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.
>> 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
Executives and wall street like to talk about free markets when they're fucking the public, but when their company loses, that's the last thing they want.
The worst ever was handing the pensions over the xxx (whatever the Gov pension guarantee thing is) because "hey it will let us avert bankruptcy" which would land the pension fund there anyway. It became a way out rather than a safety net.
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.
And? let them leave ... if there's another airline, that didn't take federal bailout money, then they should be able to hire that executive and give them whatever compensation they want. Clearly if they didn't take bailout money, then they have nothing to be limited by.
But for the airlines that take bailout money ... well, if that executive leaves, someone else will step into their place. Who cares ... you people act as if executives are some magical breed of superhuman; they're not. Sure they might have a strong business network, but nothing the new executive can't build over time.
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.
I'm very much a Canadian left-wing type, so what y'all largely call "communists" in America, and I couldn't disagree more. Failing of businesses is a critical part of capitalism. If we let the big ones fail a number of smaller ones would spring up and compete as they had before the last couple of decades of mergers and acquisitions.
Just look at this list of airline M&A in the last couple of decades [1]. Looks like over 50 airlines were folded into 5. That's a 10:1 reduction. I guarantee that in this economic climate, we wouldn't see 50 fall down, but I could see us losing all the big ones without help.
The more we rescue them the more they fold together to the point they have to be bailed out. We should allow them to fold, create short-term pain but in the long-term foster a large competitive ecosystem. I made the same exact case for letting all the major automakers fail in 2008. Ford would have made it out and Tesla would have probably been miles ahead.
Capitalism isn't supposed to be pretty.
As a side-note America has far fewer major international airlines per capita than most major geographies. There's 3 international airlines (American, United, Delta) for ~350M people, or 1 per 116MM people. Canada has 2 for 35MM. Europe has 15-ish for 741MM people, or 1 per 50MM. China has 29 for 1.386BB people or 1 per 47MM people.
50 small airlines would all individually collapse in this economic climate. None would have the capital position to weather a multi month lull of this magnitude.
I’m not saying I agree with the bailout cycles but I don’t think they’d inherently weather this storm any better. On the plus side it’s more likely smaller localized capital would be able to get them back up again when things finally turn around.
WestJet in Canada for instance is basically going into hibernation. They're laying off 50% of the workforce, and cancelling all US and international flights [1]. They are however not yet being bailed out by the government, and they are also not going out of business.
I'm not sure any small carrier need go bankrupt. They park their planes, furlough their staff, and in a few months, open up with some summer promos. Not flying doesn't mean a trip through Chapter 11.
This plan of action makes perfect sense to me, and I'm confused why American companies aren't doing the same? Or are they? If so, why would they need to be bailed out?
My question exactly. Especially as airlines have very tight relationships with credit card issuers who historically have provided debtor in posession financing as the us majors have exited bankruptcy. They do this by prepaying for large quantities of miles to hand out in reward for credit card spending. Ask them first before coming by with hat in hand.
I'm tired of this getting-more-frequent cycle where corporations come crying to the government for bailouts. You want balls-to-the-wall free market capitalism? Then live with the downsides, including that "changing market conditions might render your company insolvent on very short notice."
Otherwise, it's just corporate socialism; seemingly a dirty word only when people and healthcare is involved.
If corporations only get rewarded for maximizing profits, they'll never learn to store some for a rainy day (or weeks/months/quarter, etc.) Without heavy restrictions, who can say the money will be spent directly benefiting people?
So airlines (probably will) get bailout money... why? So they can keep operating and don't have to layoff employees? Well how about giving bailout money directly to those employees without filtering it through the corporation first which will skim a certain amount off the top?
If the goal is to keep the airline in business... why? Leisure travelers have dried up, leaving business passengers... how about jacking up the rates for business travel instead of essentially subsidizing it?
I thought corporate taxes were a waste of time because corporations would just increase their prices to make up for it. Well if that's true, how about skipping them in the bailout process, let them jack up their rates, and consumers can opt in/out of the services they offer at the going rate. Isn't that how the free market is supposed to work?
