Mitt Romney's bailout bonanza
by Greg Palast
The Nation
11/5/12
This
investigation was supported by the Investigative Fund at the Nation
Institute and by the Puffin Foundation. Elements of it appear in
Palast’s new book, Billionaires & Ballot Bandits: How to Steal an Election in 9 Easy Steps (Seven Stories). Research assistance by Zach D. Roberts, Ari Paul, Nader Atassi and Eric Wuestewald.
Mitt Romney’s opposition to the auto bailout has haunted him on the
campaign trail, especially in Rust Belt states like Ohio. There, in
September, the Obama campaign launched television ads blasting Romney’s
November 2008 New York Times op-ed, “Let Detroit Go Bankrupt.”
But Romney has done a good job of concealing, until now, the fact that
he and his wife, Ann, personally gained at least $15.3 million from the
bailout—and a few of Romney’s most important Wall Street donors made
more than $4 billion. Their gains, and the Romneys’, were
astronomical—more than 3,000 percent on their investment.
It all starts with Delphi Automotive, a former General Motors
subsidiary whose auto parts remain essential to GM’s production lines.
No bailout of GM—or Chrysler, for that matter—could have been successful
without saving Delphi. So, in addition to making massive loans to
automakers in 2009, the federal government sent, directly or indirectly,
more than $12.9 billion to Delphi—and to the hedge funds that had
gained control over it.
One of the hedge funds profiting from that bailout—
$1.28 billion so
far—is Elliott Management, directed by
Paul Singer. According to The Wall Street Journal,
Singer has given more to support GOP candidates—$2.3 million—than
anyone else on Wall Street this election season. His personal giving is
matched by that of his colleagues at Elliott; collectively, they have
donated $3.4 million to help elect Republicans this season, while giving
only $1,650 to Democrats. And Singer is influential with the GOP
presidential candidate; he’s not only an informal adviser but, according
to the Journal, his support was critical in helping push Representative Paul Ryan onto the ticket.
Singer, whom Fortune magazine calls a “passionate defender
of the 1%,” has carved out a specialty investing in distressed firms and
distressed nations, which he does by buying up their debt for pennies
on the dollar and then demanding payment in full. This so-called
“vulture investor” received $58 million on Peruvian debt that he snapped
up for $11.4 million, and $90 million on Congolese debt that he bought
for a mere $20 million. In the process, he’s built one of the largest
private equity firms in the nation, and over decades he’s racked up an
unusually high average return on investments of 14 percent.
Other GOP presidential hopefuls chased Singer’s endorsement, but Mitt
chased Singer with his own checkbook, investing at least $1 million
with Elliott through Ann Romney’s blind trust (it could be far more, but
the Romneys have declined to disclose exactly how much). Along the way,
Singer gained a reputation, according to Fortune, “for strong-arming his way to profit.” That is certainly what happened at Delphi.
* * *
Delphi, once the Delco unit of General Motors, was spun off into a
separate company in 1999. Alone, Delphi foundered, declaring bankruptcy
in 2005, after which vulture hedge funds, led by Silver Point Capital,
began to buy up the company’s old debt. Later, as the nation’s financial
crisis accelerated, Singer’s Elliott bought Delphi debt, as did John
Paulson & Co. John Paulson, like Singer, is a $1 million donor to
Romney. Also investing was Third Point, run by Daniel Loeb, who was once
an Obama supporter but who this summer hosted a $25,000-a-plate
fundraiser for Romney and personally donated about $500,000 to the GOP.
As Delphi was in bankruptcy, making few payments, the bonds were
junk, considered toxic by the banks holding them. The hedge funds were
able to pick up the securities for a song; most of Elliott’s purchases
cost just 20 cents on the dollar of their face value.
By the end of June 2009, with the bailout negotiations in full swing,
the hedge funds, under Singer’s lead, used their bonds to buy up a
controlling interest in Delphi’s stock. According to SEC filings, they
paid, on average, an equivalent of only 67 cents per share.
Just two years later, in November 2011, the Singer syndicate took
Delphi public at $22 a share, turning an eye-popping profit of more than
3,000 percent. Singer’s fund investors scored a gain of $904 million,
all courtesy of the US taxpayer. But that’s not all. In the year since
Delphi began trading publicly, its stock has soared 45 percent. Loeb’s
gains so far for Third Point: $390 million. The gains for Silver Point,
headed by two Goldman Sachs alums: $894 million. John Paulson’s fund,
which has already sold half its holdings, has a $2.6 billion gain. And
Singer’s funds and partners, combining what they’ve sold and what they
hold, have $1.29 billion in profits, about forty-four times their
original investment.
Yet without taking billions in taxpayer bailout funds—and slashing
worker pensions—the hedge funds’ investment in Delphi would not have
been worth a single dollar, according to calculations by GM and the US
Treasury.
