Wednesday, September 12, 2012
The Atlantic: What's Really Going on With Mitt Romney's $102 Million IRA:
How can an individual retirement account that was limited by law to annual contributions of at most $30,000 grow into a fund with more than $100 million in it? ...
The truth about Romney's IRA is that its massive size has very little to do with choosing the right investments and a lot more to do with the alchemy of the private-equity business itself and the opportunities that come out of that insular world for people like Romney, who was the founder and chief executive of Bain Capital for at least 15 years.
If we stipulate that when he was at Bain from 1984 to 1999, Romney put the maximum $30,000 a year into his so-called SEP-IRA, then as a baseline his IRA should have had a value of $450,000 by the time he left to run the Salt Lake City Olympic Games. If he was a talented investor and his IRA grew tenfold -- something not many people can achieve -- his IRA would be have been worth $4.5 million, a far cry indeed from the upper range of $102 million he says it is worth. (The lower range Romney put for disclosure purposes on his IRA was $20 million.)
So how did Romney do it? According to the private-equity executives I talked to, the secret is likely in the compensation arrangement the industry has cut with its well-heeled investors. In private-equity land, the general partners of, say, Bain Capital -- people like Mitt Romney and his cohort of 30 or so well-heeled Harvard MBAs who invest the limited partners' capital -- get what is called "carried interest," or 20 percent of the profits on deals, while putting up only a fraction of the equity needed to do a buyout. It's akin to getting "sweat equity," only with very little sweat. "Your carry is basically buying stock for five cents that other people have paid $1.10 for," explained one partner in a private-equity firm....These opportunities exist for people in the private-equity or hedge-fund industries because their investors have agreed up-front to compensate the general partners by giving them their upside in the form of virtually free equity in their deals (in addition to the not-insignificant annual 2 percent fees on the size of the fund, which for a $10 billion fund equals $200 million annually.)
This is a point that Zakaria made eloquently in his July 22 interview with Rattner. Citing something Washington Post (and my fellow BloombergView) columnist Ezra Klein had written, Zakaria said the "larger point at play" worth discussing is "that it shows that people like Mitt Romney and you have access to advice, mechanisms, strategies to build wealth that really ordinary Americans don't have access to. And that when you couple that with his agenda, which is to cut taxes further for those people, it gets to the heart of this idea that there are two Americas, one for the very, very, very rich and one for everyone else."