henceforth, the door would be wide open for the entire legion of Washington's K Street lobbies, reinforced by the campaign libations prodigiously dispensed by their affiliated political action committees, to relentlessly plunder the public purse." That's a pretty strong indictment.

DAVID STOCKMAN: Yeah and, but on the other hand, I think you would have to say it was fair. When you look at what came out of 2008, the only thing that came out of 2008 was a stabilization of these giant Wall Street banks. Nothing came out of 2008 that really helped Main Street. Nothing came out of 2008 that addressed our fundamental problems, that we've lost a huge swath of our middle class jobs. Nothing came out of 2008 that made financial discipline or fiscal discipline possible.

It was justified as sort of expediency. We need to do this. We need to stop the contagion. But it wasn't thought through as to what the long-term implications of this would be.

BILL MOYERS: How did you see it playing out?

DAVID STOCKMAN: I think there was a lot of panic going on in the Treasury Department. I call it "The Blackberry Panic." They were all looking at their Blackberries, and could see the price of Goldman Sachs or Morgan Stanley dropping by the hour. And somehow they thought that was thermostat telling them that the economy was coming unraveled.

I don't believe that was right. I think what was going on was simply a huge correction that was overdue on Wall Street. The big leverage hedge funds on Wall Street that called themselves investment banks weren't really investment banks. They were just big trading operations using 30, 40 to one leverage. And it was that that was being corrected.

But they used the occasion of the Wall Street banking crisis to create the impression that this was the beginning of a kind of black hole the whole economy was going to drop into. I think that was wrong.

And it was that fear that led Congress to do anything they wanted. You know, the Congress gave them a blank check.

BILL MOYERS: Not at first, don't you remember, Congress first refused to approve the bailout, right?

DAVID STOCKMAN: And then, the stock market dropped 600 points because all of the speculators on Wall Street all of a sudden began to think, 'Hey, they might let capitalism work. They might let the rules of the free market function.'

BILL MOYERS: You mean by letting them fail.

DAVID STOCKMAN: Yes.

BILL MOYERS: If they let them fail?

DAVID STOCKMAN: I think if they let them fail it wouldn't have spread to the rest of the economy. There wouldn't have been another version of the Great Depression. There weren't going to be runs on the bank. We weren't going to have consumers lined up in St. Louis and Des Moines and elsewhere worried about their bank. That's why we have deposit insurance, the FDIC. But it would have been a big lesson to the speculators that you're not going to be propped up and bailed out,

You're not going to have the Fed as your friend. You're not going to have the Treasury with a lifeline. You're going to have to answer to the marketplace. And until we get that discipline back into our financial system, the banks are just going to continue to grow, continue to speculate and find new ways to make easy money at the expense of the system.

BILL MOYERS: President Bush, he was still in office then.

DAVID STOCKMAN: Yes.

BILL MOYERS: He said, I have to suspend the rules of the free market in order to save the free market.

DAVID STOCKMAN: You can't save free enterprise by suspending the rules just at the hour they're needed. The rules are needed when it comes time to take losses. Gains are easy for people to realize. They're easy for people to capture. It's the rules of the game are most necessary when the losses have to occur because mistakes have been made, errors have been made, speculation has gone too far. The history has always been -- and this is why we had Glass-Steagall and a lot of the legislation in the 1930s.

BILL MOYERS: Glass-Steagall was the provision --

DAVID STOCKMAN: The division of banks between the commercial banking and investment banking and insurance and other --

BILL MOYERS: So that you, the banker, could not take my deposits and gamble with them, right?

DAVID STOCKMAN: That's exactly right. And we need not only a reinstitution of Glass-Steagall, but even a more serious limitation on banks.  And what I mean by that is, that if we want to have a way for, you know, average Americans to save money without taking big risks and not be worried about the failure of their banking institution, then there can be some narrow banks who do nothing except take deposits, make long-term loans or short-term loans of a standard, business variety without trading anything, without getting into all of these exotic derivative instruments, without putting huge leverage on their balance sheet.

And we need to say simply, that if you're a bank and you want to have deposit insurance, which ultimately, you know, is backed up by the taxpayer -- if you're a bank and you want to have access to the so-called "discount window" of the Fed, the emergency lending, then you can't be in trading at all.

Now, on the other hand, if they want to be a hedge fund, then they've got to raise risk capital and they have to take the consequences of their risks, both to the good side and the bad side. And until we really approach that issue, and dismantle these giant, multi-trillion dollar balance sheet banks, and separate retail and deposit insured banking from just financial companies, we're going to have recurring bouts of what we had in 2008.