Altogether, in direct and indirect payouts, the government padded
these investors’ profits handsomely. The Treasury allowed GM to give
Delphi at least $2.8 billion of funds from the Troubled Asset Relief
Program (TARP) to keep Delphi in business. GM also forgave $2.5 billion
in debt owed to it by Delphi, and $2 billion due from Singer and company
upon Delphi’s exit from Chapter 11 bankruptcy. The money GM forgave was
effectively owed to the Treasury, which had by then become the majority
owner of GM as a result of the bailout. Then there was the big one: the
government’s Pension Benefit Guaranty Corporation took over paying all
of Delphi’s retiree pensions. The cost to the taxpayer: $5.6 billion.
The bottom line: the hedge funds’ paydays were made possible by a
generous donation of $12.9 billion from US taxpayers.
* * *
One of President Obama’s first acts in office, in February 2009, was
to form the Auto Task Force with the goal of saving GM, Chrysler, their
suppliers and, most important, auto industry jobs. Crucial to the plan
was saving Delphi, which then employed more than 25,000 union workers.
Obama hired Steven Rattner, himself a millionaire hedge fund manager,
to head the task force that would negotiate with the troubled firms and
their creditors to avoid the collapse of the entire industry. In
Rattner’s memoir of the affair, Overhaul, he describes a
closed-door meeting held in March 2009 to resolve Delphi’s fate. He
writes that Delphi, now in the possession of its hedge fund creditors,
told the Treasury and GM to hand over $350 million immediately, “because
if you don’t, we’ll shut you down.” His explanation was corroborated by
Delphi’s chief financial officer, John Sheehan, who said in a sworn
deposition in July 2009 that the hedge fund debt holders backed up their
threat with “an analysis of the cost to GM if Delphi were unwilling or
unable to provide supply to GM,” forcing a “shutdown.” It would take
“years and tens of billions” for GM to replace Delphi’s parts. At that
bleak moment, GM had neither. The automaker had left the inventory of
its steering column and other key components in Delphi’s hands. If
Delphi laid siege to GM’s parts supply, the bailout would fail and GM
would have to be liquidated or sold off—as would another Delphi
dependent, Chrysler.
Rattner could not believe that Delphi’s management—now effectively
under the hedge funders’ control—would “want to be perceived as holding
GM hostage at such a precarious economic moment.” One Wall Street Journal
analyst suggested that Singer was treating Delphi “like a third world
country.” Rattner likened the subsidies demanded by Delphi’s debt
holders to “extortion demands by the Barbary pirates.”
Romney has slammed the bailout as a payoff to the auto workers union.
But that certainly wasn’t true for the bailout of Delphi. Once the
hedge funders, including Singer—a deep-pocketed right-wing donor and
activist who serves as chair of the conservative, anti-union Manhattan
Institute—took control of the firm, they rid Delphi of every single one
of its 25,200 unionized workers.
Of the twenty-nine Delphi plants operating in the United States when
the hedge funders began buying up control, only four remain, with not a
single union production worker. Romney’s “job creators” did create
jobs— in China, where Delphi now produces the parts used by GM and other
major automakers here and abroad. Delphi is now incorporated overseas,
leaving the company with 5,000 employees in the United States (versus
almost 100,000 abroad).
Third Point’s Daniel Loeb, whose net worth of $1.3 billion owes much
to his share in the Delphi windfall, told his fund’s backers this past
July that Delphi remains an excellent investment because it has
“virtually no North American unionized labor” and, thanks to US
taxpayers, “significantly smaller pension liabilities than almost all of
its peers.”
* * *
Another outcome may have been possible. In June 2009, the Treasury
and GM announced a bailout deal they’d crafted over months with the
cooperation of the United Auto Workers. GM would take back control of
Delphi via a joint venture with Platinum Equity, a buyout firm led by
billionaire Tom Gores, a self-described “Michigan man” who grew up in
the shadow of Delphi’s Flint plant.
The final Platinum plan, according to Delphi’s official statement
posted on Marketwire in June 2009, lists plants in fourteen locations
slated for closing, which would have left several of Delphi’s plants
still in business, still unionized—and still in the United States.
Crucially, the deal would have returned key Delphi operations, including
the production of steering columns, directly to GM.
The hedge funders stunned Delphi by refusing to accept the Platinum
plan. Harshly criticizing it as a “sweetheart deal,” they demanded 45
cents on the dollar for the debt bonds they had bought on the cheap—more
than double what the Treasury-brokered Platinum deal would pay.
Then the Singer-led debt holders swooped in. After the Platinum deal
was announced, Elliott Management quietly tripled its holdings of Delphi
bonds, purchased at just one-fifth of their face value. By joining
forces with Silver Point, Paulson and Loeb, Singer now controlled
Delphi’s fate.
