Goldman Sachs runs US Govt

[e-lamb]

GOP urges probe in China firm deal


October 4, 2007


By Bill Gertz - Several Republican members of Congress yesterday called for a Treasury Department probe into whether Pentagon computer networks will be compromised by the merger of a U.S. network-equipment maker and a Chinese firm with links to Beijing's military.

Senior Pentagon officials, meanwhile, are investigating the security aspects of the announced plan for China's Huawei Technologies and the investment firm Bain Capital Partners to buy 3Com, which makes equipment used by the Pentagon to block computer hackers, including those from the Chinese military.

Bain Capital announced last night that it will submit the $2.2 billion deal for review before Treasury's Committee on Foreign Investment in the United States (CFIUS).

"The agreement to acquire 3Com Corp. will be submitted voluntarily for CFIUS review," the statement said. "We believe the U.S. government review in this matter will conclude that the company will be firmly controlled by an American firm, have only a small minority foreign shareholder, and that the deal presents no risks to national security."

Republican Reps. Peter Hoekstra of Michigan and Duncan Hunter of California wrote to Treasury Secretary Henry M. Paulson Jr. formally requesting that CFIUS conduct a security review of the deal, which was announced by 3Com last week.

Both lawmakers, the ranking members of the intelligence and armed services committees, respectively, expressed "alarm" at the proposed merger because of Huawei's "close ties to the Chinese government."

"There is little doubt that this proposed arrangement should be reviewed by CFIUS, and we formally request that you initiate a review regardless of whether or not Bain Capital Partners submits the deal for examination," they stated.

"This review should be conducted, and a determination made, as to whether this sale will in any way impact the national security of the United States or increase the vulnerability of U.S. computer networks and telecommunications systems to Chinese intrusion."

Also yesterday, Sen. Christopher S. Bond of Missouri, the ranking Republican on the Senate Select Committee on Intelligence, said yesterday that Treasury should review the 3Com-Huawei deal.

"It is troubling to me that a foreign military organization with interests in communications might obtain access to our security systems," Mr. Bond said.

A Treasury secretary spokeswoman declined to comment.

In their letter, the two House members said Huawei's role as a partner appears designed to "circumvent legal issues about whether this deal should be reviewed by" CFIUS.

"At stake is whether Huawei will control voting seats on the board of the new company, and far more importantly, will it have access to the technology and research and development of the new company," they said.

Both committees' staff have been ordered to review 3Com's contracts with intelligence agencies and the Pentagon, they stated.

"This sale raises the ongoing and thorny issues of illegal technology transfers to China, public reports of Chinese cyberattacks on U.S. government networks, repeated efforts by the Chinese government to gain access to military sensitive and classified technologies of the U.S. government, and continuing concerns about infringement of intellectual property rights by Chinese companies," Mr. Hoekstra and Mr. Hunter stated.

Huawei is a state-run telecommunications firm that in the past sold equipment, in violation of United Nations sanctions, that was used by Saddam Hussein's military. The company also provided equipment to the Afghan Taliban when it was harboring al Qaeda terrorists.

Chinese military computer hackers were detected breaking into Pentagon computer systems several months ago, and there are concerns the 3Com merger would boost Beijing's hacking capabilities.

"There is no doubt as to why the Chinese want a partnership with 3Com," Mr. Hoekstra said in an interview. "They look at this as a key connection to stealing additional secrets from U.S. corporations and from our national security apparatus."

Additionally, Mr. Hoekstra said the merger could help China obtain high-technology hardware to assist the Chinese military in its aggressive efforts to penetrate U.S. government computers and networks.

If the proposed merger goes through, the Chinese will be able to learn details of "things we put in place to block hackers, so they will be in a better position to defeat those defenses," Mr. Hoekstra said.

A defense official said senior policy-makers were caught by surprise by the Huawei deal, in a manner similar to the Pentagon's failure to respond quickly to the proposal last year by United Arab Emirates company Dubai Ports World to manage six major U.S. seaports. That deal was canceled over national security concerns.

Sen. Jeff Sessions, Alabama Republican, said the 3Com-Huawei deal raises more red flags than the Dubai Ports World deal and called on the Bush administration to provide information about the 3Com deal to congressional leaders and request action from Congress if needed.

"If there is a loophole that is allowing valuable defense technology to be obtained by the Chinese military that will enable them to accelerate their military expansion, then we ought to close it," said Mr. Sessions, a member of the Senate Armed Services Committee.

Other Republican lawmakers calling yesterday for hearings or investigations included Reps. Thaddeus McCotter of Michigan, chairman of the House Republican Policy Committee, and Dana Rohrabacher of California, a Foreign Affairs Committee member.

