For Years WallStreet Spent More on Buybacks Than It Earned-Now They Want Bailout | Hacker News Reader

For Years WallStreet Spent More on Buybacks Than It Earned-Now They Want Bailout

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People seem to forget that when a business goes under, there's still something left.

If an airline goes down, the planes are not immediately turned to dust. The pilots and ground crew do not forget how to fly and maintain aircraft.

What happens at bankruptcy is that the claims on various assets are reassigned. The planes will get sold to someone who reckons they know how to run an airline, and the staff are likewise hired by new businesses.

This is worth keeping in mind when considering bailouts, because they tend to keep things in the hands of the same people, sometimes even on not much worse terms. And that's despite having steered the firm into the ground.

Don't forget there's value in this sort of reassignment. Assets and labor get moved around in new configurations that might be better.

It's true that not all of the value is destroyed, but it is still very inefficient compared to a well functioning business. Whether it's less efficient than bailing folks out is I think an open question. Maybe with a case-by-case answer.

Sure, compared to a well run business. I think the point is they aren’t well run.

I don't know. I don't necessarily think it's efficient for businesses to keep cash on hand for weathering events of a magnitude that have literally never happened in the history of their industry. I think that's a little too conservative and people would not like the drag that imposes on the economy if the rule were to be applied universally. I don't think it's a sign of poor management that the airlines did not foresee the possibility their whole industry would be entirely shut down for a year or more.

I don't think we need to apply absolutes here. It can be true both that it would be very difficult for airlines to keep cash reserves to cope with an event of this scale and that keeping essentially zero cash reserves (in fact, American has been borrowing like crazy) is absolute negligence.

If airlines are considered essential enough to the functioning of the country that they must be bailed out, they should also be run in a way that reflects that importance to society.

And yet, it is not the point that management/owners could not have foreseen this, and so do not deserve to have the company go under.

Even if the company goes under, there will still be airlines afterwards regardless of who owns them. Should we all pay to keep the ones that happen to be there, or let new players have a go?

Dinosaurs didn't hedge themselves either, in terms of evolution. But life went on anyway, and mammals dominate now.

I'm not knowledgeable enough to know which is best. Is it more efficient for these companies to go under, and for luckier rivals to buy their assets and consolidate? Or is it more efficient for the government to provide capital (for some consideration of course) and smooth out the dip? Whichever leads to better outcomes is what we ought to do.

I'm not a pure capitalist. I don't subscribe to the theory that market forces always lead to optimal outcomes. As such I don't buy the notion that bailouts are always the wrong decision.

> Whichever leads to better outcomes is what we ought to do.

The question is: better for ... the shareholders? The tax payers? The environment? The pilots? The passengers? The airline managers?

You'll find that "better" is often at odds for different groups.

For low frequency, high impact events there's a thing called insurance.

The problem is exemptions—like "Acts of God"—which I think should generally be illegal. Higher premiums suck but they'll accurately account for risk (which now goes uncovered).

This is just shifting the problem to a different industry. The insurance industry would not have been sufficiently capitalized to weather this storm.

At risk of reinventing a wheel I'm not aware of ...

What about just mandating that they all pay some fraction of revenues into a common insurance fund that pays out "holding pattern" costs (furlough wages, hangar rental, etc) in times of travel-restricting emergencies.

That way, no airline could gain a competitive advantage by running with a dangerously fragile buffer.

> I don't necessarily think it's efficient for businesses to keep cash on hand for weathering events of a magnitude that have literally never happened in the history of their industry.

It is not "cash". It is "cash and cash equivalents" i.e. short term highly liquid securities such as money market funds, or super short term government debt.

No sane CFO keeps cash in DDA accounts in excess of the immediate need if it falls outside the FDIC coverage limits.

Giant asteroid extincts a bunch of species... Sure, the now vanished mega fauna were not adapted to asteroids. But as a once in a hundred thousand years event, it doesn't mean they were otherwise unfit.

They were unfit because a giant asteroid is as much a part of the environment as anything else.

I question whether it is possible to be "fit" in this analogy, or just lucky.

Also, let's not forget that "fitness" and "conformance to our values" are separate dimensions. It is not necessarily the case that we humans want to optimize companies for their ability to withstand once in ???? year events without government assistance. Companies optimized along such criteria would be more fit for an environment where government assistance doesn't exist, but crucially that is not necessarily the actual environment that companies exist in in the real world. And it is not obvious to me that the citizenry benefits from companies optimized that way.

It's a good analogy because fit and lucky are hard to tell apart in evolution too.

Homogeneity leads to effecency and hedrogeneity leads to resiliance. The stability the fed provides allows them to do what they want in hugely optimized and complex ways, it just turns out what they want to do doesn't align with the interests of the population sometimes. I don't think they would be any less likely to do what they are doing they would just do it less effecently.

The fed doesn't want to use the stick anymore, and business gets a carrot when it throws a tantrum. The insentives are perverse.

The thing is that rare events occur frequently enough on evolutionary time scales that not being able to handle them as a species is equivalent to not being fit. This is connected to one of the theories of why humans evolved our rather strange intellectual capacities. It was a way to be fit in a rapidly changing environment. We may not have been the fittest in any specific situation, having no claws, bad eyes and weak stomachs and all, but when the environment changed we were able to retool ourselves better than animals that were optimized for specific and no longer existing environmental conditions.

Whoa whoa who says humans have bad eyes? Our color vision is like animal kingdom best practices, and we invest a ton of brainpower into visual processing.

Humans are great at throwing too, and traveling long distances.

The last time all their planes were sitting about was 9/11, and they were openly talking about the need to be prepared for another such occurrence. This seems like something we should expect on the scale of decades, rather than some vast timescale.

Unfortunately the bankruptcy process is extremely slow and costly. A lot of built-up value like institutional knowledge is destroyed.

Bailing-in creditors and diluting shareholders is fast and cheap by comparison. This is particularly true when the business is likely to continue operations similar to those in place at the time of insolvency. Bankruptcy works for Theranos or Pets.com, but not so much for airlines in 2020.

> Bailing-in creditors and diluting shareholders is fast and cheap by comparison.

I agree, whether the planes go through bankruptcy to a new player or the old ownership is radically changed, it allows to things to take a different course. With big dilution you can imagine the new owner essentially having bought the business before bankruptcy.

We could also nationalize the airline industry. We've already seen how capitalism alone is a poor predictor of future demand.

And while we're at it, let's make the internet a utility.

And like, in this case, it's not even a violation of capitalistic principals: if you need money from investors, you sell shares and ownership to investors, and in this case the investor is the people as represented by the government. If you make risk public, then profits should be public too.

Except in airlines there are almost no profits :)

http://news.aa.com/news/news-details/2019/American-Airlines-...

Airlines profited around $28 billion in 2019 [1].

If they were publicly owned, the prices of flights would just go down until there was no profit. Also, the CEOs wouldn't be paid tens of millions of dollars per year [2], so again, prices would go down.

[1] https://www.cnbc.com/2019/06/02/airline-industry-cuts-profit...

[2] https://skift.com/2019/05/29/united-wont-pay-munoz-a-full-bo...

Publicly owned doesn’t mean non-profit, it means government ownership. There are plenty of public companies who post profits.

And even if we were to make airline public, wed just be reversing the trend over the last few decades. There is a reason why so many nationalized airline went private, the government kind sucks at running businesses (not always, but often).

You’re using one data point, 2019, a pretty damn good year for the U.S. economy. I encourage you to look at the last 20 some years of U.S. airlines profits (emphasis on U.S. since those aren’t subsidized as much as national carriers like Emirates, Singapore, AirFrance...etc). Average profit margin is around 0.5% despite creating a ton of value for the US economy.

> and in this case the investor is the people as represented by the government.

Or you could just sell shares to the public, since you're a public company. That would get more people involved in the market which is a good thing. If the government were to buy the airlines to inject cash they ought to assign the shares to individual americans.

There's also a fairly good argument for this in the line of trains and highways. Planes aren't physically trapped on one course, but pretty much every nation heavily regulates who can fly where, when. Airports are often state-controlled, and even private ones need state approval to add new runways or flights.

What we have now is one of the ridiculous "private non-market" arrangements. When airlines in Europe fly empty planes to stop the government from taking their flight slots away, that's not the fault of the companies, but it's also not a functional market we should expect efficiencies from.

I'm not a fan of "regulate markets into dysfunction then nationalize them", but if the fundamental restraints on travel are too severe to let the market function freely, privatization stops making much sense.