And they haven't even begun to address that, and it's so disappointing to see that the Obama administration, which in theory should've had more perspective on this than a Republican administration under Bush, to see that one, they appointed in the key positions the same people who brought the problem in: Geithner and Summers and all of those, and secondly, that Obama did nothing about it.

It could have easily -- they could have begun to dismantle a couple of these lame duck institutions, Citibank would have been a good place to start. But they did nothing. They passed Dodd-Frank, which said, now we're going to have everybody write regulations -- tens of thousands of pages that you know, it was a full employment act for accountants and lawyers and consultants and lobbyists. But they didn't go to the heart of the problem. If they're too big to fail, they're too big to exist. And let's start right with that proposition.

BILL MOYERS: You've described what other people have called the financialization of the American economy, the growth in the size and the power of the financial industry. What does that term mean to you, financialization? And why should we care that it's happened?

DAVID STOCKMAN: Because what it means is that a massive amount of resources are being devoted, being allocated or being channeled into pure financial speculation that has no gain to society as a whole, has no real economic contribution to the process by which GNP is created, GDP is created and growth occurs.

By 2007, 40 percent of all the profits in the American economy were coming from finance companies. 40 percent. Historically it was 15 percent.

So the financialization means that as we attracted more and more resources and capital, and we made speculation easier and easier, and we funded it with almost free overnight money, managed and manipulated by the Fed, that's how the economy got financialized. But that is a casino. Casinos -- they're, you know, places for people to go if they want to speculate and wager. But they're not part of a healthy, constructive economy.

BILL MOYERS: What do you mean by the free money that banks are using overnight?

DAVID STOCKMAN: Well, by that we mean when the Fed, the Federal Reserve sets the so-called federal funds rate at ten basis points, where it is today, that more or less guarantees banks can go into the Fed window, the discount window, and borrow at ten basis points.

And then you take that money and you buy a government bond that is yielding two percent or three percent. Or buy some corporate bonds that are yielding five percent. Or if you want to really get aggressive, buy some Australian dollars that have been going up. Or buy some cotton futures. And this is really what has been going on in our markets.

The cheap funding, which is guaranteed by the Fed, the investment of that cheap funding into speculative assets and then pocketing the spread.  And you can make huge amounts of money as long as the music doesn't stop. And when the music stops then all of a sudden, the cheap, overnight money dries up. This is what's happening in Europe today. This is what happened in 2008.

And then people are stuck with all these risky assets, and they can't fund them. They owe cash to the people they borrowed overnight from or on a weekly basis. That's what creates the so-called contagion. That's what creates the downward spiral. Now, unless we let those burn out, it'll be done over and over. In other words, if, you know, if a lesson isn't learned, then the error will be repeated over and over.

BILL MOYERS: Stockman says the modern bailout culture took off under President Bill Clinton. It was engineered with the help of Federal Reserve Chairman Alan Greenspan and top economic advisors at the Treasury, Larry Summers and Robert Rubin.

BILL CLINTON: The American people either didn't agree or didn't understand what in the world I'm up to in Mexico.

DAVID STOCKMAN: I think it started with the bailout of the banks in 1994 during the Mexican Peso Crisis.

REPORTER: For investors it was a sight for sore eyes. Mexico's stock market actually soaring instead of plummeting for the first time in weeks. All this, an immediate reaction to news of a major international aid package – nearly half of it from Washington.

DAVID STOCKMAN: That was allegedly designed to help Mexico. It was $20 billion with no approval from Congress that was used, I think inappropriately out of a Treasury fund. And why were we doing this? It's because the big banks were too exposed to some bad loans that they had written in Mexico and elsewhere.

BILL MOYERS: Wall Street banks. U.S. banks.

DAVID STOCKMAN: Wall Street banks. Wall Street banks. The banks of the day, Citibank, Bankers Trust, the others that existed at that time. And so the idea got started that Washington would be there with a prop, with a bailout, with a helping hand. And then the balls start rolling down the hill.

DAN RATHER: The Federal Reserve Bank of New York has taken highly unusual action to head off what could have been a severe blow to world economies.

BILL MOYERS: When the hedge fund Long Term Capital Management blew up in 1998, it was big news.

REPORTER: Dan, the Long Term Capital fund lost billions in the recent market turmoil and last night, stood on the brink of collapse.