Bailout money should go to PEOPLE who need to eat. Corporations can renegotiate contracts, delay payments, raise prices afterwards, etc.
Maybe some good will come from this pandemic, namely a rethinking of the importance of a safety net for citizens, and a readjusted attitude that wall street's metrics shouldn't be the only goal of a corporation.
> Bailout money should go to PEOPLE who need to eat. Corporations can renegotiate contracts, delay payments, raise prices afterwards, etc.
This x100. Let corporations fail and pay unemployment to the staff until new business can take it's place. You can't look me in the face and tell me if all the major US air carriers go under people in America will stop flying.
They sure do need to eat. And if the C-levels and the board were thinking ahead, they might have the liquidity to keep those people. Instead they opted for stock buybacks and fat bonuses for themselves. Now they're sitting pretty while all their people are looking at eviction or starvation.
They don't need a bailout. Give the money to the people who actually need it.
It has rigorously zero to do with beaten cliches like "trickle down". I'm stating the fact that these employees are already receiving their salary from these companies and thus, obviously, their livelihood is already ensured and covered by them. Their paycheck is already signed and paid by these employees. There is no magic or hand-waiving.
My statement had nothing to do with the cliche. Why would you apply money to the top of the organizational structure and hope it makes its way down to the employees when you could just pay the employees directly and remove all doubt?
To guarantee it made its way down you'd have to mandate the employer pass it down to the employee using some defined and agreed upon formula, that you'd then have to monitor compliance of and enforce. Or you could mail a check from the IRS which has all the addresses and bank account details. Seems like much less work and much less guess/hope.
If it meant it was 6-12 months where there were drastically reduced availability of flights until everything could be structured I don't think anyone gains from that. As much as I want them to be held accountable this is just taking it out on a bunch of innocent people.
So the whole point is you can still bail them out in terms of solvency and not ruining the entire US transportations system while making it extremely "unpretty" for everyone involved.
> "I get the issue that a lot of execs would just walk away."
it depends on the alternatives they have. there aren't many open executive roles out there, and anyone in that position will be loathe to trade down. the incentive is prestige and power, not (just) money. they'd still be the ultimate monarchs of their little fiefdoms, just with less cash stuffed in the pockets.
USA should buy stock in them, no bailout. Here's $2.74 Billion and we own 68% or whatever the market price is.
Or go caput, let's see who blinks first. Next time save some cash for bad times. Of course sell it back in the market 2 years from now or when things stabilize. Why should we bail out their shareholders?
Instead of handing them $50b, the government should offer to buy $50b of newly issued shares and sell them off over some timeframe.
As part of the deal, executive comp packages would be frozen (so the execs couldn’t simply issue more shares to themselves to avoid the impact of dilution)
There is no way to structure it. If a CEO wants to walk away he walks, and then you’ll be stuck with choosing from a pool of people who are desperate enough to be CEO of major airlines for $50k a year. Bad idea.
Or, put it another way: agreeing to pay them high salaries has, evidently, not helped.
Edit to add: I mean, CEOs don't matter in the general sense. Of course there's going to be exceptions where visionary leader matters. Extremely thin-margined airlines don't seem particularly innovative. Any MBA should be able to do ok?
The CEO of Japan Airlines makes $80K USD/yr and their airline actually performs incredibly well so maybe that's a pool we want to swim in. [1] Nobody's going to turn down "CEO of one of the biggest airlines in the world" because it pays just a pittance. There's other reasons to take the job.
Japanese leaders get free houses, air travel, etc. worth millions. In the US you must report that to the IRS, but not in Japan.
However, American leaders scam their company using buybacks, which is the top white-collar crime of the past 2 centuries. (By boosting EPS, your options/shares are worth much more, and you can automatically hit any EPS targets.)