Privatization also stops making sense when private companies constantly need bailouts.

Good point.

The TARP bailout in 2008 involved buying a ton of stock from troubled companies, but it was sold back to them as soon as they could buy the money back. And this will be the second bailout for a bunch of airlines.

So one of the most interesting ideas I've heard is that we shouldn't nationalize things by fiat, but when TARP-style bailouts happen, the government should just keep the stock, at least for a while. If it really was a one-off crisis, the shares are a good investment. But if it's a failing business, or one paying dividends and then looking for handouts, it's not just a money sink.

> "bailouts ... tend to keep things in the hands of the same people"

yes, this is the crux, a gross unfairness. common folks get harsh punishments, while financiers and corporate executives get away with major thefts and get to keep the fruits of their transgressions.

i'm all for harsher punishments for actions that lead to greater damages to more lives (in this case, taking a little bit from lots of people). with greater power must come even greater responsibility. tear up the corporate veil.

and let's be vigorous in reassigning assets so as to support a functioning market for better management.

There is a middle path, where creditors are converted to shareholders and shareholders are massively diluted.

Effective control of the company will be placed in the hands of people who re-capitalize the company, and they will definitely not let the old management stick around.

Relative to bankruptcy, this has the benefit of allowing the company to continue operating. It also deters future recklessness. Probably should have happened in 2009, but didn't.

Great point, and very relevant to 2009, wherein the automakers would have likely not been replaced by American companies. But, in the case of United States airline companies, they would very likely be replaced by other American companies if they were not adopted by the creditors.

Foreign airlines are not allowed to provide domestic routes.

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).

Did the Treasury improve the bank operations for the better? It’s difficult to imagine that they’d do the same jobs as private creditors, considering 1. The Treasury decision makers stake in the longer term performance of the banks is low 2. The Treasury has money as an institution of government, even in a downturn, and has come to possess through political means. Private creditors have some come to possess, and more importantly keep/remain solvent during a downturn, the money they have to lend through means and methods more closely related to the effective operations of the banks. Not that every private creditor who ended up in control would do a better job, but on the whole firms would be more effectively run in the long term. Especially when it comes to avoiding risky leveraging situation as we’re in now. Not a britbong, so my understanding of how everything works over there might be wrong

I respectfully disagree with point 1 - our Treasury, at least, which I imagine works along similar lines to the HM Treasury, realises the important social role healthy, and well-capitalised banks play.

A piece is missing. RBS creditors were not "bailed-in" by having their debt converted to equity. Instead, they were offered guarantees (functionally, though not in name).

RBS was a classic bail out. Creditors were fully protected, and shareholders retained a substantial interest in the surviving entity (in this case 20%).

[1] https://www.theguardian.com/business/2010/aug/06/royal-bank-...

bankruptcy != liquidation

Liquidation (shut it down, fire everyone, sell all the stuff) is one (rare) outcome of bankruptcy. The more common is some form of reorganization, debt re-structuring, etc. The "middle path" you mention.

Bankruptcy is good. It generally prevents un-needed and chaotic liquidations.

Thanks. I wanted to avoid getting into the weeds on Chapter 7 (liquidation) vs. Chapter 11 (reorganization).

Both are so disruptive and costly that threatening to invoke them can be (and has been) used to force a public bailout.

A good example is the case of California Edison and Dynergy from 2001.

[1] https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864...

that's interesting, but it's unclear whether or not that would target the wrongdoers precisely enough. executives, some (maybe all) board members, and some principal shareholders (maybe all principals) are the likely instigators of decisions like this. those are the folks to punish.

and on the flipside, it's not clear that all creditors deserve potential upside beyond their promised fixed income (and many probably don't want the added risk and responsibility of equity over debt).

you'd also want to claw back related gains from executives, board members, and principal shareholders.

maybe the benefits should accrue to non-executive employees and to customers instead.

> creditors are converted to shareholders and shareholders are massively diluted

I don't know much about large-scale economy and business, but if I ever decided to learn it would be to learn why this is not completely the norm. I simply cannot comprehend the existence of "free" bailouts.

Dodd-Frank included a thing called "TLAC", which is this. A lot of politics happened.

In the US we have a "notice and comment" process on proposed regulations. You can see the politics play out in the comments on the Fed's proposed TLAC rules. If you read them, you run the risk of becoming cynical about our political process.

Bankruptcy courts almost always try something similar to that before closing a company. Both kinds are called "bankruptcy", but they have completely different results, what makes this all very confusing.

Anyway, it's not a new idea, and not something that needs any pushing, it's the usual way to handle company failures.

I'm largely mirroring a comment I made below. Re-organization under Chapter 11 is so costly and disruptive that threatening it has been used to extract public bailouts [1].

This is one of the reasons that Dodd-Frank included a TLAC provision, which was heavily watered down throughout the Fed's implementation process.

The bankruptcy code is really boring, but a lot of high-stakes politics plays out there. Like the tax code.

[1] https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864...

While many in a crisis that most harshly affects the poor will agree with you, the US at least has a very "pro business" government which is very unlikely to bite the hand that feeds them (their own hands, really, as many are themselves either come from highly placed positions in business, or are going there, or are very closely connected to them).

If at any time the US comes close to having a government which might threaten to "punish" en-masse (as opposed to a token example here and there) the financiers and corporate executives you speak of, there's likely to be bloody opposition.

I'm reminded of a passage from Jack London's The Iron Heel[1], about a war between the working class and the ruling class, in which the latter answer a threat with these words:

"This, then, is our answer. We have no words to waste on you. When you reach out your vaunted strong hands for our palaces and purpled ease, we will show you what strength is. In roar of shell and shrapnel and in whine of machine-guns will our answer be couched. We will grind you revolutionists down under our heel, and we shall walk upon your faces. The world is ours, we are its lords, and ours it shall remain. As for the host of labor, it has been in the dirt since history began, and I read history aright. And in the dirt it shall remain so long as I and mine and those that come after us have the power. There is the word. It is the king of words--Power. Not God, not Mammon, but Power. Pour it over your tongue till it tingles with it. Power."

Even if a revolution ever does occur, after all the blood spilled (which is certain to be copious), it's the self-serving demagogues and opportunists which will manage to grab on to power, as they always do, and it's unlikely that in the end a more just society will emerge. We'll just enter a different nightmare.

[1] - https://en.wikipedia.org/wiki/The_Iron_Heel

great literate reference, but the forgone conclusion of who wins is only in poetic terms.. you do not know, and no one else does either.. this is reality, and reality has mass, cause-and-effect, luck and providence.. your words amount to armchair resignation -- I take a different path.

There have been revolutions aplenty in the past. Can you suggest one or two that haven't ended as described?

To make another reference, meet the new boss, same as the old boss.

Cynicism is not very appealing, but seems the most realistic.

I think it's wrong that revolutions have always ended poorly. In particular two specific examples are the magna carta and the english bill of rights, which certainly made things at least incrementally better for the median englishperson. Of course, neither of those reforms came about at the end of the gun, so one wonders...

Moreover, Jack London was kind of writing very romantically at the time. He had gotten quite fat off the profits of his bookwriting. But It's not entirely clear that he really had sympathy for the working class, well according to the accounts of the laborers on his villa, anyways.

I suspect there have been times that were better and times that were worse. The only thing that is certain is that things change.

your point is well taken, but i doubt the wealthy here in the US have the wherewithal to take it to bloodshed when their high status depends on mollified underclasses (diversification globally notwithstanding).

but yes, power corrupts. the more widely distributed it is, the more stable societies are. that's the aim.

iiuc, these assets are valued at approx 10% of the previous value.

while materials such as aluminum do not rapidly decline, their meta-information does: for airlines: certifications, inspections and other legal requirements. in other businesses assets are perishable. basically a lot of momentum is lost.

Yeah, but the point is not to save the airline, it's to prevent a cascading effect. Not that i support thid bailout one bit. Unlike 2008 i don't see airlines going under cascadig beyond US regional commercial flights not being available for a few months. Cargo will be fine, anything international will be fine.

This is not what would happen in a bankruptcy in the airlines industry. They would file for Chapter 11 which lets them re-negotiate with creditors instead of having to liquidate everything. Who are the creditors? Pilots union, flight attendant union, etc. Sometimes the airlines don't own all their planes, they lease them from a holding company. The airlines would say "take an 10% haircut on benefits the next 5 years or else we will liquidate and you'll get nothing". Then they'll re-emerge from bankruptcy with a healthier balance sheet with future liabilities lowered and a better cash flow.