DAVID STOCKMAN: Long Term Capital was an economic train wreck waiting to happen. It was leveraged 100 to one. It was in every kind of speculative investment known to man. In Russian equities, in Thailand bonds, and everything in between. And it was enabled by Wall Street.

REPORTER: An emergency meeting was organized by the Federal Reserve last night, here at its New York office. At the table, more than a dozen of Wall Street's biggest bankers and brokers including David Komansky, Chairman of Merrill Lynch, Sandy Weill of Travelers and Sandy Warner of JP Morgan. One by one the firms each agreed to kick in more than $250 million to bail out Long Term Capital before its troubles sent shockwaves through the banking system.

DAVID STOCKMAN: Why did the Fed step in, organize all the Wall Street banks, and kind of sponsor this bailout? Because all of the Wall Street banks that enabled Long Term Capital to grow to this giant size, to have 100 to one leverage, by loaning them money. So when the Treasury and the Fed stepped in and bailed out, effectively, Long Term Capital and their lenders, their enablers, it was another big sign that the rules of the game had changed and that institutions were becoming too big to fail.

Fast forward. We go through one percent interest rates at the Fed in the early 2000s, we go through the housing bubble and collapse.

BILL MOYERS: Following the 2008 economic meltdown came the mother of all bailouts.

GEORGE W. BUSH: Good morning. Secretary Paulson, Chairman Bernanke and Chairman Cox have briefed leaders on Capitol Hill on the urgent need for Congress to pass legislation approving the Federal government's purchase of illiquid assets such as troubled mortgages from banks and other financial institutions.

BILL MOYERS: The Bush administration leaped to the rescue of some of the county's largest financial institutions, to the tune of 700 billion tax-payer dollars.

DAVID STOCKMAN: We elect a new government because the public said, you know, "We're scared. We want a change." And who did we get? We got Larry Summers. We got the same guy who had been one of the original architects of the policy in the 1990s, the financialization policy, the too big to fail policy.

Who else did we get?  We got Geithner as Secretary of the Treasury.  He had been at the Fed in New York in October 2008 bailing out everybody in sight. General Electric got bailed out. Morgan Stanley, Goldman Sachs, all of the banks got bailed out, and the architect of that bailout then becomes the Secretary of the Treasury. So it's another signal to the financial markets that nothing ever changes. The cronies of capitalism are in charge of policy.

BILL MOYERS: You name names in your writing. You identify several people as the embodiment of crony capitalism. Tell me about Jeffrey Immelt.

DAVID STOCKMAN: He is the poster boy for crony capitalism. Here is GE, one of the six triple-A companies left in the United Sates, a massive, half-trillion dollar company, massive market capitalization. I'm talking about the eve of the crisis now, in September, 2008.

Suddenly, when the commercial paper market starts to destabilize and short-term rates went up. He calls up the Treasury secretary with an S.O.S., "I'm in trouble here. I need a lifeline." He had recklessly funded a lot of assets at General Electric Capital in the overnight commercial paper market. And suddenly needed a bailout from the Treasury. Within days, that bailout was granted.

And therefore, General Electric was able to avoid the consequence of its foolish lend long and borrow short policy. What they should have been required to do when the commercial paper market dried up -- that was the excuse. They should've been required to offer equity, sell stock at a highly discounted rate, dilute their shareholders, and raise the cash they needed to pay off their commercial paper.

That would've been the capitalist way. That would've been the free market way of doing things. And in the future they would've been less likely to go back into this speculative mode of borrowing short and lending long. But when we get to the point where the one triple-A, a multi-hundred billion dollar company gets to call up the secretary, issue the S.O.S. sign and get $60 billion worth of guaranteed Federal Reserve and Treasury backup lines, then we are, you know, our system has been totally transformed. It is not a free market system. It is a system run by powerful, political and corporate forces.

BARACK OBAMA: Thank you. Thank you.

BILL MOYERS: So when you saw that President Obama had appointed Jeffrey Immelt, as the head of his Council on Jobs and Competitiveness, what went through your mind?

DAVID STOCKMAN: Well, I was in the middle of being very disgusted with what my own Republican Party had done and what Bush had done and the Paulson Treasury. And then when I saw this, I got the title for my book, "The Triumph of Crony Capitalism."

BARACK OBAMA: And I am so proud and pleased that Jeff has agreed to chair this panel, my Council on Jobs and Competitiveness, because we think GE has something to teach businesses all across America.