Even hardware engineers in Japan are treated really well - the company will find you an apartment, a wife, etc. When you travel, you don't carry anything, you can Fedex it ahead of your trip. Your business card from a major company is essentially a VIP pass everywhere.
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.
It did happen in the UK. Banks that took bailouts traded shares for cash with the Treasury (this is a layman's understanding at least). RBS notably became 84% publicly owned.
The real scandal is the government selling back the shares for less than they paid for them (when RBS was on the brink of collapse).
Sadly India started with this assumption (nationalized a formerly private airline) and are now trying to unsuccessfully sell Air India to private buyers without much luck.
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.
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.
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.
The treasury put 50 billion into the bankrupt company, shareholders wiped out, and eventually sold the stake in the new company for a moderate loss. It's up to the reader to determine how the net effects outside the investment/sale were profitable over all or not.
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?
> 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.
Companies used to take their profits and either invest in R&D/Capital if they were trying to grow, or give dividends if they were mature. But once C-level compensation became focused on stock options, top management have an incentive to increase the stock price over other concerns. If a company spends every dollar of profit (or cheap loans) on buybacks, they aren't spending money on things that will sustain the business long term like R&D, having funds to weather a downturn, etc. Not that every buyback is a problem. Apple has done buybacks because they felt there stock was the best place to invest their money. It's not like they blew through their cash account just to boost the price.
Because to earn dividends you must be a owner i.e. actually hold company stock.
To profit from buybacks you only need the option of buying the stock at a lower price than the buyback price.
The CEOs and other CXXs of these firms often have large amounts of options included in their comp packages.
This is why buybacks happen at market highs instead of market lows as sound management principles and common sense would suggest.
Increasing shareholder value by increasing equity value is just a pretext. The real purpose of buybacks is a swindle to funnel company money directly into the pockets of the C-Suite through what in the books appears a routine management operation.
These executives decide on the buybacks and exercise their share options just before, thus pocketing millions in company money and actually hurting shareholders.
Shareholders get the blame despite having little to no power and seeing their investments ruined and looted. Also, in many firms, a lot of shareholders are also employees.
Some companies pay out “retained dividends” on unvested RSUs.
Like buybacks vs regular dividends, the main differences have to do with their taxability.
From what I can tell, the main complaint in the Atlantic article is that CEOs time buyback announcements to coincide with their stock sales. The first example they give is the Home Depot announcing a buy back (apparently in the Feb ‘18 earnings call), and then selling stock after the insider lock up window opened. In all likelihood, that sale was scheduled well ahead of time (execs have to do this to avoid insider trading charges).
So, the controversy seems to reduce to Home Depot having a strong quarter and buying back stock, making money for shareholders, including the CEO.
Note that if they’d issued dividends, and they pay retained dividends on unvested RSUs, the net effect would be exactly the same (except taxes).
The controversy is not insider trading. It is executives exercising their share options during buybacks the price of which they themselves decide.
They decide when to buyback and choose to do it at market highs. This is not sound management and is not in the interest of the shareholders.
I learned about it in a recent edition of "The Intelligent Investor".
Most executives are shareholders only during the brief moment it takes exercising their options. They are not shareholders in the investor or even trader sense.
The claim that this amounts to distributing dividends is also not true. Options which is most of what the executives are holding don't earn dividends.
Because somehow it was decided that buybacks are greedy and dividends are good. Probably because your grandparents talked about retiring on dividends. But paying out the money in a different makes it evil.
Great umanwizard, it's a good thing you're here to tell us that Cambridge university is wrong! After all, what do they know about finance and economics?
This is clearly false: there are plenty of value companies with high volatility of profits and low volatility of dividends. Certainly I have seen loss making companies still pay dividends.
No, the definition is a payment from a company to stockholders that's labeled "dividend". I know of companies that were losing money that still paid dividends.
I am out of my depth here but isn't that because of a shortfall verses expected profits, or restrictions on moving money around the world (apple) verses borrowing huge amounts of money at low interest rates to give investors a tax advantage and giving management large bonuses?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.