
French companies benefiting from state aid can't buy back shares - thg
https://uk.reuters.com/article/uk-france-business-buybacks/french-companies-benefiting-from-state-aid-cant-buy-back-shares-minister-idUKKBN21H0RI
======
nabla9
.. or dividends as the article says.

Devil is in the details. Maybe French government has good conditions for the
aid, but the article is not giving details.

Aid should be exchangeable debt for public companies. No dividends and
buybacks. No executive bonuses or options until the debt is paid full. After
(5-7) years the remaining debt is exchanged into company stocks in a rate that
leaves the government in the neutral position or with small profit. I think it
would be OK to give compensation package to executives if it's tied to the
profit that the government makes from the aid.

The aid should be available to everyone with same conditions. Not doing so
punishes companies with good finances.

Having right incentives as a whole is the issue, not some implementation
details.

~~~
sokoloff
Presumably companies with strong finances and other options for financing
would not want to take on shareholder-unfriendly terms like a multi-year ban
on paying dividends or doing buybacks.

~~~
pjc50
No - but then they don't need the aid, so it's fine if they don't take it.

------
btrask
Why aren't shareholders on the hook for bailing out their own companies? They
have the financial incentive to protect their own investments.

Why is bailing out a compay different from "investing" in it? What is an
investment besides a non-emergency bailout?

Edit: Why don't companies raise money by issuing more stock? Isn't that what
the stock matket is for?

~~~
hnarn
> Why is bailing out a compay different from "investing" in it? What is an
> investment besides a non-emergency bailout?

Bailing a company out is just a euphemism for making a very high risk
investment that the market is unwilling to do. Putting aside whether that is
the correct thing to do or not, the option would likely (in a recession) be
mass unemployment, so there's an incentive from the state, that likely wishes
to avoid that scenario, that doesn't exist in the same way for "regular"
investors.

That said, it makes sense that if you pull the emergency lever and request a
state bailout, you should pay future dividends back to the state for at least
a decent amount of time since they basically gave you a loan that no-one else
would.

~~~
btrask
Okay, but why is buying a company's stock not the same as bailing it out? If
you're "investing" in the business, why does money have to be given to them
directly, using a completely different mechanism?

~~~
hnarn
"Bailing [a company] out" implies severe issues with the financing of the
company, and that without that investment the company would go under. I'm not
sure what you mean by "a completely different mechanism", a bailout can
definitely happen through acquiring stocks in that company.

~~~
btrask
What I mean is, simply buying a company's stock does not immediately benefit
them. They have to issue new shares to turn their elevated stock price into
cash. So if companies simply issued shares, they could raise money and
effectively undo all of the buybacks they did. Problem solved, right?

~~~
hnarn
Yes, assuming anyone will buy the stocks, and at the price you want them to...

~~~
btrask
Well, they can keep issuing stock until their share price hits $0.00. If they
still need money, then maybe the state can step in and start buying some.

~~~
sp332
If traders credibly believed that a stock's value was going to 0, then the
price would already be 0. Just saying in advance that your scheme was about to
be implemented would crater the price before any new stock was sold.

------
redis_mlc
Prediction: that won't be a precondition in the USA, and if it was, most
companies would decline the aid.

You see, buybacks are "that one weird trick" where you can steal from the
market, by inflating the EPS and hence your employee stock options, and not go
to jail.

~~~
WalterBright
It's not "stealing" from the market. All it does is increase the value of each
share in proportion.

~~~
eloisant
It's not stealing from the market, but it's essentially giving away money to
shareholders by spending to inflate the stock price.

In a way it's similar to dividends, but not taxes in the same way.

Basically the logic behind the French government reasoning is "we're giving
you money to support your business and your employees, not to give it away to
shareholders".

Note that this wasn't the initial plan of the French governement, initially
the plan was to pose no conditions, just saying "please be responsible in your
choice". It's after the public backlash that they finally put conditions.

