How Junk Bonds Made Romney Millions

Author: June 25, 2012 3:47 pm


Willard Romney has touted his time at Bain Capitol during his campaign for President. One of the biggest deals he made at Bain, however, he is not so quick to bring up, the 1988 purchase of two Houston based department stores which they had hoped to merge into a single entity. Let us see why.

The 1980s were an era of unparalleled corporate power, greed, and avarice. None epitomized this more than Drexel Burnham Lambert’s head of the high-yield bond division, Michael Milkin. His drive for the junk bond and his business savvy makes him one of the inspirations behind the character of Gordon Gekko from Oliver Stones 1987 masterpiece Wall Street.

When Romney was searching for the financing to purchase the Texas department store chain, he was approached by Milkin with a deal, a new strategy which Milkin had been developing. Putting up only $10 million up front, Milkin created a high-yield bond for the remaining capital. Then they would migrate that debt into the new firm, called Stage Stores, along with collecting hefty transaction fees along the way. In the end, Romney would produce a return of $175 million from the deal. Not bad for a $10 million initial investment.


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But what is truly remarkable is that Romney was approached by Milkin in the first place. They were polar opposites, Romney was a conservative planner who rarely took risks, while Milkin was a world-renowned risk taker. What was unnoticed initially, until after the deal had been done, is that one of the companies Romney was in negotiations to purchase had a woman named Moselle Pollack as its chairperson.

Shortly before Romney was approached, Drexel was under investigation for fraud. The case was being handled by Justice Milton Pollack. Milton just happened to be Moselle’s husband. Due to Milkin’s arrangement of the deal for Romney, a conflict of interest was introduced into the case, already well underway. The resulting conflict delayed the case, but within two years the company was bankrupt and Milkin was indicted on 98 counts of racketeering.

By the time Bain divested itself of the merged company, Stage Stores had an accumulated debt of $444 million, and was forced into bankruptcy in 2000. While some blamed its expansion, the millions in debt it had inherited through Milkin’s bond were still on the books. The bondholders, which were wiped out during the bankruptcy proceedings, filed suit against Bain as well as Bain’s selected chairman, but the suit was dismissed.

But, the thousands of jobs lost and millions lost by stockholders do not matter, do they?

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