Mitt Romney, the Schrodinger’s Cat of private equity

July 19, 2012

Mitt Romney is a quantum CEO, the Schrödinger’s Cat of private equity: From 1999 to 2002, he both was and was not the chief executive officer and sole owner of a powerful Bain Capital investment fund. After that period, Romney’s surrogates explain, he “retroactively” retired from this post. But, as Schrödinger’s famous thought experiment reminds us, just because you find a retroactively dead cat doesn’t mean he wasn’t previously simultaneously alive and dead.

While the two presidential campaigns tussle over this paradox, the real shame is how willing Romney and his defenders are to tolerate this bending of the truth, heretofore confined to particle physics. It’s another insight into the increasingly murky culture of American capitalism.

While Romney has claimed at times he was retired from Bain Capital during the period, he also signed documents filed with the Securities and Exchange Commission attesting that he was the “sole stockholder, sole director, Chief Executive Officer, Managing Director and President” of a multimillion-dollar investment fund.

Romney signed the filings because of a law passed by Congress in 1968 that tried to make financial markets more transparent. At the time, early corporate raiders – the progenitors of Romney and his colleagues at Bain – had been buying up stock in secret to seize control of public companies. They hoped to replace management and improve them enough to turn a profit. Like the similar efforts of Romney and other buyout specialists, some of the companies were run straight into bankruptcy, though rarely at a loss for the raiders.

The law attempted to balance the investors’ right to know who else owns a company with the economic benefit that comes from activist shareholders who prod management to become more effective. Thus, it required investors who own more than 5 percent of a given company to register publicly, explaining who they are and why they’re purchasing a large share of the publicly traded company.

The idea was transparency: Investors could learn a little bit about the people trying to buy up the company. The Romney campaign’s explanation is that the candidate, at the time he signed the documents, was busy saving the Olympics and thus not involved in the day-to-day management of the firm. It’s a believable claim, but Romney listing himself as the chief executive and primary stockholder of his fund when in fact he was not seems flatly misleading. While arguments about whether this move is illegal or not are moot – the statute of limitations has expired – it certainly raises questions about how conscientious he was about exercising his competing responsibilities.

In the United States, we practically expect our politicians to spin the truth; no one is surprised at Romney’s dodging around his record at Bain. But the frightening thing about the Romney episode, and the events of the past several years, is that no one seems surprised that he employed similar dodges as an influential financial executive. In politics, lying is an art; in finance, it’s supposed to be career-ending.

Consider Bob Woodward, the Washington Post‘s famous investigative reporter, discussing those documents on Meet the Press this Sunday.

“People who were relying on SEC documents know the value of SEC documents,” he said. “I mean, they are often camouflages for what’s really going on. So that – that’s not really the issue.”

This is a version of the sophisticated investor defense that has been so prevalent in other recent financial scandals. The argument: When a huge bank is making a deal with another huge bank, shenanigans are to be expected, however the fallout might affect the public.

Glenn Kessler, the Washington Post fact-checker who has been assiduously tracing Romney’s claims, finds an anonymous expert who notes that “the titles are basically meaningless, that someone can be listed as a chief executive and actually have no responsibilities whatsoever.”

So two influential reporters have the following expectations for the public disclosures of financial firms: that they camouflage what’s going on and that they are meaningless.

The casual treatment applied to these public disclosures seems strange as markets confront the Libor scandal, another case where casual misrepresentation was seen as standard operating procedure by savvy financiers, or the revelations of HSBC’s money laundering excesses, or the discovery that the founder of the Peregrine fund had been spending his customers’ money for years.

That this is just the way business is done isn’t much of an excuse, however: The U.S. has fallen to 24th on Transparency International’s global corruption list – below Chile and Barbados – and public trust in big business and the financial sector is falling dramatically.

A culture of trust is key to success in a large, diverse economy, and, along with the rule of law and property rights, has been touted by development economists as a key cultural ingredient to prosperity. The United States has always bragged about its record on this front, but if recent news – and the reactions of our elites – is any indication, there’s not much interest in rectifying the situation.

During Romney’s period as a quantum CEO, the U.S. saw several famous corporate fraud scandals at Enron and WorldCom. Consumers and investors lost millions, and Congress responded with Sarbanes-Oxley, including new rules requiring CEOs and CFOs to certify financial statements as accurate or face major criminal penalties. Imagine if a CEO, caught fibbing in such a disclosure, could simply explain that he retired retroactively and was no longer responsible for anything he had signed? While the idea seems far-fetched, it’s not unimaginable after the tale of Romney’s multidimensional tenure as a (not) CEO.

