
Mark Cuban says bailed out companies should never be allowed to buy back stocks - electrum
https://www.cnbc.com/2020/03/18/mark-cuban-says-bailed-out-companies-should-never-be-allowed-to-buy-back-their-stocks-ever-again.html
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anm89
From a seperate thread a few days ago:

As someone who leans heavily free markets, even I buy the argument that it's
not wise to let every airline in the country fail simultaneously, regardless
of fault.

Here's the thing, there is nothing unfree market about demanding terms for
those bailouts, it should be a negotiation, not an ultimatum from the airline
industry. So for example, if you enforced all bonuses to be canceled for the
next three years and retroactively fined for the last three years, set
executive pay at a max of $50k for the next three years (and banned any new
stock incentives during that time), fined the executives equal to 125% of
capital gains they made on stock incentives, during the stock buyback period,
and made all bailouts loans not grants at above market rates, you could
ostensibly let them decide how much bailout they wanted without continuing
this endless cycle of letting them run at losses knowing the public will foot
the bill. And if they don't take it, then let them die.

Basically the end result of the bailout has to be drastically net negative
over the last 3-5 years for every airline executive for this not to create
moral hazard. I think that is achievable.

Unfortunately well probably just hand them $50 billion and make poor people
pay for it.

note: I get the issue that a lot of execs would just walk away. You'd have to
think how to structure it to hold them on the hook. It's just an example.

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formercoder
I’m always confounded by this “banning bonuses” conversation. In any job I’ve
had my bonus is an expected part of my annual compensation. If you ban
bonuses, people will switch companies, and their new contracts will state the
same comp at 100% salary. Setting a total comp threshold could make sense. Not
sure if it should be related to what % of revenue comp is, though at airlines
it’s very high.

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jdc
What alternative disincentive would you propose?

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formercoder
Setting up this system would be really tough while making it impossible to
game. For every one smart person in the public sector writing laws, there are
10 smarter people trying to work their away around them to make more money.

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jdc
If only there was some kind of chain of command or responsibility we could use
to hold people accountable for the actions of a firm.

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sirsar
One way to accomplish this would be to nationalize companies instead of
bailing them out, right? If the taxpaying public bears the risks of your
business, why shouldn't it get to share in any of the rewards?

I suspect the answer is something having to do with the overlap between the
politically powerful and those with a great exposure to those risks and
rewards.

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malandrew
Instead of nationalizing them, create an index fund run by the government.
Capitalize the fund using taxpayer dollars and use the fund to buy out the
companies at rock bottom. Then distribute the entirety of shares in the fund
to all US tax payers.

Taxpayers then win on the upside when things recover.

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colechristensen
If you buy a troubled company, the company is still troubled, you just own it,
no resources have been transferred into it. Give away the shares to the
population then you don't have any influence on it any more.

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hedora
If you buy it by purchasing newly issued shares, then the money does go
directly to the company and the existing shareholders stakes are diluted.

The effectively takes the bailout money away from the stockholders, which
seems appropriate, since their shares would be worth even less if the company
were allowed to fail.

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colechristensen
If the company is allowed to fail shares usually come out worth zero after the
bankruptcy. Dilution can't be worse than 0.

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jon_dahl
I'll go on the record asking a question that might be dense: why would this
apply to stock buybacks and not dividends?

Stock buybacks accomplish a similar goal to dividends. You're transferring
profits to shareholders. By paying dividends, you distribute profits via cash.
With a buyback, you distribute profits by increasing the value of equity.
There are tradeoffs between these two approaches (tax treatment and
otherwise), but they do the same thing.

And aren't dividends (or future dividends) the ultimate point of equity?

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rumanator
> By paying dividends, you distribute profits via cash.

Dividends are paid from profits. This particular example of stock buyback
would be paid from an emergency loan granted to the company under the
assumption that it is to be used to help the company get back on it's feet.

Wasting an emergency loan on buybacks is the equivalent on burning the
emergency cash by funneling it straight into the pockets of the company owners
at the tax payers' expense, in a way that's a whole lot like fraud.

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tedunangst
Where does the idea that the company is going to immediately spend its
emergency loan on more buybacks come from?

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not2b
From what happened in 2008.

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tedunangst
I suppose they'll be prohibited from ever distributing dividends too, but then
I wonder why anybody would buy the stock.

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teruakohatu
Would anyone buy the stock if they knew that when the next Black Swan or
recession happens there would be no possibility of a bail out? Or are bailouts
just welfare for investors (with a happy coincidence of keeping voters
employed in bad companies)?

The last time Air New Zealand was bailed out the government in fact bought
them out (over 50%). I think governments should have buy outs not bail out.

This way any future dividends or buybacks will benefit the tax payer at the
expense of existing investors.

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adrr
Buyouts make more sense and allows the government to recoup the money. Example
being the Great Recession an the AIG take over by the US government.

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lubujackson
I have an idea - if companies are legally persons and also too big to fail,
maybe they should be required to put a portion of their profits into a rainy
day fund that will be used for bailouts when the "once a decade unforseen
cataclysm" comes. Yes, some companies would benefit more than others and lots
of them would grumble about lost profits but it would save everyone a whole
lot of headaches.

We can call it Corporate Social Security.

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jka
It feels like there could be perverse incentives developing here.

There's a lot of discussion about providing cash bonuses to employees and
perhaps citizens across the U.S.