Pilots aren't easily replaceable and you need a certain amount of flight attendants minimum for every flight.

Clearly a strike would be effective - look what's happening now. They barely can handle 1 month without asking for a bailout. Even more so in an economic recession.

Let them liquidate. It's no different than before.

Sure there's value in this sort of reassignment but what usually happens in that case is:

1) Private equity acquires the assets at bargain basement prices and proceeds to squeeze out whatever profits they can. One of the most common ways this is done is by laying off staff.

2) A competitor buys them out, leaving less competition. Also followed by a large layoff to reduce redundancies.

3) The business is reorganized to maximize short-term efficiency, regardless of the cost to others - customers, partners and society at large.

These aren't bad outcomes per se, but I suspect that those that are reflexively against corporate handouts wouldn't be happy about these either. The general point of an industry bailout is to avoid outcomes like this since in crises, these can add to the pain. The actions taken to ensure your own company is financially solvent are often counterproductive if they are all taken by all parties involved. And various markets involved - whether in terms of labor or capital - are also likely not functioning efficiently enough to absorb the resulting dislocations.

And typically bailouts are not great outcomes for the shareholders involved. Bailouts can be great for the management, but only to the extent that it's also great for most employees. As long as the shareholders (and creditors to a lesser extent) take a big cut, there isn't a huge moral hazard either.

Remember, you're not actually bailing out the airlines, you're bailing out the banks that loaned them money. The banks always, always win.

Can tell you don't have much experience of bankruptcy. Okay, airlines go bankrupt...presumably, airports go bankrupt too...simple, the various assets are "reassigned"...true.

One big problem: if an airline is bankrupt, what airport is going to give them a slot? I can tell you: no airport, because they will lose that money in bankruptcy. Likewise: what airline will land at a bankrupt airport? Again, no airline.

What you are saying is that we should stop all flights into and out and within the US for a period of months (probably years) whilst these cases go through court (and it will probably take years)...is that realistic? Likewise, you appear not to realise how difficult it will be to fire millions of staff and rehire them at other companies. Bankruptcy is neutral in terms of assets, it is not neutral in terms of cost...it is very very very costly.

This isn't a hard problem. You are completely wrong that bailouts "keep things in the hands of the same people". This is what largely happened in the US...because the US led insolvent companies go bankrupt (mostly but not always i.e. Fannie/Freddie) most of the companies that were "bailed out" weren't insolvent. But, irregardless, it is very easy to create a package that forces losses...very very easy.

I agree with you. Companies that gorged on debt should be punished. It is very easy to do this with new equity issues, preferred issues, etc. without bankruptcy. This should only be, however, for companies that have substantial net debt positions (where I am, one or two airlines were buying back shares but they had/have net cash positions...the issue isn't repurchasing shares, that is just a tax-efficient return of capital, it is being under-capitalised and expecting someone else to capitalise you for free).

> One big problem: if an airline is bankrupt, what airport is going to give them a slot? I can tell you: no airport, because they will lose that money in bankruptcy. Likewise: what airline will land at a bankrupt airport? Again, no airline.

Why would both of these be true? Normally you don't want to sell to a bankrupt customer, or at least you don't give them credit. But you would definitely buy from a bankrupt supplier if they have something you need.

Some airports pay airlines, but mostly the cash flows the other way, so the airline should be happy to land at the bankrupt airport.

No. Airports most certainly do sell stuff to airlines. Do you think airplanes have a little refinery in the back with a million barrels of oil?

That's again cash flowing from the airline to the airport, so if the airport can keep the fuel flowing, the airline should be OK landing there.

When one makes personal attacks like, "Can tell you don't have much experience of bankruptcy," it is imperative that you actually know more than the person being attacked.

Many, if not most, US airlines have been through bankruptcies before (https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_i...). Typically, large ones are not grounded; companies go into receivership, where they continue operations as normally as possible while the bankruptcy is settled.

Most US airports are public infrastructure. JFK is owned by the City of New York and operated by the Port Authority. O'Hare, Denver, and ATL are owned by Chicago, Denver, and Atlanta, respectively. LAX is "owned and operated by Los Angeles World Airports (LAWA), an agency of the government of Los Angeles." Public institutions such as cities can go into bankruptcy, but it's difficult.

Correct, but we are talking about multiple airlines going. Not just one or two. And we are talking about them going quickly.

Thankfully, you quoted the part of my answer that proved my point. Again and again, you will find solutions that are apparently "obvious" and simple...with no basis in reality. You need to actually understand what is going on.

Most companies are worth far more than the value of their assets.

Take Google or Microsoft for instance. If either of these companies were split apart, and the assets were sold at auction how much would those assets be worth compared to the market cap of the company?

That seems non-comparable. Google and Microsoft have a lot of value in IP and mindshare, plus various monopolies. American and Delta (for example) are 100% fungible.

> What happens at bankruptcy is that the claims on various assets are reassigned. The planes will get sold to someone who reckons they know how to run an airline, and the staff are likewise hired by new businesses.

Alternatively, it would be possible to create a worker cooperative from the failing business. The managers who created the mess would be ousted and the actual employees could decide what to do with the rest.

if the workers want to buy the stock up while it's cheap or bankrupt then why not? The whole point of a bankruptcy is that the company literally is worth less than zero.. Whoever buys it would owe the bank a ton of money and have to pay the bank out of their own pocket until they become profitable. Workers are free to do that, but if no one wants to do that, then the bank steps in and takes ownership.

You do lose the inherent value in the organization. Planes and humans don't create value on their own they have to be organized into a system. That system falls apart when a company is sold off for parts. Sometimes it makes sense if the organization is dysfunctional, but being a victim of a worldwide economic shutdown is not what I would call dysfunctional.

> You do lose the inherent value in the organization. Planes and humans don't create value on their own they have to be organized into a system.

Isn't the problem in that system itself, and thus the collapse of that particular system is a net-benefit. A better run company will absorb these sell-offs and reassign priorities.

If they're collapsing due to a massive external event, the answer is no.

If part of the blame is to be assigned in the decision to do share buybacks over the course of many years, then the people responsible for that decision need to be held accountable (personal gains clawed back etc.).

Seriously. All the talk about markets this and that but when the market acts and these companies go bankrupt mostly because of their own incompetence, it's time for a bailout. It's absurd. Either you let the market run its course or make this available to everyone. If United can get a bailout small businesses should too so neither should fear bankruptcy. If that's not palatable, then let all these businesses fail. That's part of the system and it seems to be there for good reasons.

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

There is a way out of this joke. Keep your heads up and don't give up.

The least we can demand for these bailouts is that executive bonus of last years will be returned. These companies don't deserve bailouts and should all go into chapter 11.

We got all severely fucked last time. Boeing bought for $52 billion shares back and now they want $60?

I hope Donald Trump is going to push his Tough guy act now. If he says no to all the bailouts he is going to be remembered as the best president ever.

The only tough guy act that Trump will play is for election support. He'll gladly bail out any company that supports his reelection, and play tough guy to any company that doesn't.

And there are no possible circumstances where he'll be remembered as the best president ever. He's fighting for 44th place.

>He'll gladly bail out any company that supports his reelection, and play tough guy to any company that doesn't.

A more generous reading of this strategy is that Trump will do what the people want. I fail to see how that's any worse than someone in Washington saying they know what's best, or tat we need to "tighten our belts".

>He's fighting for 44th place.

In a survey of Californians maybe. You're sorely mistaken if you don't think Trump is popular, and might be surprised (again) in November. Will the Democrats blame the Russians again?

Trump is stuck between Wall Street and his base, I think. He is going to be crucified by his base if he bails out large companies like Obama did.

If he's not crucified by his base for letting the disease go rampant, he won't get crucified for anything else. In any rational country his approval ratings would be in the teens, not the forties, right now.

>If he's not crucified by his base for letting the disease go rampant

For his small part in this, it was mismanaged, certainly. But if you think that the reason Covid-19 is spreading is because "Trump let it happen", you have an interesting view of how the institutions work.

Firing the pandemic department certainly doesn't help... For starters.

https://www.snopes.com/fact-check/trump-fire-pandemic-team/

He's been in denial for weeks, event calling it a Democratic Party hoax to try to take him down, instead of starting to take early measures.

But being crucified for letting the disease go rampant would be totally reasonable and his base isn't that.

His base will be more worried about their 401k/IRA/pension benefits. Everyone talks the talk about bailouts, but once it hits their accounts they are all for it.

Don't most corporate bailouts negatively impact their employee retirement prospects? I'm thinking of GM and Hostess in particular at the moment. The only winners seem to be the investors.

