Mark Cuban says bailed out companies should never be allowed to buy back stocks

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

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

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

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

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

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

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

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

We can call it Corporate Social Security.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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