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.
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.
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.
That's what the finance geniuses did in 2008...it was a great job market.
Ban bonuses or go bankrupt but no board will choose to go bankrupt so who cares about what's normal during normal times.
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.
[1] https://www.airlines.org/dataset/u-s-airline-mergers-and-acq...
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.
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.
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.
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?
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)
Apparently CEOs don't matter: https://duckduckgo.com/?q=why+ceos+dont+matter&t=canonical&i...
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?
[1] https://www.flightglobal.com/sink-or-swim-haruka-nishimatsu-...
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).
Taxpayers then win on the upside when things recover.
I definitely agree with the idea, but it's effectively the same as taking them private with government money and re-IPOing them later.
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.
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?
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.
Maybe there’s an effect of executive compensation, but the standard narrative on buybacks is tax avoidance
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.
You can find it better told here:
https://www.theatlantic.com/magazine/archive/2019/08/the-sto...
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).
(Well put, by the way — I’m agreeing with you.)
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.
We can call it Corporate Social Security.
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.
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.
You're no doubt correct that the same result could likely be achieved in other ways too.
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.
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.
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.
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.