I’m referring to everyone being invested in index funds, even via their defined benefit pensions. If SP500 goes up, then everyone’s net “worth” goes up.

Trump will bail out any company that has a large blue collar workforce. I really doubt they will be tough on the bailout terms, either. The onus of the failure will be put onto Covid-19 rather than any kind of mismanagement or misconduct or buy backs.

1) Hoping Trump will have a backbone when facing corporate cronies 2) Hoping that executives will skip bonuses, after seeing what happened to Wall Street in 2008

In the old language of my ancestors, rotfl.

All the industries they are looking at bailing out already are huge political donors: airlines, oil & gas, etc.

These industries have already priced in that they can do whatever the hell they want, completely fall apart and they will get bailed out.

They know that:

1. They are needed, or seen as needed by politicians

2. The appetite for true nationalization of industries is extremely low in the US, so they will get bailed out instead of taken over by govt.

The oligarchic control over power is something that can change very very fast.

If it can change very fast, it’s not real power

Boeing unfortunately has to be bailed out, if we as a world want airplane as a method of transportation. It’s only Boeing and Airbus, there are no others.

Management should be punished excessively as a warning to others, though I do not expect them to be punished at all.

> Boeing unfortunately has to be bailed out, if we as a world want airplane as a method of transportation. It’s only Boeing and Airbus, there are no others.

Somehow I suspect that if the earth swallowed every employee of Boeing and Airbus, and every plane ever produced by either, there would be more airplanes and more airplane manufacturers soon enough.

Sure, eventually and corners will be cut to expedite that long development and testing window.

May even be better in the end, though let's say the USSR and NASA stopped space launch vechiles - how long would it take to make an alternative. Longer than we appreciate.

Sure, eventually and corners will be cut to expedite that long development and testing window.

So, still Boeing.

Maybe Elon Musk would just create a branch off Space X and manufacture airplanes...

Ahh yes... The "switch editor" button in Kerbal space program to the rescue.

you mean the guy who is trying to get his factory workers to come in and build luxury cars during the greatest pandemic facing mankind in generations.

he seems trustworthy.

Luxury cars largely co-financed by the government :D

Soon enough will still be around a decade - the development/tooling development for your average sedan is already 5+ years, and that's building off of previous experience and technology. I can't imagine what it would be for creating a vehicle bigger than a doublewide that has to be hefted in the air by 100k lbf engines from scratch

Sure, that's fair, but a Boeing bankruptcy is unlikely to actually kill every employee and destroy every existing plane, so recovery might be faster than that.

Hobbiests construct air plains from off the shelf components fairly often. Large passenger planes are difficult but not impossible. It’s not like all the engineers working on these just disappear either, they’ll want a job doing what they’re good at.

Bailing these things out only protects executives and shareholders, I hope you’re not arguing that those have been doing a good thing for the world recently.

That's just silly. Bankrupting Boeing does not destroy 140 years of aviation technology or make aeronautic engineers forget their training. Neither does it erase the thousands of aircraft flying today. All those assets that Boeing has inefficiently hoarded now becomes available for other, more competent organisations and businesses.

Nationalize them and let them slowly rot away - what's the argument against that?

You can let the purely virtual "company" frame go bust (and the top management - would that really be a problem in such a case, and not the main purpose of such an action?) - and immediately use the assets and people to build new ones with minimal disruption. The factories don't have to be stopped for a single minute.

Not to mention that maybe letting them get so big was a mistake in the first place? Based on petty power games of "leaders" (in politics, finance and business) and not on technical necessities.

The problem is all of the employees of said companies. It's not their fault the company makes the decisions it did/does, yet it is their work that generates the money for the executives to do what they do. So my suggestion is for the bail out to go through, the entire executive level (however deep that needs to go) must be replaced. Keep the actual working employees.

the new company could just rehire all non exec-employees.

> ... the entire executive level (however deep that needs to go) must be replaced.

Determining how deep that goes is tough. Replacing the executive level is admitting the company must replace with a radically different culture. Those take time to cultivate, and the US incentives are aligned such that without great effort, standard American business culture is to evolve to what we see from Boeing. The tragedy isn't that Boeing is exceptional in its systemic broken culture, the tragedy is that this is par for the entire American business edifice without assiduous work by company leadership (many examples of that working away without recognition, but business journalism shares blame in lionizing on KPIs that don't measure for the brokenness); Boeing is simply different by scale of acute fatalities flowing straight from the business culture.

Embraer obviously isn't quite a Boeing or Airbus but their E-Jets seem like viable narrow-body jets. Now if the argument is that the USA isn't ok with all of the big jet manufacturers being foreign, then yeah, they have to bail Boeing out.

Buy it out and nationalise it if it is that important to the country. Anything else is lining shareholders and no assurance staff of these entities still won't feel the brunt.

If a company is too big to let fail, it's too big. We should have blocked any mergers or acquisitions that made Boeing larger.

For now, give them a loan, as much as they need, interest free for 10 years. No more bonuses nor stock buybacks until the loan has been repaid.

Why free money? Give them a loan in exchange for controlling stake and future profit, like any other investor.

And we seem to have stumbled upon the Chinese economic system

Except the US has already kind of done that before. Ex the treasury stake in GM.

Well, at least on the downside. The gains are privatized, the losses socialized - a private good when times are good, a public good when they are not.

The problem with this is then the state is now responsible for this thing, which wasn't able to keep itself afloat financially. This works in a some cases, where the state is actually more efficient at managing than a private corp, but in many cases you just have the taxpayers supporting zombie corporations.

Sick companies have to die in order for capitalism to survive. In the long term people will lose trust in this system because every new bailout puts pressure on everybody in the system for generations. No bailouts of companies over 250 people ever again.

If you let the corporation go bankrupt, the shares become worthless. But the assets remain, and can be taken over by new owners, who can keep producing airplanes etc.

At least that's the bankruptcy theory. Real world bankruptcy may well have a lot more friction.

Feel free to educate me on how the real world works here!

There's Comac, with pretty much unlimited money behind it.

"if we as a world want airplane as a method of transportation"~

Maybe we ought to rethink the extent of our wants versus our needs.

(Just Quoting) 'But a culture of contribution doesn’t succeed in a vacuum.'

'Why what we’ve been doing stopped working and why you don’t have to assume it: So, there was a chaotic system and an organizational structure on top of that system that could not react to disruption and the wheels ground to a halt. (...)'

Asked just one Topic away, 'Is the status quo scaling?' P-:

Someone else will buy the assets and restart manufacturing, maybe with less safety issues even

But only because we allowed them to purchase all of their competition -- letting them become too big to fail.

> Management should be punished excessively as a warning to others, though I do not expect them to be punished at all.

"Management" is a group of ordinary people who are doing their jobs - trying to maximize profits for their employers. I'm not going to sit here and say my job is any different. I'm writing code so my employer will make money, not anyone else.

What specifically are you going to punish management for?

> trying to maximize profits for their employers

> What specifically are you going to punish management for?

Maybe punish them for their myopic view on "maximizing profits"? What's worth more: $100 in profit in Q1, or $25 in profit for the next 8 quarters? It would better for everyone if we had a return to sustainability in the private sector.

> Boeing unfortunately has to be bailed out

No one has to be bailed out. They can take out loans, issue new shares, or file for bankruptcy. The government should not be bailing anyone out.

There is no commercial Boeing. They've outsourced. Let them go bust, someone that has a clue can buy the company and run it.

That they get propped up is a major reason no competitors appear. No one thinks it's wise to try to invest a huge sum, when their competitors are entities backed by governments.

It wouldn't be that long for new companies to pop up if the only two players collapsed. People can just buy the existing facilities for making parts and assembly.

Obama's biggest fault was that he didn't sell the American people on the inarguably excellent deal he got on the bailouts. The American people did profit off of those and most people don't know that because he didn't make a big deal about it.

Conversely, Trump, if he knows nothing else, knows how to focus doggedly on what's going to excite his base. If he can sell his base on the idea of loan-sharking Boeing (which is a legitimate strategy), then he'll come out looking like a winner, despite the fact that he'll have done the exact same thing as Obama.

Remember, never let your accomplishments go unrecognized by those you serve. https://www.joelonsoftware.com/2002/02/13/the-iceberg-secret...

I get what you are saying but I disagree with 100% of what you wrote.

According to "The Balance" - https://www.thebalance.com/auto-industry-bailout-gm-ford-chr...

Taxpayers lost $10.2 billion. Are those the bailouts you're talking about.