~~~
ComputerGuru
Raising the value of a stock doesn’t make the shareholders money unless they
sell their holdings (although it might incentivize doing that) as compared to
dividends which encourage holding on to your investments so long as they pay
out nicely.

The real beneficiaries of buybacks are executives and employees with vested
stocks. They both lose money on dividends and directly benefit from the
contraction in available shares.

~~~
smolder
Dividends would also go up if there are fewer stocks and the same profit, no?

~~~
ComputerGuru
Only if the company doing the buybacks pays out dividends in the first place.
(UAL doesn’t.) But the cost of buying out those shares is significantly more
than the slight increase in dividends yields in all cases.

------
raphaelj
That makes sense.

But what about prioritising partial nationalisation of these companies by
injecting cash in exchange for shares? That way it would have no impact on the
net public debt, as the gouvernement assets increase at the same rate as the
debt.

~~~
anticensor
> gouvernement

French detected. We spell it as "government" in English.

~~~
zentiggr
And "regering" in Swedish...

------
bradleyjg
I don’t have a big problem with stock buybacks in general. But if companies
buy back stock when times are flush they ought to be issuing new stock to
raise money when times are lean. Not putting their hands out to the public
fisc.

~~~
rorykoehler
Lean times are absolutely the worst time to issue new shares though. The
downward trend could spiral out of control if that was put into practice.

~~~
bradleyjg
For that reason business managers may want to hold on to cash rather than
buying back shares and investors may want to buy shares in companies run by
such managers. If we bail out all the grasshoppers then what incentive is
there to be an ant?

~~~
rorykoehler
Absolutely agree but a middle ground is to regulate this kind of behavior out.

~~~
bradleyjg
I don’t know that we can or should regulate how much cash every single
business in the country keeps on hand. Financial institutions that pose
systemic risks, sure, but if a cruise company goes out of business because it
was mismanaged (i.e. didn’t keep enough cash on hand) is that really something
regulation should have prevented?

~~~
rorykoehler
The argument made elsewhere on this thread was that if the cruise liner
employs thousands of people then yes it makes sense to have some sort of rules
in place to stop them over-leveraging (or similar) to the point where their
failure has knock on effects to the greater community/society.

Another argument is that we cannot guarantee letting them fail will happen due
to political influence etc so it is better to put in place rules to stop bad
behavior in the first place as there is always a risk of corruption when it
comes to bailouts.

~~~
thekyle
But if a cruise line fails surely it won't be long before someone buys their
assets (maybe a better managed competitor or new entrant) and they will still
need to employ people to run those ships.

------
Adiqq
I'm not from France, but is it controversial at all? If company wants state
support, money needs to stay at the company, that's what it is about, right?
Do companies in France could abuse this rule in other way?

~~~
mcv
It's only controversial with short-term investors and executives who care more
about using free money for some quick profit than about saving jobs.

------
hnarn
The same discussion is happening in Sweden.[1] The minister of finance has
basically said that (my translation):

> The tax payers are taking a risk, so they should also have the possibility
> to join the rebound, when it comes, and get some of that money back.

And regarding dividends:

> If you take part of different forms of state financed support, of course it
> will look bad if you at the same time give out large dividends.

[1]: [https://www.dn.se/ekonomi/magdalena-andersson-oppnar-for-
oka...](https://www.dn.se/ekonomi/magdalena-andersson-oppnar-for-okat-
statligt-agande/)

------
netwanderer3
If the government keeps bailing out large corporations, can this eventually
form a pattern in which major corporations and industries may collectively and
artificially engineer a crash or downturn event to game the system?

Once any pattern is formed and determined, there are always some people who
will attempt to exploit it, and those people are often the ones who would
eventually ruin all the good things for everybody else.

~~~
fmajid
The term you are looking for is "moral hazard".

