Mitt, Ayn Rand, Reardon Steel Vs GST Steel

Dear Hank,

I have one of those recurring ideas in my head I’ve just got to get out so I can stop thinking about it. It concerns the following bits: Mitt Romney, Bain Capital, GST Steel, Ayn Rand, Atlas Shrugged,  Reardon Steel.

I can’t help but think about the parallels between Mitt and Bain Capital’s acquisition of GST Steel to Ayn Rand’s Atlas Shrugged in which Reardon Steel, which makes the world’s finest steel, struggles to stay in business despite being hampered by government and competitors interference. In Atlas Shrugged the competitors lobby the government to pass regulations that would be favorable to them and harmful to the small, yet efficient and profitable, Reardon. Does this sound familiar?

The theme in Rand’s book is one of let people be, to struggle, and not interfered with. The real good will come out. Governments only obstruct the will of the people.

The narrative that you hear from the pro-Romney camp about “private capital”, like Bain, is they try to rescue companies in trouble, and not all companies can be rescued. The narrative you hear from the Obama camp is that Bain Capital bought GST Steel, loaded it up with debt, sold off what it could, and then went bankrupt leaving 750 people without jobs, the government with a $40 plus million pension fund bill and Bain with a $16 plus million profit.

So which is it? Is Mitt with Bain and GST Steel struggling to keep a failing company alive but despite their best efforts it can’t be saved due to huge dark forces beyond their control or is Bain and Mitt a group of robber barons out to fleece a poor struggling company and in the process ruin the lives of hard working loyal employees?

Well there is a narrative that says Bain agreed to buy GST Steel and it tried to save it for 8 years. It invested $100 million of it’s own money to try and modernize the plant and make it competitive, but the unions wouldn’t accept any cuts and their demands were out of line, that cheap foreign steel was being dumped here and GST couldn’t compete and Bain regrettably had to close the plant and those workers lost their jobs. Another article attacks the unions saying workers were making huge salaries, didn’t work, and did what they could to avoid work including putting in tickets for repairs near the end of their shift so they wouldn’t have to do the work and bringing sleeping bags in during overtime situations so they could sleep on the job.

Let’s look at these in reverse order. Sleeping on the job and sloughing off work onto the next shift - obviously, whoever wrote this article has no experience in a large factory because both can happen. But my question is where’s the management? Isn’t Mitt saying what a great boss he would be? Is this what he allowed to go on in his business?

Foreign steel got dumped in the U.S. and GST couldn’t compete; it’s the union’s fault for not accepting lower wages. Cheap steel may have been getting put here but that’s hardly the union’s fault. The union is their to protect the worker’s rights and jobs. Sounds to me like Bain and Mitt didn’t know how to negotiate. Alcoa Aluminum went through similar problems their president took the company from $8.5 billion in sales to $22.5 billion and negotiated new contracts with the unions. Maybe, Mitt and his boys could have learned something from a guy like that. What was his name? Paul O’Neil, Secretary of the Treasury under W, until he got relieved of his job for speaking the truth.

Let’s look at how much money Bain put into GST Steel. From what I’ve been able to glean they bought the company for $75M of which they put up $8M. I’m not sure where they got the difference, $67M, but it wasn’t their money.

The $100M modernization? Well, that’s an interesting story. Before we can go there let’s look at the first $125M bond sale. Bain took over GST and immediately put up a bond sale for $125M. Here’s where they spent that money:

$65M - stock payout,

$36.1M dividend

I calculate they had $23.9M left.

They needed to modernize so they did a second $125M bond. They also used this money to merge with another steel company in South Carolina. Apparently, if you are going to carry that much debt you need to show large volume in sales, hence the reason for the merger.

The $100M modernization was really $98M. The LA Times said Bain put in $16.5M of their own money for the modernization. Really? I think they took $16.5 from the $23.9M that was left from the first bond issue. Maybe, they got the remaining $81.5M from the second bond sale. In any case I haven’t found anyone showing that Bain actually put in any of their own money other than the original $8M. Some folks might want to say the two bond issues totaling $250M was their money, but that isn’t true because others got left holding the bag - not Bain.

In 1995 GST owed $378M, in 2001 it owed $554M. “It couldn’t be saved and went bankrupt” so goes the narrative. The pension fund, which they had depleted as much as possible, was turned over to the government to bail out to the tune of over $40M. It turns out when the union went on strike, for the first time in 40 years, it was because Bain was not putting enough money into the pension fund.

So I ask you - does this sound like a little guy riding in to try and save the day and despite his best efforts and valiantly standing side by side with his workers and using the sweat of his brow and the vast knowledge of the business trying to save a struggling enterprise?

There’s more, a lot more, but I think you have to ask yourself do you want this guy, or his team, or the team that followed him at Bain, running your business? Or your country? If so Mitt is your man. Me? I think I’d either end up being one of those workers or a person holding some of those worthless bonds.

Gotta go,

Bryce