DAVID STOCKMAN: If you have a former community organizer who was trained in the Saul Alinsky school of direct democracy, appointing the worst abuser, the worst abuser of crony capitalism, GE, who came in and begged for this bailout, to head his Jobs Council, when obviously GE's international corporation, they've been shifting jobs offshore for decades, then it becomes so obvious that we have a new kind of system, and that we have a real crisis.

BILL MOYERS: Where is the shame? Shouldn't these people have been at least a little ashamed of running the economy and the financial system into the ditch and then saying, "Come lift me out?"

DAVID STOCKMAN: Yes. You know, I think that's part of the problem. I started on Capitol Hill in 1970s. And as I can vividly recall, corporate leaders then at least were consistent. They might've complained about big government, or they might've complained about the tax system.

But there wasn't an entitlement expectation that if financial turmoil or upheaval came along, that the Treasury, or the Federal Reserve, or the FDIC or someone would be there to back them up. That would've been considered, you know, it would've been considered, as you say, shameful. And somehow, over the last 30 years, the corporate leadership of America has gotten so addicted to their stock price by the hour, by the day, by the week, that they're willing to support anything that might keep the game going and help the system in the short run avoid a hit to their stock price and to the value of their options. That's the real problem today. And as a result, there is no real political doctrine ideology left in the corporate community. They are simply pragmatists who will take anything they can find, and run with it.

BILL MOYERS: So this is what you mean, when you say free markets are not free. They've been bought and paid for by large financial institutions.

DAVID STOCKMAN: Right. I don't think it's entirely a corruption of human nature. People have always been inconsistent and greedy.

But I think it's been the evolution of the political culture in which there have been so many bailouts, there has been so much abuse and misuse of government power for private ends and private gains, that now we have an entitled class in this country that is far worse than you know, remember the welfare queens that Ronald Reagan used to talk about?

We now have an entitled class of Wall Street financiers and of corporate CEOs who believe the government is there to do what is ever necessary if it involves tax relief, tax incentives, tax cuts, loan guarantees, Federal Reserve market intervention and stabilization. Whatever it takes in order to keep the game going and their stock price moving upward. That's where they are.

BILL MOYERS: You were disaffected with the party of your youth, the Republican Party, because it has-- because it's become dogmatic on so many of these issues and no longer listens to evidence and facts. I'm disaffected with the party of my youth because that Democratic Party served the interest of the working people in this country like Ruby and Henry Moyers. And so many people feel the same way. How do we overcome this pessimism about the American future? "The Wall Street Journal" had a headline on an op-ed piece that said, "The End of American Optimism." A recent survey said only 15 percent of the people were satisfied about the direction of the American people. I mean, this is a serious situation, is it not?

DAVID STOCKMAN: I think it is. And -- but we also have to recognize the pessimism that the public reflects in the surveys and polls is warranted. In other words the public isn't being unduly pessimistic. It's not been overcome with some kind of a false wave of emotion. No. I think the American public sees very clearly the current system isn't working, that the Federal Reserve is basically working on behalf of Wall Street, not Main Street.

The Congress is owned lock, stock and barrel by one after another, after another special interest. And they logically say how can we expect, you know, anything good to come out of this kind of process that seems to be getting worse.  So how do we turn that around? I think it's going to take, unfortunately a real crisis before maybe the decks can be cleared.

BILL MOYERS: What would that look like?

DAVID STOCKMAN: It will take something even more traumatic than we had in September 2008.

BILL MOYERS: But on the basis of the record, the lessons of the past. The experience you have just recounted and are writing about. Do you see any early signs that we might turn the ship from the iceberg?

DAVID STOCKMAN: No. I think we've learned no lessons. We really have not restructured our financial system. The big banks that existed then that were too big to fail are even bigger now. The top six banks then had seven trillion of assets, now they have nine or ten trillion.

Rather than go to the fundamentals which have been totally neglected-- we've simply kind of papered over the current system and continued the game of having the Federal Reserve and the Treasury if necessary prop up all of this leverage and speculation, which isn't helping the economy.

And when we talk about zero interest rates. That's not helping Main Street. Our problem in this economy is not our interest rates are too high. The zero interest rates are just more fuel for leverage speculation for what's called the carry trade and that is causing windfall benefits to the few but it's leaving the fundamental problems of our economy in worse shape than they've ever been.

BILL MOYERS: No one I know has a better understanding of the see-saw tension in our history between democracy and capitalism.

Capitalism, you accumulate wealth and make it available. Democracy being a brake, B-R-A-K-E, on the unbridled greed of capitalists. It seems to me that democracy has lost and that capitalism is triumphant -- crony capitalism in this case.