There was a brief period where loans were paid back profitably but everyone crowing about profits was ignoring that the rest of the loans were booked against stock which was heavily underwater and later liquidated at substantial losses.

I don't know who The Balance is but these numbers seem consistent from other sources I just looked at.

Please correct me if I have this wrong (not being snarky) -- what I think I know is comprised of varied articles spread across years.

The auto industry bailout was a loss, but that was smaller than many of the other bailouts, and most of the bailouts were profitable. In net, taxpayers came out substantially ahead in the end.

Not that making a direct profit was even the goal of the bailouts, but it sure is nice that we made money off of them on top of saving the economy.

https://money.usnews.com/investing/articles/2017-01-19/finan...

Why don't they just sell stock?

They were playing a speculative game and bought high, now they have to sell low.

OOPS

Realistically it’s because they’re not going to sell low, but they may just fire a ton of people, max profits, and then sell. There’s a balance of funding to dissuade making that decision, especially when there’s a natural disaster occurring that does have some expiration date.

Because their not going to is not a reason. They should in fact issue more shares, diluting the current ownership. No one wants to buy them because no one has money and so they have to sell extra low.

The generic reference of "Wall Street" in the title, but then not referring to financial firms but transportation, manufacturing and other firms located across the country seems to be a misuse of the term. Like many other things the meaning drifts into "things I don't like".

I've always took "Wall Street" to mean all parties involved in the U.S. financial market, publicly traded companies in particular.

I thought "Wall Street" meant financial firms and exchanges.

Those two words have an extremely fluid definition depending on who you talk to.

Having worked on Wall Street, it essentially boils down to public/private businesses and financial institutions/firms/banks/exchanges are considered "Wall Street"...

Everyone one else is considered "Main Street"...

They have their own language and culture that exhorts greed and profit above humanity and peace. ie. "Wolf of WallStreet"...

It’s not the transportation firms who are owed the money, my understanding is the airlines took on debt to financial institutions (to buyback stock, held by other financial institutions), and the bailout money would ultimately go to those obligations to financial institutions (“wallstreet” here).

It's a metonym, and you're right it refers to finance. But, many corporations over the past 30 years have kind of evolved into financial companies. Look at GE. The criticism, relevant to this very article, is that (many) companies focus far too much on maximizing shareholder value, at the expense of other investments.

https://www.wsj.com/articles/ge-powered-the-american-century...

Wouldn't it make the most sense then for the Bailout to be mostly for equity at the current price? They have stock, they want cash, they sell the stock. American Taxpayer holds onto the stock for a while, fixes the company, and then sells for profit.

That of course is if the American Taxpayer wants to save that business.

Sells for profit to who? The "american taxpayer" isn't a person, the taxpayer is the economy. The taxpayer is every business and most individuals.

Yes buybacks were dumb. It's done now. Just change the regs and make sure it never happens again.

The last bundle of financial bailouts included the Government taking an equity position in companies. They made profit when they sold the stock. One example is the ownership stake they took in Citigroup.

https://projects.propublica.org/bailout/

>The main sources of that revenue are $23.1 billion through dividend or interest payments, $19.7 billion from sales of equity or other assets that Treasury acquired (mostly stock in Citigroup); and $9.63 billion through stock warrants which Treasury received as part of most of the investments. When companies pay back the TARP investment, the warrants are either sold back to the company or auctioned off.

Such numbers are purely notional. Governments are not judged based on profit or loss, particularly the US government because of the special status of the dollar (in times of crisis people want USD or USD bonds). Governments are judged based on the strength of their economy which requires a holistic approach. "Making a profit" does absolutely nothing for any of the economic indicators that governments are judged on, such as employment, GDP PPP, etc

I think this is the answer. If they want additional runway, they should dilute. It's fine for the government to act as a buyer of last resort in the event that it believes the market is responding irrationally. But it should still get a steep discount. The government can sell the assets back into the market when it believes the situation has stabilized.

Maybe don’t sell it but put the holdings into a big sovereign wealth fund? The wealth fund can rebalance its holdings later, and can work as an infrastructure bank or similar in future to support the country’s ongoing development.

I don't know. Maybe. In general I'd prefer the government to hold debts than assets, especially when debt is so cheap as it is today. I don't want to see long-term crowding out of private investment. I think the investment system generally works pretty OK, except for in extreme circumstances like this.

If the government is going to play kingmaker and choose which business succeed and fail, the profit for those moves should go back to the government, not just the old shareholders.

>I don't want to see long-term crowding out of private investment.

This really wouldnt be that different than Blackrock and Vanguard and State Street controlling like 10% of the market, except the government wouldnt be a passive investor, they would exert some form of control over controlled companies.

It almost seems like cheat mode, for the government to say "we wont let this undervalued stock collapse, watch us save it. now its worth more (naturally because we saved it.) profit."

> the profit for those moves should go back to the government, not just the old shareholders

If the government buys the assets at distressed prices and sells them at ordinary prices, it would?

Why sell if you fixed the company? Reap your reward? If youre confident their value will continue to increase after your bailout.

If you wouldn't buy it you should probably sell it is my motto. The gov't wouldn't pay retail for one of these companies, so they should probably sell it at that price. But if they believe the long term fundamentals are good, they might buy at a distressed price. That's my working theory anyway.

This seems like a logical solution to me. It's gonna look funny though, between government owning all the companies and handing out $1000 to all Americans, Trump will be the surprise socialist candidate.

That is basically how the 2008 auto bailout worked. Taxpayers profited off that too.

As usual Matt Levine has a pretty good take on this: https://www.bloomberg.com/opinion/articles/2020-03-17/the-go...

This gets to one of the fundamental limits of for profit operation of businesses, different scales of firm have different incentives. For American Airlines it made logical sense to do stock buybacks, but if the whole of society was in control of American Airlines they would've prioritized service and just paid to keep the operation on life support during the downturn.

Given the way that public transit is run, I think service would be the lowest priority of an airline if it were run by society instead of capitalists.

Try public transit in literally any country besides the US, the US is currently terrible at public utilities for ideological reasons. Basically the line of thinking is the government doesn't work, so let us in power to prove it to you

> But you are the hypothetical CEO of American Airlines and your loyalty is to the shareholders.

Because screw your employees!

"Prior to 1982, stock buybacks were considered market manipulation and were illegal under SEC rules. Whether buybacks should be outright illegal or not, they are a sign that a company thinks so little of its own products, services, and market potential that its capital should be diverted from growth and towards financial engineering."

That's very well put.

Performance based compensation, were share value is the key measure/indicator for performance, leads to this kind of culture.

There are legitimate reasons for stock buybacks, but when they're being used for nothing more than short-term increases (in share prices), then that says something about the system.

If an individual is expected to have a 3-6 month 'emergency fund', would it be reasonable to expect the same of a corporation?

That 3-6 month projection of operating expenses goes out the window once an emergency happens. Business require many more things to sustain itself. The recommendation is good for every day people because the actual cost to keep a healthy human sustained is actually pretty cheap (food, water, shelter). A business does not have human needs, it might need oil, metal, ores, chemicals, etc. to do its job. If the prices of those things spike dramatically, your 3-6 month emergency fund could quickly turn into 1-3 months.

Have prices spiked dramatically? The only variable costs to an airline that I can think of are fuel and parts. With worldwide travel demand evaporating, it seems unlikely to me that either of those things are in short supply.

Oil and airline parts may not necessarily go down in price for every emergency. Forcing companies to keep 3-6 months cash for Covid-19 is too little too late. This would be regulation that has to consider many more emergencies.

You could take all of the profit (including buybacks) American made in the last 6 years and that would still be only enough to fund 4 months of operations. I'm against the bailouts because I think we shouldn't make some investments riskless and subsidized , but to blame airlines for not having 6 months of reserve is just weird.

Buybacks are just a scapegoat when in reality an airline parking 14b$ in case of a black swan event would have made absolutely no financial sense especially since shareholders expect some reward for their risks. Imagine if they did that and ended up with just 4 more months of operation at incredible losses. Stocks would probably have plummeted to similar levels anyways and the shareholders would've ended up with no returns at all.

The reality of the industry is that they had to keep prices super low to satisfy consumers expecting always cheaper flight and at the same time satisfy shareholders who are aware of how cyclical the industry is and require a big RoI to justify their risk. That requires a lot of leverage, high efficiency and a low margin of error in their cashflow predictions.

Not to mention the only way to park $14bn would have been to diversify it across an investment portfolio that could be liquidised easily. That cash would also have seen some damage during this time too.

