Mitt Romney, the Schrodinger’s Cat of private equity
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