They won't deliberately cause crashes, because those are not profitable, but
they will deliberately make risky bets that benefit them if things go well,
and get bailed out if they fail (riskier bets have more upside for the
kleptocrats looking out for Number One).

Given the odds, crashes are nearly inevitable. This is undistinguishable from
deliberate crashes.

The policies enacted after the 2008 crisis have actually made the banking
sector even more concentrated and increased the likelihood of another such
crash caused by moral hazard in the Too Big to Fail financial institutions.
The procedures to fight against that, like "living wills", will likely have
the same effectiveness as bulletproof vests made of wet toilet paper.

------
paol
Some opinions on stock buybacks worth reading:

[https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-
for...](https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-
economy)

[https://www.nytimes.com/2018/08/23/opinion/ban-stock-
buyback...](https://www.nytimes.com/2018/08/23/opinion/ban-stock-
buybacks.html)

~~~
ComputerGuru
Skip the NYT article, it is fluff and doesn’t take paying out dividends into
account. The HBR article is better (but still only a cursory introduction).

------
mooshmoosh
Perhaps a better approach would be to require these companies to maintain
capital ratios like we do for banks. They could be forced to raise more equity
if their debt becomes too large. After all the point should be to prevent them
from needing future bailouts.

I mean there are other ways to extract money from a company than paying
dividends or doing share buy backs.

Are they also going to cap salaries for employees? Are they also going to stop
companies paying out large fees to related companies? What about investing in
expensive but highly speculative projects?

~~~
sfj
Why aren't we letting them fail instead of allowing these idiots to stay in
business? Say American Airlines went bust. It's debtors would get its planes
and other company assets, who would then in turn sell them to other airlines.
A new airline might form to take its place, which would probably be a little
more prudent than the last one.

~~~
ajsnigrutin
In some indistries, that means thousands of people without work, and hundreds
of other companies in the supply chain going bankrupt, and even more people
without work. Sometimes it's cheaper to bail out the main company, then to
deal with the unemployed, many more bankrupt companies etc.

But some regulation should be put in place... if a CEO fscked up the company
so much, it needed government bailout, they don't deserve a bonus, no matter
what their contract says. A good system would also be, to turn a bailout into
a 'long-term loan' from the government, and have a mandatory percentage of the
companies profits go to repaying the 'loan', with some regulation on internal
business (to prevent dumping everything to a new, 'clean' company, and letting
the old shell fail).

~~~
skewart
> In some indistries, that means thousands of people without work, and
> hundreds of other companies in the supply chain going bankrupt, and even
> more people without work.

A popular counter-argument is that governments should plan to spend money on
unemployment relief for individuals if it looks like a lot of big companies
won’t make it. Let companies fail but cushion the blow for people affected.

~~~
smaryjerry
Unemployment relief is a temporary solution because people are usually single
skilled. For example an airplane engineer doesn't easily get a new job in
another industry.

~~~
triceratops
Wouldn't former AA employees find jobs in the new company formed by whoever
bought up the assets formerly owned by AA? Why would they need to change
industries? The need for airlines won't go away.

------
physicsguy
EasyJet in the UK is a prime example of why these restrictions are necessary.
Paid out £160 million in dividends, now wants loans on favourable terms...

------
jylam
That's a false statement, Le Maire said that he _ask_ shareholders not to.
Companies and shareholders can do what the hell they want.

~~~
moviuro
Right now, it's your word against Reuter's. Do you have a source?

~~~
jylam
In French : [https://www.lemonde.fr/economie/article/2020/03/28/le-
gouver...](https://www.lemonde.fr/economie/article/2020/03/28/le-gouvernement-
impose-le-blocage-partiel-des-dividendes-en-2020_6034759_3234.html)

"Enfin, les employeurs bénéficiant du dispositif de chômage partiel, lui aussi
financé sur crédits publics, sont appelés à « la plus grande modération » en
matière de dividendes."

~~~
tsimionescu
You omitted the important parts:

> Toutes celles qui auraient bénéficié de reports de charges sociales ou
> fiscales et qui auraient versé des dividendes se verront obligées de
> rembourser cette avance de trésorerie sur les charges sociales et fiscales,
> avec une pénalité d’intérêt.

So, he asked the all companies whose employees are being partially payed by
the state to be very moderate in paying dividends. But they will force all
companies which are getting direct aid from the state to stop paying
dividends, or pay back the aid they got, with interest.