>Buybacks are just a scapegoat when in reality an airline parking 14b$ in case of a black swan event would have made absolutely no financial sense especially since shareholders expect some reward for their risks. Imagine if they did that and ended up with just 4 more months of operation at incredible losses. Stocks would probably have plummeted to similar levels anyways and the shareholders would've ended up with no returns at all.

If they are the only airliner left standing after four months I think the outlook would be quite different. That only works if the government doesn't bail out their competitors leaving them at a disadvantage.

Maybe that will give you better chances of survival but think about it from an airlines perspective. Is it rational to basically ignore shareholders to hold reserves in case of a black swan that would cut your entire cashflow in the hope of surviving a few months at best?

You're basically giving no return on investment to your shareholders, which could have made use of the money in a more productive way than just parking it in cash/equivalents, so that they get the privilege of seeing that money burnt down at a phenomenal rate if that improbable worst case scenario happens? And all of that while investing in a riskier industry?

Again, the investors took a risk and should not be bailed out. But the buybacks and the lack of reserves make sense. You can't take a risk without expectation of return only to get an extremely risky solution (that may or may not save half of your equity value) to an improbable event.

> If the prices of those things spike dramatically,

Futures contracts have existed for a very long time for exactly this reason. [0] It's up to management to use them responsibly. For an example from the last crisis, Ford managed to avoid needing a bailout while GM and Chrysler took part in one. Management makes a difference. I'd want to steer out of a situation where management uses government to finance its carelessness.

[0] https://en.wikipedia.org/wiki/Futures_contract

>It's up to management to use them responsibly.

There's the rub, by mandating a cash reserve, does that necessarily include required futures on critical operating items? Who decides what's critical? What happens if they don't follow those rules?

GM and Chrysler are still around. I don't know how well they've done compared to Ford, but until the bailouts stop coming or the laws don't change, there may not be a reason to do this.

Pretty sure GM bought Chrysler

Fiat bought Chysler.

We need a way to include "black swan readiness" in corporate finance / valuation. Historically, it's not something investors have cared about, so corporations haven't done it.

It is 2 black swans this time, coronavirus and gas prices, but yeah, you are right

Low gas prices would be good for airlines normally, because gas prices are a large portion of their operating costs.

+1 to this. I think it was 4 years back, the oil prices dropped hard and the airlines bought futures quantities in large supply to hedge for future needs. It was a smart strategy

...then they sold the futures when prices went back up to make a quick, tidy profit.

Except Southwest -- which had the other airlines whining because they had an "unfair advantage" with their locked-in lower prices.

Wow, do you have a source for that last part?

Oil prices have cratered, that should be a positive for the transportation industry.

Yes, but demand is also down due to isolation/quarantine

Yes, but that's still only one event.

One is good (gas prices), but I'm skeptical that the other is even a black swan. Global pandemics have happened before (Spanish Flu), and airplanes have been grounded for a week in recent history followed by weak demand (9/11), but last I checked, planes have still been flying.

>We need a way to include "black swan readiness"

Black Swans cannot be prepared for, that's what makes them Black Swans.

One of the principles is:

The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).

How do you establish an emergency fund for something with a non-computible probability? How much money should you put aside for it?

6 months of operating expenses would be a good start. Apparently they only put aside a few weeks worth.

That would be over $20 billion for a company like Delta. That's a decade of free cashflow just saved. No reinvestment in the business, no return to shareholders, none of that. Just saving every dollar for a decade.

I think a lot of people just don't understand the math here.

There are dozens of financial instruments they could have used to hedge their position without having to save decades of cashflow. That's what those instruments are ostensibly for. At the scale of companies like airlines that have a history of bailouts, the OTC markets offer plenty of options (no pun intended) with premiums a tiny fraction of $20 billion.

They can hedge fuel and they can hedge labor costs through contract, but no industry could realistically survive an 80-90% reduction in revenue.

Lots of businesses could survive an 80-90% reduction in revenue for an extended period if they shut down 80-99% of their operations.

It's not like travel demand won't come back.

But they still have to pay to park those planes, continue to pay lease payments, continue to pay maintenance on those planes, continue to pay for landing and gate spots at all the airports they serve globablly... essentially the only costs that go away are labor that they've put on unpaid furlough, and fuel costs, which if they've hedged, they're essentially paying for anyway.

Airlines aren't an SaaS business where you just scale down AWS and youre good.

They can collect interest on their rainy day endowments. Nonprofits do it all the time.

10 years yield is not much right now. They won't be beating inflation. And if they were in stocks they'd be eating a 25-50% haircut when they needed the money

they need to pay the bonuses from something!

It's not clear what "black swan readiness" means.

In terms of a company having a healthy balance sheet, there are many well known metrics that can signal that a company is at higher risk of bankruptcy.

E.g. acid test, interest coverage ratio, Altman z score: https://en.m.wikipedia.org/wiki/Altman_Z-score

The Altman Z score was defined over 50 years ago and can be approximately competed using the standard accounting data that public corporations are required to report to investors.

I'll push back a bit: there are ways of measuring/ estimating some of these. If you read an old school book on value investment, some of these ideas may be covered. Why not use them when considering how to invest wealth?

I don’t see a problem with the loans. They get paid back with interest. I see no problem loaning the airlines money.

Grants, however, is something else entirely. If they are in so much trouble they need a literal bailout then they should be nationalized. They can be re-privatized later, after a decade of drama and red tape, but nationalization should be the consequence that’s faced until bad actors can become responsible.

> I see no problem loaning the airlines money.

A cynic would say if the airlines want market-rate loans, they can get them from the market.

If the airlines want subsidised loans, that's just a grant with a stick-on moustache.

This can be listed among the moral hazards of bailouts. These companies know that when a downturn occurs, the government or the Fed will bail them out.

Instead of a bailout, lets do a stock offering, with the government as the purchaser. This way, the government can sell it's shares later on and get the public's money back.

This is close to how the TARP bailout (2008) worked and the government did get the public's money back. From the banks, the Treasury got about a 21% profit (https://www.thebalance.com/tarp-bailout-program-3305895)

One thing to remember is that the current share price of companies is based on the value that buyers and sellers are agreeing to. There are many more people who own shares and are unwilling to sell at the current price. When someone talks about Boeing costing $51B, that doesn't take into consideration that many people holding Boeing shares wouldn't sell at that price. That's the price you can buy at if you're looking to buy 1 share. If you're looking to buy all the shares (or a substantial portion), there probably aren't enough sellers at that price.

The point of that is to note that companies will reject money that comes with terms or pricing that is too bad. If you offered to give Boeing $60B in exchange for 100% of the company, shareholders would reject it. Might as well take your chances that the company will survive. Fire all employees, eliminate all payroll for a year, and then try and re-start in 2021. If you ask too much, investors have other options.

For the government, these other options are really bad for the economy - and ultimately for government revenue. We don't want a situation like that if there's a way to avoid it. If the government lends $10B to a company at 0% interest and it means that the company keeps paying $5B per year in taxes instead of filing for bankruptcy and paying $0 in taxes, that's still important even though the government is getting no interest. One thing that people don't realize is that the government basically already owns parts of companies - the government gets a percentage of the profits. If those profits go down, so does government revenue.

The TARP bailout was smart. Dividends to the government were between 5% and 9% interest along with warrants for shares. Usually banks bought the warrants back from the government rather than the government converting them into shares and selling the shares, but it's essentially the same as what you're talking about (without throwing the market into chaos as the government tries to find buyers for hundreds of billions in shares).

Could the government have gotten more? Maybe. Berkshire Hathaway got a couple deals at a slightly higher interest rate before the government started stepping in. However, some banks wanted to reject the government's help because it was expensive - they thought they had enough reserves to weather the storm without help.

It's bad that the public thinks of these "bailouts" as free money. They aren't free money. It makes a lot of sense for the government to be a lender in a time of crisis since they're the only lender that can print money. If the government lends with an appropriate eye to risk and sets reasonable interest rates and secures those loans against the companies, it's a really good thing for the economy.

Personally, I think that the government should also be working on the individual side as well. In some ways, they are. Unemployment usually covers instances where you're temporarily unemployed for things like this. I'd go even further and say that the government should save money for rainy days and give people grants (rather than loans) to keep everything normal. Bailout loans wouldn't help a lot of people who wouldn't be able to pay back an 8% loan easily. However, grants would go a long way to making sure that people were taken care of.