Encouraging people to put that money back into the stock market could be sold
on the notion that "we're reaching a bottom; join the economy on the way back
up, and you'll help the recovery while profiting".

If that works as intended, then in the short term that would seem good.

However there could be a significant number of stocks which don't recover. And
the whole process would then essentially signal that "crisis is good for these
types of business", leading to continued ascent of crisis-oriented businesses,
and, as a side-effect, more incentive for crises.

This may be a cynical or slanted perspective, and perhaps a correctly-
functioning market avoids this trend somehow. Any opinions and discussion
would be appreciated.

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umanwizard
Why would you expect them to encourage people to put the money into the stock
market?

If the government wanted to print money to make the stock market go up, it
could do so directly. That's not the point of giving money to all citizens.

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jka
The concern is that an artifically-created economic recovery could be a
political goal, and might not align with the interests of humanitarian
response; nor indeed with longer-term genuine economic recovery.

You're no doubt correct that the same result could likely be achieved in other
ways too.

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MR4D
I disagree with Mark, as I think it’s important to let people make bad
decisions.

However, and this is important, I believe that we should let those companies
fail (i.e bankruptcy), and let their creditors manage them _through an
expedited process, whereby the government can choose to be a party_.

I’ve found that creditors are much more ruthless than governments quite
frequently.

Further, I look at a company like Boeing, and think that bankruptcy might
break up the company (which looks like a good thing, as their engineering
issues appear to be systemic).

I can’t see the government bailing Boeing out and then breaking it up. Which
would mean they may never buy back shares, but still have a broken engineering
process.

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cletus
I'm not sure I understand the hate on stock buybacks. Consider how this
evolved.

The traditional model was that companies would make a profit and would return
some or all of that to shareholders in the form of dividends. Retaining
profits, generally, doesn't help anyone.

Some investors like dividends but some don't. Some use stocks as an income-
generating stream. Some don't need or want the income as it generates tax
events.

So the share buyback was born. This allows a company to return profits to
shareholders who want to sell while generally helping the share price as the
supply of stock is decreasing. This is kind of a win-win for shareholders.

What's different in that post-GFC we had zero or near-zero interest rates on
corporate bonds such that what companies would do is borrow money for
buybacks. Now this is a little different but I'm not sure I have a problem
with it either. If the interest rate is fixed, this is essentially free money
and it's really the government's fault that exists.

What I do have a problem with is retaining profits overseas (to avoid US
taxes) and then borrowing money to pay for buybacks and general operations. If
your interest rate is near zero this is essentially deferring taxes
indefinitely. Combine this with moving IP overseas and paying "royalties" to
further reduce US profits (and thus taxes) and your tax bill essentially goes
to zero.

What I think should happen is that every dollar borrowed counts as a dollar of
foreign profits repatriated to the US (and is thus taxed). If the company has
no foreign profits retained offshore then no problem, it's not a taxable
event.

Executive pay is another matter. It's clearly out of control. I'm honestly not
sure what you do about it however.

Another thing that should change is that when a company goes through
bankruptcy, there is a pecking order for creditors. Secured creditors are
first, then bondholders, then preferential shareholders and then ordinary
shareholders. There may be other classes too.

Top of that pecking order should be non-executive worker pay and benefits.

Additionally, pension funds should be held in trust such that they can never
be spent by the company or claimed by creditors.

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thrill
Telling companies how to operate, other than health directed concerns such as
during a pandemic, when their operations are not the reason they are in a bind
is a great way to destroy process and effectiveness of companies. Due to the
health concerns, make loans sufficient to carry them through at minimal
staffing levels so that they can recover quickly, and otherwise stay out of
their way. Their executive-to-employee compensation level is not the concern
of government.

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untangle
I agree with Mark Cuban on this. Easy decision and implementation.

1\. Taking this money is optional but if you take it you accept the following
terms. 2\. You will not buy back stock for a period of 12 (?) months after the
transaction. 3\. For the four quarters following this transaction, you will
not reduce your workforce by greater than 5%. 4\. Etc.

There has to be a quid pro quo. It's not free.

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gz5
and buying back shares is exactly what the airlines have been doing - $15B
from AA in past 6 years for example - from Matt Levine:
[https://www.bloomberg.com/opinion/articles/2020-03-17/the-
go...](https://www.bloomberg.com/opinion/articles/2020-03-17/the-good-times-
for-airlines-are-over)

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JohnJamesRambo
How about no companies are allowed to buy their own stocks? It makes no sense
and just sets up a company to focus on one thing- raising the stock price.
When all the companies do it, it seems like an elaborate multi-sector price
fixing scheme. If they all have so much extra money, they could be lowering
the prices on their products for consumers.

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umanwizard
It absolutely has to be legal and normal to distribute profits to business
owners, in order for capitalism to function.

If you want to entirely abolish capitalism, so be it, that's a position many
smart people do indeed hold, but I'm not sure if you realized that that's what
your position is basically tantamount to.

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jb775
I think the market tanking as a result of coronavirus is actually a very good
thing in the long term. It corrected the fake value added as a result of
absurd stock buybacks, and will most likely halt that behavior. If these
buybacks continued for years, could you imagine the outcome? Talk about a
house of cards.

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megaman821
Can they not just sell their stock to get the operating cash they need for the
next 90 days or so? Maybe next time airlines will figure out a better balance
of reserve cash vs stock buybacks.

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ykevinator
Mark Cuban has no surviving companies. Celebrity is not expertise.

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haecceity
What do stock buy backs do that makes it unethical?

