Tuesday, October 23, 2012

Debating a Straw Man


I don't disagree with your judgement of the debate, (Romney looked in charge, Obama looked lost) and you've put your finger on what I think is important about these debates. From an argument standpoint I think the debates have been ties. But from a signaling standpoint Romney has been the hands down winner.

Unfortunately for Obama, winning or losing an argument is less important to the public than the impression given by the candidates. What's interesting to me is despite 40 years of doing this we continue to think winning or losing the argument is the most important thing to come out of the debate. Think back to Nixon/Kennedy. The conventional wisdom is Nixon won the argument but lost the debate. Visual signals were more important. Kennedy looked calm. He eased fears he was too young, too untested. In the Reagan/Carter debate Reagan convinced the public he wasn't what he had been portrayed by Carter. Bush/Gore had that classic encounter where Gore invaded Bush's air space and Bush nodded him off. It wasn't necessarily the argument that won the debate, but some ineffable quality the winning candidate was able to convey.

My belief is there has always been much greater dissatisfaction with Obama than the polls conveyed. My biggest piece of evidence for this is the election of 2010. The Democrats were shellacked and I don't see how you can avoid the conclusion it was at least to some extent a referendum on the Obama presidency. Going into this election cycle I can't think of anything to significantly alter that judgement, not even the killing of Osama bin Laden. I think the reaction from the country was one of "Finally," rather than "Thank you Mr. President." Fair or unfair I know not.

Obama created a caricature of Romney and then ran hard against that caricature. I don't know if that was the right or wrong strategy, but it's not working anymore. Romney is not a heartless plutocrat, shipping jobs overseas, killing the wives of the men he has thrown out of work. I've tried to convey this to you in various snippets and it probably came off as a defense of Romney, which it has been partially, but more so I've tried to point out the portrayal of Romney by Obama is far from accurate.

Another example is a comment from Andrew Sullivan's Daily Beast blog  on the foreign policy debate. A reader commented:

"Did this guy just say businesses that don't balance budgets go out of business? This from the guy who made his millions by loading up companies full of debt and then pulling the equity out of them, sending them into bankruptcy. The cynicism is galling."

I haven't seen everything, but I have seen a lot. And it's rare an investor can consistently make money by loading up companies with debt, then putting them into bankruptcy. I don't even know how that can possibly work. If you are an investor and load companies with debt and put them into bankruptcy, as a strategy, why would any bank lend to you? In bankruptcy they would lose money. If you as the investor buy the company for $1, and borrow $10 (and that's a pretty high leverage ratio) how does putting the company into bankruptcy allow you to sell the company for more than $1, or how is it possible that you are able to extract more than $1 before putting it into bankruptcy.

Some of the deals private equity players make are sweetheart deals, and they reduce risk as much as possible upon purchase of the company. But how it is possible to pursue of strategy of deliberate destruction and make money in the process demonstrates an odd understanding of investing.

The reality is, this is a caricature of Romney and of private equity. It works as a campaign strategy until voters see something different with their own eyes. If voters come to believe that caricature is incorrect, your campaign strategy is doomed. That is what has happened in this debate, in my opinion

The "gaffes" are another example of trying to portray Romney as something he is not. In my opinion, the left seems to focus on "gaffes" like big bird, binders and bayonettes in an attempt to characterize Romney as a buffoon, and inept. But it's not working because either the public has seen and heard the quotes in context and ignore it or see something else about Romney and decide the "gaffes" are harmless. Or both.

Not to say the Right hasn't tried its best to paint its competing and untrue portrait of Obama; it certainly has. It keeps repeating Obama has no agenda for a second term, and he certainly does, and that he isn't running on his record, but he certainly is. The problem for Obama, as I see it, is Americans are dissatisfied with the President (for evidence see the 2010 election) and have been waiting for a signal that the portrayal of Romney by Obama is not accurate.

I think the voter was looking for a reasonable alternative to Obama. I think that's why there was such a rush to Romney after the first debate. Voters concluded he was a reasonable alternative and it was less important if he won the argument of the debate or that Obama was listless. The voters were never that much in love with Obama as was portrayed or thought by the sabbath gasbags. I think it's also why there hasn't been much of a change in the polls after Obama won both the second and thrid debates, nor after Biden won the VP debate. Won or lost, for the voter, was irrelevant. The relevant question was, "Do I trust Romney and Ryan enough to vote out Obama and Biden? And the answers have been sure, why not.

It will be close. Lots of time.



  1. "how does putting the company into bankruptcy allow you to sell the company for more than $1, or how is it possible that you are able to extract more than $1 before putting it into bankruptcy."

    You do it by investing in a company about to enter bankruptcy and cashing out through a recievership process of strategic bankruptcy and/or strategic default that results in benefit to investors over creditors.

    Think of it as something akin to shorting an entire company rather than individual shares:


    1. To clarify some things I forgot to add:

      In the case of Bain Capital, their primary model is derived from leveraged buyouts that syphon off a portion of a purchased company's profits as both collateral against the loan used to buy the business as well as a source fo income for Bain Capital. If the purchased company fails to maintain a healthy enough profit margin to support this, then it collapses and Bain carries on like nothing ever happened.

      The majority of the "negative effects" of a bankruptcy would be felt by employees of the purchased company and its pre-existing creditors rather than Bain Capital (which can still liquidate the company in bankruptcy to cover at least part of the loan). In essence, businesses are bought, left to manage themselves but ultimately must serve the interests of Bain Capital as Owner.

      In my head I can't help but think of Bain Captial as a Plantation Owner Corporation.

  2. I don't understand your first comment about investors getting preference over creditors. In a bankruptcy, or receivership, the creditors will be first in line and dictate to the equity investors. I've seen strategic bankruptcies, but it's the creditors not the equity holders I've seen controlling the process. I understand a short sale but not your short sale metaphor.

    Right, Bain is a LBO fund, so their returns are levered by the debt used to buy the property and Bain loses fewer dollars than the lenders if the company is liquidated, but it loses more as a percent, which is a bad model for both Bain and the lenders. If Bain liquidates the company, as the equity investor it stands in line behind the creditors. So unless it can extract its investment upfront, which is certainly possible, I still don't see how deliberately loading companies with debt then putting them into bankruptcy is a viable investment strategy for an equity investor.

    But my point was/is, the description by Obama/Dems of what Bain does is a caricature and bears little resemblance to reality. When that caricature is shown to be inaccurate, the argument loses its power.