If people start spending less money, it has cascading effect. Businesses employ X number of people assuming a certain number of customers. If their customers go down by 10%, they probably need 10% fewer employees. Then those laid off employees start spending less causing other businesses to lay off unneeded employees. Then those new laid off employees spend less causing... and so on.

We want the country to go through this crisis as smoothly as possible. The government should lend money to companies on terms that are good for the government and good enough for companies that they'll take it. We don't want companies thinking that they should take their chances or shut down for extended periods of time beyond what is necessary for public health. We don't want a huge drop off in government revenue if companies shut down more than is necessary for public health.

I largely agree with your thesis here, but I wanted to point out that the taxpayer has a right to be cranky when executives receive large compensation packages during bailouts.

These compensation packages are a small part of the bailout money, and it's unfortunate that the people with the most knowledge of the company's position and needs are the ones who put it there. They're not fungible and there's no good way to say, "Fix this for zero salary before we fire you and start looking to claw back some of your prior bonuses."

Most taxpayers do have little idea what's going on, but they're at least on point about the injustice of that. Preventing that involves rather substantial changes, and doing them after the last crisis and before the next one -- exactly when politicians, some voters, and business all start to get cranky about burdensome regulation. Voters who said "I told you so" have some justification and a right to be pissed.

> If you offered to give Boeing $60B in exchange for 100% of the company, shareholders would reject it. Might as well take your chances that the company will survive. Fire all employees, eliminate all payroll for a year, and then try and re-start in 2021. If you ask too much, investors have other options.

Well then, the investors or government should just wait for the chapter 7 or chapter 11 filing if an offer is rejected. If one never comes, it was rightly rejected; and if one does - well, the party with the cash gets to set the terms.

This was a compelling read on the buyback issue from earlier this year: https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...

> The appropriate course of action for distressed companies that have engaged in share buybacks is that they should issue new shares to raise capital. If they can’t raise enough capital through share issuance, they should enter Chapter 11 bankruptcy and be restructured. If they cannot pull through a restructuring, they should go out of business. That’s how capitalism works.

If Uncle Sam stopped bailing out corporations, I wonder how differently they would do business.

The excuse that always seems to endlessly get rolled out is that these companies are 'too big to fail'. So they continuously get bailed in the US and the UK too whether it be banks or airlines.

Too big to fail should mean public utility. If we can't live without it, why is it privately owned?

It should at least mean additional regulations.

If you're getting a public bailout then the public has a greater interest in regulating how you conduct your business.

Greater interest?

By very definition the public owns the business, because they paid to keep it afloat. Absolutely the company should be publicly owned.

It's telling that Spirit Airlines (among the least likely airlines to be bailed out) has 3x the cash on hand as American Airlines.

Calls on Spirit, Puts on American ftw

Through this unprecedented money printing, the Fed is devaluing not only the dollar and all pegged fiat currencies but also all institutions which are centered around it. It's not surprising then to see cryptocurrencies outperforming stocks over the past couple of days.

The Fed's QE program back in 2008 was one of the main incentives which drove the creation of Bitcoin and its subsequent adoption.

The Fed has a real problem now. People are beginning to realize that not everyone has to work as hard to get the same amount of money, but the truth is even worse than that; not everyone has to deliver the same amount of value to society in order to get the same amount of money... The root of the problem is the Fed and the mechanism by which this newly printed money enters the economy. It's not a fair process.

The real intrinsic value behind fiat money is based solely on its ability to:

- Deceive people into thinking that it has value backed by real economic contributions.

- Forcibly coherse people into accepting its nominal value even if some of those people doubt it.

In other words, the intrinsic value of fiat is rooted in lies and manipulation. Smoke and mirrors. Then it follows logically that every institution which derive their value from it is also rooted in those same lies and manipulations.

People want to get all pissy about this, and come up with all kinds of contrived punishments for the offenders. I’ll grant that this is an awful looking situation, but the most cost effective thing we could do is just learn the damn lesson finally. Don’t give companies money in boom times, keep it around for when a true unexpected disaster strikes. It literally requires no work, no new bills, just a memory that lasts a little bit and some introspection.

The problem as I understand it is that those large companies hire thousands of skilled workers, and are often the only source of employment in some regions. If they go under, they bring a significant segment of the population with them.

And how is that different from thousands of small businesses who went under with nary a peep? Of all of the others who put their eggs in one flimsy rotten basket?

The way I see it too big to fail is always just special pleading furiously rationalizing from being spoiled by status. There is no logical reason to give them special treatment in spite of all of the stupid human hierarchy tricks. I see it no different than demanding that a rich kid who killed someone driving drunk be treated as "making a mistake" and anyone else as "proven an irredemable waste of human life".

The only sane and just thing is equal treatment. Either everyone can get bailouts or nobody can. The favor for a few approach doesn't work morally or practically - just producing more spoiled nitwits who can and should be replaced. There are no redeeming circumstances or grand sacrifices on their part to justify special treatment.

It's remarkable that the same parties who denounce any government participation in markets will be using that government to decide which companies to prop up. No doubt with lobbyist's advice.

The irony is there is a way to do this _and_ use a little market force: dump the money on to consumers and let them rather than lobbyists decide what is worth keeping afloat. I imagine in that case, cruise lines would be lower priority.

If they hadn't used stock buybacks, they would have issued dividends, and we would be in the same situation.

Buybacks are worse because so much of it has not been financed with cash, but cheap debt from issuing corporate bonds which are now at risk of default.

It’s weird that paying out dividends from borrowed money is not ok but doing buybacks is.

So then the real problem is the debt, most likely that US corporate debt is given special tax treatment.

Borrowing for tax purposes is sort of a perpetuated myth. Firms in zero tax nations have debt, and firms in the US prior to corporate taxes had debt. Debt is first a foremost a way of financing corporate activities.

This seems like one of the core problems to me.

I don't necessarily think that companies should be banned from ever doing stack buybacks when they have sufficient cash (for some definition of sufficient), but allowing companies to take on debt to do stock buybacks seems asinine, both on the part of the company doing the buyback, and the creditor lending them the money to do it.

Any company doing so should be the last one to receive a public bailout; so maybe regulations should be targeted to industries deemed too critical to fail, such as airlines.

Except for all those companies like Apple and Google and Microsoft and Berkshire Hathaway that are sitting on $100B+ cash reserves each [1].

The idea a business might be prepared to weather cyclical downturns doesn't seem that unusual to me? Seems more like competent management?

[1] https://www.cnbc.com/2019/11/07/microsoft-apple-and-alphabet...

Our leaders, both business and government, find themselves entrapped in thinking about economics in terms of money. Soon we will be thinking about it in terms of productivity: how do we make sure enough food is made and distributed? How do we make sure we have enough medical supplies? We got away without thinking about productive capacity, instead focusing on money.

We will lose more people to this disease than any war since WW2, based on the statistics presented by people I trust. If we don't learn about wartime economics and fast, then the number will be higher than it needs to be.

Unfortunately, like I said, the people in charge are trapped in a box, believing that the systems that awarded them with great wealth must be the best possible system. The side-effect of this will be more death than necessary.

There is a reason why money was used for eons - planned economies failed horribly and the logistics of it likewise would utterly break. I accept that it is theoretically possible for a better system to be come up with but in practice we have been kept waiting. Even when there was a nominal alternative in the USSR their "economics" were nonsense backed by ideology even by the standards of questionable economics.

I would be interested in seeing theoretical and hypothetical alternative system models but sadly what I have come across is more like "alternative" in the alternative medicine sense. Sellinf questionable cures and railing against "big pharma" rhetoric and attacks and little to none on rigorous models or experimentalism to actually build anything.

Surely they can just start selling those shares? that's where their current investments are.

Of course they likely wont get as much as they paid for them, but that's just a poor investment decision on their part, not something the government should bail out

This crisis is exposing that our modern economy has a very thin layer of resilience. I can't help but think of Climate Change as the next obvious thing that we should have seen coming, but have not adequately taken seriously.

When companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.

That’s why banks have regulatory capital requirements, which have gone up since ‘08. There are no such regs for non financial firms sadly.

Buybacks signify that the company's management can't find any better use for their money.

It signifies that the company sees no value in investing that money in developing more business for the company in the future, but wants to spend that important money on ephemeral share prices instead.

Companies that only plan for today instead of planning for their own greater futures deserve to go under.

In my opinion, we need to support them with a bailout because we can't not have functioning airlines or banks.

But we should do by taking a stake in the company by having them issue stock. This would punish shareholders (through dilution) while at the same time not bankrupting the companies.

The stakes in the company would be tied to a timeframe and then sold by the government within a time window.