Gores, Delphi and UAW officials declined to respond to queries about the deal on the record, but the
sworn deposition [1]
by Delphi CFO Sheehan (confidential then, but later posted on
Scribd.com) lets us in on the tense negotiations culminating in a
twenty-hour showdown between Delphi, GM, the UAW, the Auto Task Force
and the US pension agency, on the one hand, and Singer’s hedge fund
group, on the other. Delphi said it would dump the Platinum deal if the
hedge funds would agree to terms that would take care of all
stakeholders, including the following stipulation: “Agree on plan
structure to maximize job preservation.”
The hedge funders said no, since they had a billion-dollar ace up
their sleeve. According to Sheehan, Singer and company’s controlling
interest allowed them to force the bankruptcy judge to hold an auction
for all of Delphi’s stock. The debt holders outbid the Michigan Man’s
team, offering $3.5 billion. But it wasn’t $3.5 billion in cash: under
the rules of Chapter 11 bankruptcy, debtors-in-possession may bid the
face value of their bonds rather than their current market value, which
at the time was significantly lower. Under the Platinum deal, Delphi
would have had much more in real money for operations: $250 million in
cash from Gores, another $250 million in credit, and $3.1 billion in
“exit financing” from GM, all of it backed up by TARP. Still, under
Chapter 11 rules, the Platinum bid was technically lower. And that’s how
Singer’s funds —which included the Romneys’ investment— came to buy
Delphi for the equivalent of only 67 cents a share.
Rattner and GM, embarrassingly outmaneuvered, tried to put a good
face on it. As Rattner wrote in his memoir, “In truth we didn’t care who
got Delphi as long as GM could extricate itself from the continual
drain on its finances and assure itself of a reliable supply of parts.”
* * *
Even before the hedge funds won their bid for Delphi’s stock, they
were already squeezing the parts supplier and its workforce. In February
2009, Delphi, claiming a cash shortage, unilaterally terminated health
insurance for its nonunion pensioners. But according to Rattner, the
Treasury’s Task Force uncovered foggy accounting hiding the fact that
the debt holders had deliberately withheld millions of dollars in cash
sitting in Delphi accounts. Even after this discovery, the creditors
still refused to release the funds.
The savings to the hedge fund billionaires of dropping retiree
insurance was peanuts —$70 million a year— compared with the profits they
later extracted from Delphi. But the harm to Delphi retirees was severe.
Bruce Naylor of Kokomo, Indiana, had been forced into retirement at the
age of 54 in 2006, when Delphi began to move its plants overseas.
Naylor’s promised pension was slashed 40 percent, and his health
insurance and life insurance were canceled. Though he had thirty-six
years of experience under his belt as an engineer with GM and Delphi, he
couldn’t find another job as an engineer—and he doesn’t know a single
former co-worker who has found new employment in his or her field,
either. Naylor ended up getting work at a local grocery store. That job
gone, he now sells cars online for commission, bringing in one-fifth of
what he earned before he was laid off from Delphi.
Even with his wife Judy’s income as a nurse, it hasn’t been enough:
the Naylors just declared bankruptcy, and their home is in foreclosure.
After the hedge fund takeover of Delphi, the squeeze on workers
intensified through attacks on their pensions.
During its years of
economic trouble, Delphi had been chronically shorting payments to its
pension funds—and by July 2009, they were underfunded by $7 billion.
That month, Singer’s hedge fund group won the bid for control of
Delphi’s stock and made clear they would neither make up the shortfall
nor pay any more US worker pensions. Checkmated by the hedge funders,
the government’s Pension Benefit Guaranty Corporation agreed to take
over Delphi’s pension payments. The PBGC would eat the shortfall.
With Delphi’s new owners relieved of its healthcare and pension
obligations, its debts to GM and its union contracts—
and now loaded
with subsidies from GM funded by TARP—the company’s market value rose
from zero to approximately
$10.5 billion today.
* * *
But there was still a bit of unfinished business: President Obama
needed to be blamed for the pension disaster. In a television ad airing
in swing states since September, one retired Delphi manager says, “The
Obama administration decided to terminate my pension, and I took a 40
percent reduction in my pension.”
Another retiree, Mary Miller, says, “I really struggle to pay for the
basics…. I would ask President Obama why I had no rights, and he had
all the rights to take my pension away—and never ever look back and say,
‘Not only did I take it from Mary Miller, I took it from 20,000 other
people.’”
These people are real. But it’s clear that these former workers, now
struggling to scrape by, were hardly in the position to put together $7
million in ad buys to publicize their plight. The ads were paid for by
Let Freedom Ring, a 501(c)(4) nonprofit advocacy organization partially
funded by Jack Templeton Jr., a billionaire evangelical whose foundation
has sponsored lectures at the Manhattan Institute (the anti-union think
tank whose board of directors includes not only Singer but Loeb). The
ads also conveniently leave out the fact that the law sets specific
ceilings on what the PBGC is allowed to pay retirees—regardless of what
they were originally owed.
