Mitt Romney’s detractors accuse him of destroying jobs or creating low paying jobs. Mitt’s defenders argue that he brought free market discipline to the companies that he and Bain Capital purchased and that by restructuring these companies he saved jobs and created new ones.

Lost in the political jousting is a discussion of the complex business of restructuring and refinancing failing businesses. Business begin to fail because they mistime investments, deploy capital unwisely, misjudge markets, fail to adapt to changing markets and demand and because they are undercapitalized. Management is too often inadequate and too frequently overpaid. Structural costs weigh down profit potential.

Every job in a failing business is at risk if the business cannot be turned around.

Mitt was and is a turnaround expert, skilled in analyzing whether distressed companies can be saved. He brought management savvy and fresh capital needed for essential investments, like technology needed to make companies efficient and competitive.

Of course, underperforming and redundant employees were fired because their very presence made the company unprofitable.  Other employees got clearly defined job responsibilities and a chance to prosper as the reorganized business prospered. So, some were fired and others were hired. Big deal. Anyone running a small business knows the drill.

Mitt’s critics conveniently ignore that he and his partners at Bain Capital provided new risk capital to rescue and restructure the businesses that they purchased. By providing essential capital that preserved the jobs worth preserving they created the opportunity for new jobs filled by new employees with appropriate skills. It is perhaps understandable that politicians used to filling jobs with unqualified cronies and family members are stupiefied by Mitt’s business like approach to job creation.

Restructure or Die

A financially distressed business that is unable to change or obtain adequate working capital in the financial markets has few choices: restructure in an out of court workout; restructure by swapping debt for equity or new debt; and restructure in Chapter 11. None of the restructuring options are viable without new capital, and none work without drastic changes to how the business has been run. Companies that do not restructure are liquidated.

Management changes, union concessions, revisions of contracts always take place in a restructuring—just look at the chapter 11 cases of GM and Chrysler. Mitt criticized and still criticizes the secured loans to GM and Chrysler on philosophical grounds because the loans were made by theUSA. As a distressed debt guy, Mitt may feel a tad jealous that he and his private equity friends did not have enough capital to make the $100 billion of profitable secured loans to GM and Chrysler that got priority in repayment in the bankruptcy court proceeding. In predicting the failure of the government loan package, Mitt missed the business point which was that GM and Chrysler (and their employees) were able to change and that they could be reorganized with the right lender. And, Mitt missed the point that hundreds of thousands of decent jobs inAmerica’s heartland were at stake.

By sticking to his guns during his campaign, Mitt appears to lack concern for workers in America’s core manufacturing industries.

 

Mitt also argues that using the bankruptcy courts was inappropriate and that the holders of the bonds (many his friends in the world of private equity and restructuring) were treated unfairly. Mitt is naïve. His finance friends surely know that in every Chapter 11 case the lender making a dominant secured loan that has a first priority lien on all the assets of a Chapter 11 company like GM, has considerable influence and control on how the company is reorganized and who and how creditors are paid. GM’s sophisticated bondholders knew the bankruptcy strategies; this time they were outmaneuvered, so they should stop Mitt from his surrogate whining about the result. Putting aside the legal jargon and jockeying for priority, bankruptcy laws are a framework for settlement of disputes, and Mitt’s insistence on some non-existent principle of bankruptcy law makes him look inexperienced. If Mitt and his advisors can’t understand the bankruptcy laws, how will they possibly be able to lead the country in the next decade in solving far more complex matters of finance and social conscience?

It is time for Mitt to admit that his abstract principles were worth formulating, but that he was wrong about the practical merits of lending money to Chrysler and GM.

 

Conclusion

As a restructuring expert Mitt had to be smart, intuitive and decisive, and he had to make hard decisions. As a leader at Bain he needed to be well-informed and forward thinking. Our next President will be restructuring the military, restructuring Social Security and trying to reorganize Congress so that our elected officials stop acting like packs of snarling wolves. Maybe the country needs a restructuring expert like Mitt?