~~~
jylam
Exactly. " he asked the all companies whose employees are being partially
payed by the state to be very moderate in paying dividends", my point.

~~~
simiones
But the Reuters article isn't talking about that. It is talking about the
companies receiving direct state aid, which _will not be permitted_ to pay
dividends, under penalty of paying the money back to the state, with interest.
So the Reuters article is absolutely correct. You are just dismissing an
unrelated claim.

------
Havoc
Could someone explain the sudden anger at share buybacks to me?

Media seems to portray it as some sort of evil trick, but I don't see it. It's
not that different from distributing divs

~~~
rorykoehler
It's basically rent seeking behavior if you taking public money and then using
it to enrich yourself with no benefit to the public. That money could be 1)
saved for a rainy day (like now) so they won't have to ask the public for
money or 2) reinvested in the company to generate more value. As it is it just
sucks value from the economy while also artificially increasing the stock
price.

~~~
smaryjerry
It does the opposite. Buybacks send that money directly back into the economy
to the shareholders that sold.

~~~
zentiggr
Anything that increases share values or enriches shareholders is going
straight into the hands of the 1%, or the funds that hold huge percentages of
the market. It's not going out to be respent.

------
tim333
I'm not sure "can't buy back shares" is the right policy economically. Buying
back shares is just a way to give profits to shareholders like paying
dividends or similar.

What they should do is companies benefiting from state aid have to give a lot
of shares or options to the state in return. Maybe near 100% in bad cases.

------
Zenst
Much was learned from the banking crisis bailouts and good to see the French
are mindful of that and addressing such issues that caused public outrage
(rightly so) in a way that will curtail such abuse.

------
nraynaud
I think if a company wants to buy back, now is the time.

------
madhadron
Most of the commenters here focus on the finances of individual firms. The
only reasons for a government to bail out a company are 1) to protect the
supply chain of a necessary good or service, 2) as a way of providing a safety
net for people that doesn't involve direct payment, 3) a way of maintaining
the structure of the economy so it can resume normal operation more quickly
after the shock, or 4) a way of giving a handout to a set of wealthy and
connected members of society. I think most of us can agree that 1-3 are
necessary response to a major disruption and 4 is corruption.

For a small business like a dog groomer or a restaurant, we expect the
fraction that aren't viable to go out of business with some probability during
small economic shocks, and we expect that this will be a small fraction. So we
let them go. But in a crisis where an entire sector will be mostly wiped out,
such as restaurants in the current pandemic, some attempt at preserving the
sector makes sense because otherwise you send shocks through everything
connected with it. For example, if a restaurant occupies the bottom floor of
an apartment building, and the building's cashflow depends on that space not
being unoccupied for more than two months, then you can have a sequence of
events that result in mass evictions unless you control those side effects as
well. It's probably easier to try to maintain the web of cashflow.

Now, you may be able to get side effects that you like in some sectors, such
as restaurants turning into food kitchens for the duration as part of the
direct injection of cash. On the other hand, a bar or a salon probably just
shuts down. But even there, most stylists rent a chair in a salon, so you need
to make sure that web of cashflow isn't broken by an owner pocketing it. It
still gets very complicated. For some areas like farms we already have large
measures in place, since bad seasons tend to affect large swathes of farms.
Thus reserve boards, farm subsidies and the like.