In June 2011, Charles and David Koch hosted a group of
multimillionaires at a retreat in Vail, Colorado. In secret recordings
obtained by investigator Brad Friedman, the host, Charles Koch, thanks
Singer and Templeton, among others, for each donating more than $1
million to the Koch brothers’ 2012 anti-Obama election war chest.
Of course, it wasn’t Obama who refused to pay the Delphi pensions; it
was Paul Singer and the other hedge funds controlling Delphi. The
salaried workers’ pensions were, after all, an obligation of Delphi’s
owners, not the government. Delphi’s stockholders—the Romneys
included—had one easy way to rectify the harm to these pensioners, much
as GM did for its workers: just pay up.
Making good on the full pensions for salaried workers would cost
Delphi a one-time charge of less than $1 billion. This year, Delphi was
flush with $1.4 billion in cash—
meaning its owners could have made the
pensioners whole
and still cleared a profit. Instead, in May, Delphi
chose to use most of those funds to take over auto parts plants in Asia
at
a cost of $972 million—purchased from Bain Capital.
* * *
That leaves one final question: Exactly how much did the Romneys make
off the auto bailout? Queries to the campaign and the Romneys’ trustee
have gone unanswered. And Romney has yet to disclose the crucial year of
his tax returns, 2009. But whatever the tally, it was one sweet deal.
The Romneys were invested with Elliott Management by the end of 2010,
before Delphi was publicly traded. So, in effect, they got Delphi stock
at Singer’s initial dirt-cheap price. When Delphi’s owners took the
company public in November 2011, the Romneys were in— and they hit the
jackpot.
In
their 2011 and 2012 Federal Financial Disclosure filing [2],
Ann Romney’s trust lists “more than $1 million” invested with Elliott.
This is the description for all of her big investments—the minimal
disclosure required by law. (Had Romney kept the holding in his own
name, he would have had to reveal if his investment with Singer had made
more than $50 million.)
It is reasonable to assume that Singer treated the Romneys the same
as his other investors, with a third of their portfolio invested in
Delphi by the time of the 2011 initial public offering. This means that
with an investment of at least $1 million, their smallest possible gain
when Delphi went public would have been $10.2 million, plus another
$10.2 million for each million handed to Singer— all gains made possible
by the auto bailout.
But that’s just the beginning. Since the November 2011 IPO, Delphi’s
stock has roared upward, boosting the Romneys’ Delphi windfall from
$10.2 million to $15.3 million for each million they invested with
Singer.
But what if the Romneys invested a bit more with Singer: let’s say a
mere 3 percent of their reported net worth, or
$7.5 million? (After
all, ABC News reported—and Romney didn’t deny—that he invested “a huge
chunk of his vast wealth” with Singer.) Then their take from the auto
bailout so far would reach a stunning $115 million.
The Romneys’ exact gain, however, remains nearly
invisible—and
untaxed—because Singer cashed out only a fragment of the windfall in
2011. And the Singer-led hedge funds have been able to keep almost all
of Delphi’s profits untaxed
by moving Delphi’s incorporation from Troy,
Michigan, to the Isle of Jersey, a tax haven off the coast of France.
The Romneys might insist that the funds were given to Singer, Mitt’s
key donor, only through Ann’s blind trust. But as Mitt Romney said some
years ago of Ted Kennedy, “The blind trust is an age-old ruse, if you
will. Which is to say, you can always tell a blind trust what it can and
cannot do.” Romney, who reminds us often that he was CEO of a hedge
fund, can certainly read Elliott Management’s SEC statements, and he
knows Ann’s trust is invested heavily in a fund whose No. 1 stake is
with Delphi.
Nevertheless, even if the Romneys were blind to their initial
investment in Elliott, they would have known by the beginning of 2010
that they had a massive position in Delphi and would make a fortune from
the bailout and TARP funds. Delphi is not a minor investment for
Singer; it is his main holding. To invest in Elliott is essentially a
“Delphi play”: that is, investing with Singer means buying a piece of
the auto bailout.
Mitt Romney may indeed have wanted to let Detroit die. But if the
auto industry was going to be bailed out after all, the Romneys
apparently couldn’t resist getting in on a piece of
the action.
In last week’s issue, Lee Fang revealed [3] how Mitt Romney’s son Tagg and investors in his firm Solamere Capital can cash in if his father wins.
Links:[1]
http://www.thenation.com/sites/default/files/user/17/Delphi%20CFO%20Sheehan%20Deposition.doc
[2]
http://www.thenation.com/resource/romney-federal-disclosure
[3]
http://www.thenation.com/article/170470/tagg-team-romney-family-recipe-crony-capitalism