If they want money they can always issue stock. Just like how they bought it up to artificially inflate it in the first place.

Good point - although I wonder - can they do that in the timeframe they need the money on (I have no idea on how long it takes to issue stock)?

I'm fairly certain they can do it immediately if they want, the reason they don't is it will cause their stock price to fall. Why spend your own money when you can just wait for the government to bail you out?

For those who want to understand buybacks, please read the first 7 pages of [1].

This is the leverage ratchet effect in action.

[1] https://www.gsb.stanford.edu/faculty-research/working-papers...

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

I want to say just let them fail, but that would make competition even lower in already low-competition industries. If there are bailouts, it should be in a form that spreads out the losses over time, so these companies can still operate short-term but still get punished for the mis-management.

Failing doesn't mean that the airline disappears. All of the planes and personnel don't just evaporate. Failing should mean replacing the current equity holders with the current bondholders and continuing to operate.

Honest question here.

How would they continue to operate post-bankruptcy if they cannot pay their employees? Or why would they?

To start with, they don't pay a lot of their (former) employees. Global travel demand is going to take a long time to recover and a lot of furloughs are going to happen across the industry in any case. Second, the new company probably takes on some amount of new debt. If they can't find it in the private market then there's nothing wrong with the government stepping in. The two keys are that the government steps in after the current equity holders are wiped out completely, and that the government support comes in the form of loans, not grants.

I found a book which very well explains the ideology behind what has been happening over the last 11 years. It is called Capitalism 4.0 by Anatole Kaletsky.

If Capitalism 4.0 is really capitalism I would leave to everyone's discretion. It is about to end in an really really ugly way though.

P.S. The book distinguishes between american 'democratic capitalism' and chinese state-run capitalism, but I personally don't see how the democratic one based on money printing[1; the stock market growing 20% a year with GDP only 2%] is any different or capitalism in any way.

1. https://www.businessinsider.com/qe-correlations-between-stoc...

Trust me, I am the LAST person to advocate corporate socialism. But I think this deserves an honest conversation. I really wonder what would happen if we didn't save the airlines. What would happen if we let an entire industry collapse under the weight of a natural disaster? (That's not a rhetorical question, I'm honestly asking). Wouldn't that cause a domino effect crashing through the whole system?

Don't get me wrong - I agree that it's terrible to have to continue bailing out greedy corporations. But is this the time to rebuild the system? I'm not so sure we can handle that on top of everything else going on.

We should attach all kinds of strings to this bailout, and then hold our representatives responsible for fixing this mess. But I'm not sure letting the whole thing collapse is the reasonable thing to do.

> But is this the time to rebuild the system?

Thing is, though, whenever this conversation is relevant (ie when the airlines need a bailout because of recession, whatever), you can always dodge the issue by saying "but we have too much going on right now for this".

> We should attach all kinds of strings to this bailout

Definitely. But normally what happens is that corporate lawyers are much smarter and more devious than government lawyers with the benefit of huge leverage and these strings get waived, ignored, litigated for years, etc.

“corporate lawyers are much smarter ”

They aren’t. They just have more money to throw around. Anybody who really (!) wants to see knows what’s going on.

>you can always dodge the issue by saying "but we have too much going on right now for this".

I agree with this, which is why I'm looking for an honest conversation. Maybe THIS IS THE TIME to push back. I fully support direct political action in response to the bail outs, if "we the people" decide enough is enough. I just think we should do so thoughtfully, not emotionally.

>these strings get waived, ignored, litigated for years, etc.

Unfortunately we also allow that by being swept up by the next big emotional moment, and once we've been redirected to something else, the strings magically disappear.

>I really wonder what would happen if we didn't save the airlines.

I don't think the argument is about whether we should bail the airlines out; it's about how we should bail them out.

Handing them $60B and saying, "Go about your business!" is not going to fly (pun). If the taxpayers are going to provide the capital, they should get equity. It's that easy.

Would the government be able to run an airline? I don't know. Could they be any worse than current management?

> Could they be any worse than current management?

Pre TSA nationalized security checkpoints it was actually faster to fly from Phoenix to Las Vegas...

First of all, we're clearly going to bail them out, but my argument IS about whether we should. I'm an "all possible options" kind of guy. That is, no matter how extreme, I want to discuss and rule out as many options as I can on my way to making a decision. It's how I frame things in my brain when I'm deciding.

Secondly, I strongly agree with the main point you're making - that "we the people" should get equity in exchange for the bail out. When these companies bounce back in a few years we should all get a special refund the year we sell the equity back to industry. However, unless we're buying some HUGE stake, I don't think we should exercise the option of taking over the management of these businesses.

>collapse under the weight of a natural disaster

This is flawed reasoning. They're not collapsing because of the natural disaster, they're collapsing because of a financial disaster of their own making.

Our points are NOT mutually exclusive. The system is flawed, and always buckles under the pressure of a disaster. Yes, the flaws made it weaker and it is therefore buckling hard. But it's pretty clear that people are scared, and the market reflects that. If you're in doubt, take a quick look at the VIX and other volatility indicators.

EDIT: "Our points are NOT mutually exclusive" changed to add "NOT"

Boeing LOL.

This behavior is being systematically reinforced more and more with every recession. Is there anyone outside of the mainstream of the two US parties who thinks that modern capitalism is desirable or sustainable?

> This behavior is being systematically reinforced more and more with every recession.

Not surprising, given that employment is going ever more and more centralized. What has been, for example, two dozen airlines is now concentrated to four airlines. Mom-and-pop food stores in every village? Mostly gone, replaced by huge supermarkets. Software/startups? Picked up by the megacorps. Regional phone/internet carriers? Same thing. Banks? Same thing, especially after the fire sale following 2008 where bigger banks bought off the skeletons of smaller collapsed ones.

The ultimate advantage of modern capitalism is that it benefits from simple scaling to outright monopolic domination (where scale effects are fully exploitable). But on the other hand, this creates situations that are vulnerable to either exploitation of customers (e.g. when Uber has destroyed all local taxicabs, then it can jack up prices as it wants as they're the sole remaining provider and people need on demand transportation), exploitation of upstream vendors (e.g. Walmart with its scale can dictate vendors absolutely ridiculous terms) or to "too big to fail" status (most famous: banks, but just imagine Walmart going out of business, that would be 700k (!) people out of a job overnight plus MANY MANY MANY regions without a place to shop food).

This is why originally there was anti-trust regulation established, but it fell out of use for a couple decades now. No company should be so big that it vanishing can threaten national security (Boeing!), or hundreds of thousands of lost jobs (Walmart, McDonalds, ...), or destitute entire regions overnight, or the national food supply.

Exactly. This is regulatory failure. The FTC has failed us. We've accepted it because of ever increasing retirement returns but this is the cost.

An unfortunate side effect of a purely capital based pension system - additionally, with more and more investment capital coming from pension funds, it's going to be an interesting question how the funds managers govern the companies they've invested in - will they be "silent" participants that do not vote, or will they behave as activists? And what will happen in the latter case if the interests between the funds managers (demanding profits above e.g. environment protection or social/wage responsibility) run against the interest of the future pensioners investing in the funds?

Exactly which state pension funds are not evaporating at this moment?

Germany. Our pensions are on a rolling system - meaning that the current worker generation pays the pensions of the pension generation (plus a bit extra cash from taxes).

Downside: you need a healthy young population for such a system to be sustainable, and a combination of various factors making it harder for young parents to start families (exploding rents linked with wage depression, job insecurity) and utter xenophobia means that it will have problems in the next 20-30 years if something isn't done now.

government bailouts are not capitalism

True, but now you are in the No True Scotsman weeds.

Government bailouts have been happening regularly for most of our lifetimes. We are incessantly told the US is a Capitalist country. So in the minds of the average citizen, either bailouts are part of the capitalist system, or the US has never been capitalist.

We're going to see "Modern Capitalism" and "Late Stage Capitalism" thrown around with a lot more frequency as corporations exert their power and we struggle to define what we are seeing.

If we had more consciousness and weren't so confused by 50 years of Cold War brain rot we would just call our age Late Stage Plutocracy or something.

The thing is that this is inevitable with capitalism. Money will always end up influencing government power, leading to a plutocracy who make their money through anti-competitive rent-seeking behavior instead of innovation. That's precisely what's happened the world over, if you haven't noticed.

The pure Platonic ideal of capitalism or even anything approximating it is impossible in practice. It has never happened, and it will never happen. It is just as utopian and pie-in-the-sky as "from each according to their ability, and to each according to their need."

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