DAVID STOCKMAN: And I think it's important to put the word crony capitalism on there. Because free-market capitalism is a different thing. True free-market capitalists never go to Washington with their hand out.  True free-market capitalists running a bank do not expect that every time they make a foolish mistake or they get themselves too leveraged or they end up with too many risky assets that don't work out, they don't expect to go to the Federal Reserve and get some cheap or free money and go on as before.

They expect consequences, maybe even failure of their firm, certainly loss of their bonuses, maybe the loss of their jobs. So we don't have free-market capitalism left in this country anymore. We have everyone believing that if they can hire the right lobbyist, raise enough political action committee money, spend enough time prowling the halls of the Senate and the House and the office buildings, arguing for their parochial narrow interest -- that that is the way that will work out. And that is crony capitalism. It's very dangerous and it seems to be becoming more embedded in our system.

BILL MOYERS: So many people say, "We've got to get money out of politics." Or as you said, "Money dominates government today."

DAVID STOCKMAN: Well look, I think the financial industry, over the two or three year run up to 2010 spent something like $600 million. Just the financial industry, the banks, the Wall Street houses and some hedge funds and others. Insurance companies. $600 million in campaign contributions or lobbying.

That is so disproportionate, because the average American today is struggling to make ends meet. Probably working extra hours in order, just to keep up with the cost of living, which is being driven up unfortunately by the Fed.

They don't have time to weigh into the political equation against the daily, hourly lobbying and pressuring and, you know, influencing of the process. So it's asymmetrical. And how do we solve that? I think we can only solve it by -- and it'll take a constitutional amendment, so I don't say this lightly.  But I think we have to eliminate all contributions above $100 and get corporations out of politics entirely.

[Hallelujah! -- J]

Ban corporations from campaign contributions or attempting to influence elections.  Now, I know that runs into current free speech. So the only way around it is a constitutional amendment to cleanse our political system on a one-time basis from this enormously corrupting influence that has built up. And I think nothing is really going to change until we get money out of politics and do some radical things to change the way elections are financed and the way the process is influenced by organized money. If we don't address that, then crony capitalism is here for the duration.

BILL MOYERS: David Stockman, thank you very much for sharing this time with us.

Reagan's OMB Director: We can't afford tax cuts

He's going to lose his membership card if he keeps this up.

We Can't Afford Bush Tax Cuts: David Stockman

By Nicole Lapin
September 13, 2010 | CNBC

Don't extend the George W. Bush tax cuts, David Stockman, the director of Office of Management and Budget under President Reagan, told CNBC.

"We couldn't afford those tax cuts back when they were implemented by Bush. We can't afford them now," said Stockman.

"This is $300 billion a year. I think both parties are dreaming. Our fiscal situation is far worse than they're really telling the public, and since they're unwilling to cut taxes, and since we can't keep borrowing a trillion and a half dollars year in and year out, it's time to face the music."

Meanwhile, the White House continues to cite a report from the Congressional Budget Office that maintains that extending tax cuts for the wealthy could add $700 billion to the US deficit over the next decade.

"I realize people will say this [increasing taxes for the wealthy] will slow down the recovery, but, frankly, the recovery is over. We had a small inventory bounce. That's done. The economy is now bouncing along the bottom. It's not going to get a lot better, and we don't have the luxury of time," Stockman said.

"We're borrowing money or creating deficit at a $100 billion a month. We're creating deficit, or new debt, at twice the rate of our economic growth. I don't think that's sustainable and one of these days we're going to get a huge wake-up call as the global markets finally figure this out. We can't wait for that to happen, because if we do, it will be too late."

Stockman scoffed at the idea that tax cuts creates jobs, a point made by Obama's former OMB director Peter Orzag, in a recent New York Times column.

"That's a Republican National Committee talking point. We have millions of excess small businesses in the United States that were created during the boom—construction companies, restaurants, retailers and so forth—that have no business, and they're not hiring because their taxes are too high, they're not hiring because they don't have any customers," said Stockman. He also said that there are more homebuilders than housing starts.

"We have to recognize that we're in a major debt deflation, debt liquidation. Our economy has to go through vast restructuring, and the typical historical expedience, like tax cuts for a short period stimulus, simply is irrelevant. They [tax cuts] will only make the problem larger in terms of the fiscal side and will not create jobs. We've had tax cuts for the last three years, and how many jobs have been created? Net, very few."