Government officials concerned about the deal have doubts about a Treasury review, because Mr. Paulson is a former executive at Goldman Sachs, which is advising 3Com on the deal. White House Chief of Staff Joshua B. Bolten also was a Goldman Sachs executive.

S.A. Miller contributed to this report.

[PatrickSMcNally]

As far as I could tell, Goldman Sachs was only mentioned briefly in the last two sentences. How did you end up with this thread title?

[e-lamb]

www.talkradionetwork.com/savagearchive;jsessionid=...

listen to the Oct 4 show, he explains it better than i.

[e-lamb]

June 4, 2007
Romney’s Fortunes Tied to Business Riches

By DAVID D. KIRKPATRICK
WASHINGTON, June 3 — Mitt Romney owes his nearly $350 million fortune and his political career to a delicate negotiation with his boss in the summer of 1983.

His boss, Bill Bain, founder of the Boston consulting firm Bain & Company, called Mr. Romney into his corner office to say that the partners had picked him to start an investment fund to cash in on the huge gains their clients were making in the stock market.

To Mr. Bain’s surprise, Mr. Romney, then 36, seemed wary. He worried about giving up his comfortable salary for a venture that might fail and, later, that investing would pose conflicts for a consulting firm.

Mr. Bain had been determined not to cede any control of the investment fund, but over months of talks Mr. Romney persuaded him to do just that. Mr. Romney emerged as head of an independent sister company, Bain Capital. And Mr. Bain protected him financially while assuming the most risk.

Two decades later, Bain Capital is one of the nation’s five largest private equity firms, and Mr. Romney, who left its management eight years ago, is making his success there a cornerstone of his campaign for the Republican presidential nomination.

Citing his business experience, he urges voters to reject “lifetime politicians” who “have never run a corner store, let alone the largest enterprise in the world.”

Mr. Romney, though, never ran a corner store or a traditional business. Instead, he excelled as a deal maker, a buyer and seller of companies, a master at the art of persuasion that he demonstrated in the talks that led to the forming of Bain Capital.

“Mitt ran a private equity firm, not a cement company,” said Eric A. Kriss, a former Bain Capital partner. “He was not a businessman in the sense of running a company,” Mr. Kriss said, adding, “He was a great presenter, a great spokesman and a great salesman.”

Supporters of Mr. Romney argue that those skills also equip him for public office, whether as governor of Massachusetts, which he was for four years, or as president.

“In private equity and in consulting, a lot of what you rely on is trust and confidence and persuasion,” said Mr. Kriss, who worked in Mr. Romney’s cabinet when he was governor. “It is the same in the public sphere, and over many decades that is what Mitt has proven to be good at.”

But Mr. Romney’s Bain career — a source of money and contacts that he has used to finance his Massachusetts campaigns and to leap ahead of his presidential rivals in early fund-raising — also exposes him to criticism that he enriched himself excessively, sometimes by cutting jobs to increase profits.

He made his money mainly through leveraged buyouts — essentially, mortgaging companies to take them over in the hope of reselling them at big profits in just a few years. It is a bare-knuckle form of investing that is in the spotlight because of the exploding profits of buyout giants like Bain, Blackstone and the Carlyle Group. In Washington, Congress is considering ending a legal quirk that lets fund managers escape much of the income tax on their earnings.

“The amounts of money are so vast that it is truly a matter of time before the taxation of private equity is front and center of the public agenda,” said James E. Post, a Boston University professor who teaches business-government relations. “Increasingly, this world of private equity looks like a world of robber barons, and Romney comes out of that world.”

Mr. Romney learned the perils of campaigning on his business career in his first run for office, when accusations that Bain Capital had fired union workers at an Indiana company it controlled derailed his effort to unseat Senator Edward M. Kennedy, a Democrat, in 1994. “Basically, he cut our throats,” a laid-off worker said in a commercial attacking Mr. Romney. (He has said he had nothing to do with the firings.)

Mr. Romney, in an interview, acknowledged that Bain Capital’s acquisitions had sometimes led to layoffs but said that he could explain them to voters.

“Sometimes the medicine is a little bitter but it is necessary to save the life of the patient,” he said. “My job was to try and make the enterprise successful, and in my view the best security a family can have is that the business they work for is strong.”

Second Thoughts

But he said he did have some second thoughts about elements of his Bain Capital career.

“The experience of the last eight years, running the Olympics and being a governor, would make me take an even more sensitive look at the impact of business decisions on the lives of suppliers and employees and others who are involved,” he said.