Disclosures should have teeth. Whether or not Romney’s tenure at Bain ends up influencing the election, the nod-and-a-wink culture exemplified by the former private equity banker and his friends in the financial industry has far more significant and pernicious economic ramifications than any of the laundry list of sins he hangs on the Obama administration. We saw as much in 2008.

PHOTO: U.S. Republican presidential candidate Mitt Romney speaks at a campaign town hall in Bowling Green, Ohio, July 18, 2012.  REUTERS/Matt Sullivan


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

[…] about Mitt Romney’s business record? I needed particle physics to sort the whole thing out. Share this:ShareTwitterFacebookEmailStumbleUpo nDiggLike this:LikeBe the first to like this. […]

Posted by TIM FERNHOLZ | Report as abusive

Romney is quickly becoming the Palin of 2012. Nice try Repubs ..

Posted by Woltmann | Report as abusive

Not a bad article all told but I do take offense at the “the real shame is how willing Romney and his defenders are to tolerate this bending of the truth” statement. Anyone who has ever voted in politics has been willing to accept such bending of the truth except those who have always voted for altruistic candidates who never win. Not saying it’s right, it’s sad, but it’s the truth and has been since the beginning of time. To me this whole situation is a glaring example of all that is wrong with our government (in an effort to encourage transparency in the investment world a law was passed that, years later, has created a situation where no one can reasonably be sure of what the hell was going on and what the situation really was BECAUSE Romney had to report things one way to satisfy the requirements of the law even though the actual situation on the ground may or may not have been different. In doing so hey may or may not have broken other more or less serious laws which is an issue because democrats want to show A) Bain outsourced, which is pretty much a moot point, lots of companies outsource regardless of political affiliation and B) Bain was an investor in a company that disposed of aborted fetuses, also a moot point because Democrats largely support the right to choice which happens to result in aborted fetuses that need to be disposed of). I personally could care less about what Bains investments are or have been in the past. I am a Romney supporter solely because I see the fiscal ruin our country is currently headed for and I want a president who will do exactly what Bain capital does to our government. I want him to identify agencies, departments, and programs that aren’t working and eliminate those so that the money being wasted can then be better spent on meaningful programs that DO work. It’s not going to be pretty, but something HAS to be done. Let’s argue on the merits of each candidate and what each of them has to offer instead of the intricacies of SEC regulations (which i think we can all agree has problems, just ask the folks at Bernie Madoff’s Worldcomm/Enron Investment Emporium).

Posted by speshalk | Report as abusive

How right you are, Woltmann!

And I’d like to thank Mr. Fernholz for an opinion piece that prompted me to update a blog on Ethics that I did 4 years ago. What I’ve written (in my blog) is way too long to post here. But I will quote several of my opening paragraphs and then provide a link to my post of today, which contains a link to the prior post (a post which amply supports the comment of Woltmann).

A link to the whole post:  /2012/07/romney-2012-study-in-why-ethic s-matters.html

What follow are quotes from the post:

“Most professions offer some training in ethics. But an ethics code, no matter how detailed, is no substitute for extensive training in ethical decision-making. And many people who enter politics may stumble seriously for lack of sensitivity to ethics. Awareness of boundaries and the ability to draw firm boundaries goes a long way toward protecting oneself from ethical lapses. I doubt politicians get any training in that. And then we’re just left with the person’s own ethical understanding. That, to my mind, is exactly why character and temperament are so important in picking leaders.

“What follows is a list of general problems, which may arise from a failure to draw boundaries (borders) between professional roles and duties versus private or personal roles and duties. Many of the examples in this list relate to [Mitt Romney] specifically, but they are typical of the kinds of problems any politician, bureaucrat, or other professional might face.”

In the case of Romney, I’ll also be adding some other issues relating to his failure to draw boundaries between the personal, the business, and the political realms. And perhaps what I have to say will throw light on the conflicts currently boxing Mitt in, some of which I have already detailed [elsewhere].

“When a politician mixes personal and professional [and political] roles, he or she is not looking out for the citizens’ interests so much as for his or her own.”

Romney, for personal reasons, wants to withhold releasing years of taxes. His personal reasons? Shame, it would appear. He is putting this before a fiduciary duty to voters. (Interestingly, he should feel ashamed not to do as his father did. So there’s another role conflict in his tangled inner torment.)

