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Comment by lordnacho | Hacker News Reader

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.

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> "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.

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-...

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.

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...

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...

> 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.

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.

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

> 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.

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.

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.

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.).

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.

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.

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.

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.

> 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.

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.

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.

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.

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.

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.

> 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.

Except in airlines there are almost no profits :)

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...

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.

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).

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

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).

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.

> 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.

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