Others have pointed out that such structural maintenance can be gamed by
having a barely-viable company that is too big to fail. Then even small shocks
can be turned into structural crises. Someone else suggested requiring capital
reserves the way we do for banks, and for large companies that makes sense. If
you're that big and structurally risky, you should be required to derisk
yourself.

One discussion I hope we will be having as a society during and after this is
what disaster preparedness looks like. We should have the regulations for what
putting the economy on such a footing looks like, run simulations every few
years for a week, and have adversarial gaming on an ongoing basis to try to
find loopholes and close them.

------
yalogin
Wonder how hhat the conditions for the bailout money in the US is. Do the
companies have to pay it back? What about small businesses?

------
apexalpha
Surely government are getting equity stakes?

------
adultSwim
As we pump trillions into companies, at minimum, we should get an ownership
stake

------
whatever1
Investors need to change our market valuation attitude and stop expecting that
companies jeopardize their operations/stability so that they give us pennies
from their cashier forever. Public companies should not be allowed to pay
dividends/buybacks or in other terms to use their savings to keep paying in
perpetuity fictional obligations. The initial investors ( _who are the only
ones that physically put money in the balance sheet of the company_ ), are
being rewarded by the increase of the share price (like Amazon, Google etc).
The shareholders that are coming later, are being rewarding by holding
something of value, and their participation in the board can increase/decrease
this value. The value of a share of a profitable company will never go to
zero, the same way that gold has non-zero value (they are finite).

What will happen with that excess money? Option 1 (The capitalist) : Trust the
companies that they will handle them properly by planning for a rainy week
(apparently nobody does), or investing in their business. Option 2 (The
socialist) : Tax heavily the earnings and redistribute them in democratically
approved way.

------
js2
Here's a counter point from a couple economists who say that the most
important thing should be preserving jobs and not worrying about preconditions
for now:

 _This dramatic spike in jobless claims is an American peculiarity. In almost
no other country are jobs being destroyed so fast. Why? Because throughout the
world, governments are protecting employment. Workers keep their jobs, even in
industries that are shut down. The government covers most of their wage
through direct payments to employers. Wages are, in effect, socialized for the
duration of the crisis.

Instead of safeguarding employment, America is relying on beefed-up
unemployment benefits to shield laid-off workers from economic hardship. To
give just one example, in both the United States and Britain, the government
is asking restaurant workers to stay home. But in Britain, workers are
receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are
guaranteed to get their job back once the shutdown is over. In America, the
workers are laid off; they must then file for unemployment insurance and wait
for the economy to start up again before they can apply for a new job, and if
all goes well, sign a new contract and resume working._

And: _There is nothing efficient in the destruction of businesses that were
viable before the virus outbreak. The crisis cannot be blamed on poorly
managed corporations. Government support, in the case of a pandemic, does not
create perverse incentives. Bankruptcies redistribute income, but in a chaotic
and opaque way. And while bankruptcy might be a way to deal with the economic
fallout of the pandemic for large corporations, it is not well adapted to
small businesses. Without strong enough government support, many small
businesses will have to liquidate. The death of a business has long-term
costs: The links between entrepreneurs, workers and customers are destroyed
and often need to be rebuilt from scratch._

Instead, tax corporations for excess profits later:

 _Windfall profits have a fair, comprehensive and transparent solution: The
government should impose excess profits taxes, as it has done several times in
the past during periods of crisis. In 1918, all profits made by corporations
above and beyond an 8 percent rate of return on their capital were deemed
abnormal, and abnormal profits were taxed at progressive rates of up to 80
percent. Similar taxes on excessive profits were applied during World War II
and the Korean War. These taxes all had one goal — making sure that no one
could benefit outrageously from a situation in which the masses suffered._

[https://www.nytimes.com/2020/03/30/opinion/coronavirus-
econo...](https://www.nytimes.com/2020/03/30/opinion/coronavirus-economy-saez-
zucman.html)

However, I'm not sure what would prevent the Hollywood accounting trick in
that scenario.

