Bloomberg News

Schwarzman-Romney 24-Times Return Inciting Democrats’ Scrutiny

December 28, 2011

(For more campaign news, go to ELECT.)

Dec. 22 (Bloomberg) -- Wall Street magnate Stephen Schwarzman, when asked why he is supporting Republican Mitt Romney for president, had a simple response: profit.

“We ended up making 24 times our money” from a joint investment, Schwarzman said in a Nov. 30 Bloomberg Television interview, explaining a fundraiser he was planning for the presidential contender at his apartment on Park Avenue in New York. “In finance, that’s the way to make friends.”

Democrats plan to focus on that friendship.

In 1988, Schwarzman’s Blackstone Group LP invited Romney’s private equity company to invest in Transtar Inc., a holding company for rail and barge subsidiaries that had served United States Steel Corp., according to Schwarzman, 64, Blackstone’s chairman and chief executive officer. Romney’s Bain Capital LLC became a minority and “completely passive” investor, said Geoffrey Rehnert, a former Bain executive.

Bain made a $13.3 million profit before it eventually sold its stake. Transtar dismissed hundreds of employees during the 1990s in the Midwest, as the U.S. steel industry was battered by international competition and the domestic rail business adjusted to regulatory changes.

Blackstone spokesman Peter Rose defended the firm’s business practices, saying its portfolio of companies exceeded the national average by increasing their employment by 3 percent in 2010. He argued that Americans with pension plans were the “principal beneficiaries” of the company’s profitable transactions.

“Sometimes there are job losses when companies become more efficient and competitive,” said Rose. “But private equity also provides capital to enable companies to grow and expand.”

‘Failed Record’

Anticipating criticism from President Barack Obama, the Romney campaign plans to emphasize jobs that Bain has created to turn attention to the country’s 8.6 percent unemployment rate.

“It’s no wonder that President Obama wants to distract from his failed record to attack the one candidate who can do what he has failed to do: Focus on job creation and turn around our nation’s faltering economy,” said Andrea Saul, a Romney spokeswoman.

“Bain Capital invested in many businesses,” she said. “While not every business was successful, the firm had an excellent overall track record and created jobs.”

‘Windfall Profits’

That defense won’t deter Obama’s supporters from focusing on the 25 years Romney, 64, spent in private equity, as they scrutinize the former Massachusetts governor’s deals, looking for layoffs in companies that Bain invested in.

“Voters are learning that Romney’s Wall Street deals often resulted in windfall profits for him and his friends but were financed by mass layoffs of middle-class workers,” said Bill Burton, who left the White House in April to co-found Priorities USA, a group that can accept unlimited corporate and union contributions to re-elect Obama. “The victims of Romney’s deals are American families who were decimated when Romney and his friends came in.”

Obama’s campaign is already seizing on some of those deals.

“Generally, his practice has been to bet other people’s money, not his own,” said David Axelrod, a senior adviser to the campaign, on Dec. 13. “But that’s the way he ran his leveraged buyout business.”

“And they closed down hundreds of factories; they outsourced thousands of jobs; they took a lot of companies to bankruptcy and made a fortune off those bankruptcies,” he said in a briefing for reporters.

‘Great Divider’

Romney, in a response to a question about his private equity dealings, accused Obama of being “the great divider” in a Fox News interview on Dec. 18. “This is a president who goes after anybody who is successful,” he said.

His business relationship with Schwarzman, a longtime Republican donor who collected more than $100,000 for President George W. Bush’s 2004 re-election campaign, began in 1985. Blackstone and Bain joined forces to turn around a company making aluminum wheels, which “expanded very rapidly,” Schwarzman said in the Bloomberg TV interview.

For their next venture, Schwarzman said he asked Romney to be a “minority partner” in the deal involving Transtar of Monroeville, Pennsylvania.

In 1988, Bain invested $1.1 million in the new holding company, according to a Deutsche Bank AG prospectus from 2000.

Cutting Jobs

At its creation, Transtar, which held railroads like Elgin, Joliet and Eastern Railway Co. and the Duluth, Missabe and Iron Range Railway Co., assumed existing labor contracts and employed about 4,000 workers, according to press reports at the time. Over the next 12 years, with Bain as a minority partner, Transtar eliminated almost 1,000 jobs.

Bain sold its original $1.1 million stake in Transtar for $14.4 million in 2000, according to the Deutsche Bank prospectus. Blackstone sold its holdings to U.S. Steel and later to Canadian National Railway Co.

Nationally, from 1988 to 2000, employment in the railroad industry also declined to 231,000 from 290,000, or by 20 percent, according to railserve.com, relying on Bureau of Labor Statistics.

Transtar’s job losses “were on par with the other rail lines, large and small,” said Charles Clowdis, a managing director at IHS Global Insight in Lexington, Massachusetts. “Some of their decline is because they were heavily involved in the transport of steel.”

Cities like Duluth, Minnesota, long reliant on the steel industry, were hit hard.

No Choice

“There was a lot of reduction in steel production,” said Patrick Dorin who teaches transportation policy at the University of Wisconsin at Superior and worked on the Duluth, Missabe and Iron Range Railway. “Transtar just really didn’t have any choice but to have the number of employees that were needed to do the job.”

“They were trying to be as frugal as possible, without causing harm to the shippers,” he said.

Phil Qualy, Minnesota state legislative director for the United Transportation Union, said that, while “you can’t blame Blackstone for a downturn in the economy” during its ownership, the company “leveraged every efficiency that they could” out of the Duluth, Missabe and Iron Range Railway. “Since the 1990s, we’ve seen the safety margins become thinner and thinner.”

--Editors: Mark McQuillan, Jim Rubin.

To contact the reporter on this story: Hans Nichols in Washington at hnichols2@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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