Romney, for similar personal reasons is trying to disclaim responsibility for 3 or 4 years of his tenure at Bain, even though business and government records indicate his involvement. And even though his prior role as Chairman, CEO, and Sole Owner would have set the tone and business plan for his company’s conduct during those years. His reason? Again, to avoid shame. This time on both the personal and the professional (business) levels.

THERE’S LOTS MORE. But this is my penultimate paragraph:

“Mr. Romney seems to be ruled by his pride. And this, to my mind, is his Achilles Heel. To the extent that the election feeds into his fear of shame and difficulty swallowing his pride, I anticipate his campaign will continue to have problems. And should he win, I hesitate to even contemplate how foreign forces could exploit this weakness of his, let alone other powerful forces within this country, be they political, corporate, societal.”

Posted by TheraP | Report as abusive

What a rubbish article! Another leftwinger blows his horn. Know-it-all: can you answer this: Who ran the only Olympics in history that made a surplus?

Posted by Midnattsol | Report as abusive

Getting hard to tell the flipping from the flopping.

Posted by borisjimbo | Report as abusive

[…] a retroactively dead cat doesn’t mean he wasn’t previously simultaneously alive and dead.” reuters TPG Said to Consider Bid for Nine Entertainment  |  Reuters reports: “U.S. private […]

Posted by Morning Take-Out – | Report as abusive

What a waste of time. This report is so far to the left it is unbelievable — I guest we can assume Reuters is going left too.

Posted by theHook | Report as abusive

Ninety-five percent of Republicans will see no problem with Romney ‘misrepresenting’ his status at Bain because they would do the same. Keep in mind that the vast majority of them realize that both Clinton and Bush told lies to the American people; Clinton about having sex with an intern, and Bush about weapons of mass destruction in Iraq. Clinton’s affair was a real embarrassment, but no one died because of it. On the other hand, Bush’s lies about WOMD in Iraq have caused hundreds of thousands of wounded and dead, yet Republicans would still vote for Bush every time over Clinton. It makes you wonder just what kind of morality, if you can call it that, they believe in.

Posted by lhathaway | Report as abusive

Long article about nothing.

romney and bain are not an issue. No one cares. The author is an u-bam-a stooge putting out a smoke screen. The smoke screen is to try to cover u-bam-a’s FAILURE with the ECONOMY.

It is the economy, stupid.

The facts no one wants to read.

Learn to think for yourself.

Censorship is evil.

Posted by ALLSOLUTIONS | Report as abusive

Yet another long article on an issue that probably deserves little attention but then Democrats have nothing to show or fight for except dig out such non existent issues.

All I would say in response to these articles and blog posts – ever heard of something called a ‘Leave of Absence’? One could be out on paternity leave for a few months but still hold the title and signing authorities. Similarly one could take a leave of absence to go learn meditation in the Himalayas or write book and still maintain the official title and signing authorities. Is this too hard to understand?

Posted by VarunGupta82 | Report as abusive

[…] Schrödinger’s cat alive, dead, or both […]

Posted by Sunday Talk: Known and unknown | Hotspyer – Breaking News from around the web | Report as abusive

[…] Schrödinger’s cat alive, dead, or both […]

Posted by Sunday Talk: Known and unknown | Anti American | Report as abusive

[…] Schrödinger’s cat alive, dead, or both […]

Posted by Sunday Talk: Known and unknown | FavStocks | Report as abusive

[…] Schrödinger’s cat alive, dead, or both […]

Posted by Sunday Talk: Known and unknown – Online Political Blog | Report as abusive

This article is biased and we can all tell who Fernholz will vote for. I am disgusted and disappointed.

I suggest you look up the terms “power of attorney” and “silent partner” because they both apply to Romney’s situation, IMO… One can own a business 100% and not be physically present or able to manage it because of other obligations. Ergo, someone else would have to have POA to run Bain cuz Romney was NOT physically present… OMG, that explains why Romney was in UTAH, doesn’t it? LOL!

As for the stupid tax returns, Romney has supplied what is required of him every time he’s run for a political office. Do you mean to tell me that you can’t get access to his older tax records now? If you can’t, it must not be *legal* for them to remain public forever then, huh?

Let’s get real, folks. What about the economy and JOBS?

Posted by backtothefuture | Report as abusive