Mr. Romney started his early career intending to run a company, not buy and sell them. As a boy, he had accompanied his father, George W. Romney, to work as chief executive of American Motors, where he said they discussed the new models, corporate strategy and even union contract talks.

“He would pretend to be very interested in the things I would say,” Mr. Romney recalled. (His father later became governor of Michigan and ran unsuccessfully in 1968 for the Republican presidential nomination. He died in 1995.)

After graduating from Brigham Young University, Mr. Romney finished near the top of his class at Harvard Business School in 1975 with a law degree as well. He soon joined Bain & Company, a training ground for aspiring corporate chieftains. Among the consultants when he arrived were the future chief executives of American Express, eBay and Dell, for example.

Mr. Romney’s academic credentials were competitive with any of them, but he had something more, Mr. Bain recalled.

“Think of the way he looks now and picture him 30 years younger,” Mr. Bain said. “He was very good looking. He was very comfortable in his body. He moved gracefully. He wasn’t awkward. He had the appearance of confidence of a guy who was maybe 10 years older.”

Like other consulting firms, Bain coached new employees in how to impress older executives. Mr. Bain bought each consultant a copy of the best seller “Dress for Success” and provided a clothing allowance. Clients learned to expect a familiar red tie and monogrammed shirt when the next “Bainiacs” stepped off the elevator. (Most were men.)

Mr. Romney seemed to have been born freshly pressed. And colleagues say he was quick to adapt to each client, an essential skill.

By around 1981, however, Mr. Romney was restless for a company to run. He nearly accepted a job at an electronics conglomerate in hope of eventually running one of its businesses. He stayed when Mr. Bain wrote him a check for $200,000 and promised to get him a better position, Mr. Bain said.

When Mr. Bain proposed starting Bain Capital about two years later, Mr. Romney said, “I loved the idea,” adding that he was cautious at first because “it is my nature to study things extensively before I jump.”

Lawyers advised separating the investing venture from the consulting business to avoid a conflict of interest. To ease Mr. Bain’s concerns about yielding control, Mr. Romney set up a complicated partnership structure that gave Mr. Bain the right to fire him. In the early years, Bain & Company partners received a cut of Bain Capital profits, as well, although Mr. Romney later persuaded Mr. Bain to give that up.

Still, Mr. Bain recalled, “all the risk and investment was basically on my side. I was clearly putting my neck on the line and the company on the line.”

Mr. Bain took the lead in raising money from his partners and rich friends, including Mortimer B. Zuckerman, the Boston real estate mogul, and Robert K. Kraft, owner of the New England Patriots football team. But he always took Mr. Romney along to help seal the deal. The younger man would stand in front of a string of skeptical multimillionaires, flipping overhead projector slides that highlighted Bain Capital’s plans, honing the knack for opening wallets that would help him become the top Republican presidential fund-raiser this year.

The political fund-raising “was a lot easier than raising some of the first Bain funds, I can assure you,” said Mr. Kriss, the former Bain partner. “Mitt is very, very good at that, and he has done it for a long time.”

When Mr. Romney finally set up shop just across the hall from Bain consulting in 1984, his initial plan centered on providing venture capital — seed money — for ideas spun off by Bain consultants. The first investment, a chain of eye-surgery centers, was a modest success.

A year later, Mr. Romney hit on a big winner: the office supply chain Staples. To evaluate the business plan, he insisted on reading invoices to find out what small businesses were spending on notepads, paper clips and pens — a demonstration of his devotion to data that he brings up often on the stump.

But the investment was primarily a sales job. The founder of Staples, Thomas G. Stemberg, had already sold a successful grocery business. Investors were lining up to get in on his next venture. Mr. Romney’s achievement was persuading Mr. Stemberg to let Bain Capital take the lead.

“Mitt was just really nice, humble, listened, asked questions,” Mr. Stemberg said in an interview. “And he talked about how at Bain, unlike other venture capitalists, they would actually help you run the business.”

On the campaign trail, Mr. Romney still calls Bain a “venture capital” firm, a phrase that evokes innovation and entrepreneurship. But his former colleagues say Bain Capital’s partners increasingly put money into the relatively new business of leveraged buyouts, which involves taking over companies with a relatively small down payment by borrowing against their assets to pay most of the purchase price.

About half of Bain’s deals were buyouts by the close of its first fund and as much as 90 percent by the end of the second, Mr. Romney’s former colleagues said.

A Profitable Approach

Leveraged buyouts are often associated with hostile takeovers to break up companies. But under Mr. Romney, Bain Capital took a smoother approach. It presented itself to corporate management teams as a partner that would help improve performance, sometimes by investing to buy smaller competitors. Its first move was usually trying to persuade management to let Bain take over.

In “Turnaround” (Regnery, 2004), his memoir of running the 2002 Olympics in Salt Lake City, Mr. Romney wrote of his Bain career: “We had to sell business owners on why they should sell their business to us. We had to sell banks to lend us money, and we had to sell folks on giving us their money to manage.” Selling “is far from my favorite thing,” he wrote, but it was crucial to his career.

Bain invested in more than 150 companies under Mr. Romney. Most were in industries like oil drilling or medical waste, but the firm also acquired household names like Dominos Pizza, Brookstone stores, Mattress Discounters and Artisan Entertainment (in time to cash on its “Blair Witch Project” hit).

By the time Mr. Romney left the firm in 1999, the investments it had sold off had made enough money to deliver an average annual return that amounted to as much as 100 percent before fees, several of its investors said. (Later sales were less lucrative, the investors said.)

By then, the firm had expanded to 18 partners from 5, with $4 billion under management and 115 employees. (A spokesman for Bain Capital declined to comment on its profits.)

Its investors did very well, but not as well as Mr. Romney and the Bain Capital managers. Private equity firms typically keep 2 percent of the total invested in each fund as well as 20 percent of any profits.

Bain was hardly the only private equity firm delivering breathtaking returns in the early years, when there was little competition in the business and the stock market was soaring. But even among its peers, Bain’s results were so remarkable that by 1998 Mr. Romney had persuaded investors to let the Bain partners keep 30 percent of the profits — an arrangement that is still rare.

“Mitt broke the mold there,” said William F. Weld, another former Republican governor of Massachusetts and private equity fund manager.

“The private equity business is a pretty good place to make a lot of money,” Mr. Weld added. “The market rewards people who show they can see value in a company quickly, adjust a few toggle switches and sell it again four or five years later. It is capitalism’s way of picking the fleas off the dog.”

Such astounding profits brought critics as well. Warren E. Buffett, the legendary investor, has derided private equity firms as “deal flippers” who do little to increase the real value of their targets, profiting from rising prices driven in part by their own deals and by charging their acquisitions “fees, fees, fees.”

Others complain that private equity fund managers like Mr. Romney pay only capital gains taxes instead of income taxes on their cuts of investors’ profits. At present tax rates, that means that they pay 15 percent instead of 35 percent on most of their earnings.

“When you look at the amount of money these guys are making,” said Victor Fleischer, a legal scholar who has consulted with the Senate Finance Committee about changing the law, “the effective tax rate is just sort of shocking to the conscience.”

Anticipating Criticism

Meanwhile, Democrats and labor unions are stepping up charges that Bain and other buyout firms profit at the expense of workers. Two Bain deals have become particular targets of criticism.

One transaction, involving the medical diagnostics company Dade Behring, took place in 1999 as Mr. Romney was leaving the firm, and the other, involving KB Toys, occurred about two years later. Bain and its co-investors extracted special payments of over $100 million from each company, enabling Bain to make a healthy profit even before re-selling the businesses — a practice known as “getting back your bait.” Lenders say Bain is one of the firms that has taken the most in such payments, which companies usually make by taking on additional debt.

Both Dade Behring and KB Toys soon suffered dips in their business. Unable to meet the burden of their debts, each filed for bankruptcy and laid off thousands of workers. Bain Capital spokesmen have said the company did nothing improper.

Mr. Romney, who remains an investor in Bain Capital, said he had not been involved in those decisions but acknowledged that such payments became part of the buyout business “very early on.”

“It is one thing that if I had a chance to go back I would be more sensitive to,” Mr. Romney said. “It is always a balance. Great care has got to be taken not to take a dividend or a distribution from a company that puts that company at risk.” He added that taking a big payment from a company that later failed “would make me sick, sick at heart.”

Mr. Romney’s rivals in the Republican primary, courting business support, have shown little interest in the casualties of his Bain career. But Mr. Romney acknowledged that Democrats inevitably will. He said he felt confident he could persuade voters to see past such attacks, just as he did when he was elected governor of Massachusetts in 2002.

Running Bain Capital, he said, has more in common with being a candidate, governor or even president than many people realize. The job of a chief executive also involves persuading fractious constituencies — investors, bankers and even “people who want your job” — to pull together, he said.

“There is a popular conception that being a C.E.O. you have no boss and that people just do what you tell them to do, like the captain of a ship,” he said. “Nothing could be further from the truth.”