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Comment by nabla9 | Hacker News Reader

.. or dividends as the article says.

Devil is in the details. Maybe French government has good conditions for the aid, but the article is not giving details.

Aid should be exchangeable debt for public companies. No dividends and buybacks. No executive bonuses or options until the debt is paid full. After (5-7) years the remaining debt is exchanged into company stocks in a rate that leaves the government in the neutral position or with small profit. I think it would be OK to give compensation package to executives if it's tied to the profit that the government makes from the aid.

The aid should be available to everyone with same conditions. Not doing so punishes companies with good finances.

Having right incentives as a whole is the issue, not some implementation details.

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As others have said, make it convertible debt. It converts to voting shares. I actually like these conditions. If you need the money, you shouldn't be paying dividends or doing buybacks anyway. This real issue is that we need to ban C-suite and BOD compensation from using anything stock related. Then this perverse incentive for buybacks and quarterly numbers fades and people start focusing on building healthy companies.

Companies (and their directors) care about the share price because their owners care about the share price, since they are the shareholders.

If the directors and bosses stopped caring about the share price, the shareholders would be more likely to kick them out and recruit some more co-operative people.

If you want companies to care less about share prices, you'll have to structure companies differently.

Of course, companies will always care about the stock price. And that's a good thing. There should be strong limits on the way to increase that price.

Increasing the value of the company? Awesome, go ahead. That's what the bailout is supposed to be for.

Buying back stock? No. No value is created.

Sure, but changing C-suite compensation from being stock-based won't change the dynamic around buybacks because the buybacks are pushed by the owners not just the management.

This whole issue is overblown. Employees, retirees, and generic Wall Street investors have a preference for buybacks because it leaves equity holders with the ability to put their capital to good use. I don’t want GE to invest in vanity projects if they don’t have good ideas. Buy back shares, return capital to shareholders, and let shareholders invest in something else.

There two sides to a buyback transaction, and saying it creates no value is BS. Someone is SELLING.

If the issue is just using debt to buy equity, then there is some discussion to be had, but even then, the result looks more like a need for a stress test/capital buffer rather than a ban. Alternately, just modify the tax treatment of buybacks to look exactly the same as dividends.

What prevents shareholders from just selling their shares? Why does the company have to be the buyer?

A company generating demand for its own stock does not create value, it creates liquidity. I hope you understand the difference.

As for the solution, I think we're on the same page. Government debt should not be used for creating liquidity for shareholders holding a shitty asset.

Nothing prevents shareholders from selling shares. However, if a company does nothing - e.g. no growth, no buybacks, the future value of their stock will decline continually. through buybacks, they can hold those share prices steady, at least. This gives shareholders liquidity as you suggest - shareholders selling without buybacks means that they will push the price down.

There's a line of thinking which says either a) buy all your equity and go private when the innovation runs out, or b) issue bigger and bigger dividends from FCF and then eventually go out with a bang. IMO, those are strategies that should be specific to a business model. E.g. a gas pipeline may love to pay out dividends since the business model is quite steady. A big electronics manufacturer might want to buy back its shares in the hope that it can eventually go private to restructure.

my point is, the mechanic of a buyback is not inherently evil, and does provide value. I agree that the government should not be creating that liquidity. Though, in reality I don't have a specific problem with letting the government issue convertible debt if companies want a long-term counterparty. the irony is that buybacks are often seen as short-termist, but bailouts should have a long-term lens.

The value of the stock going down is the correct behavior if shareholders want to liquidate their holdings. For whatever reason.

Dividends seem also like the correct way to distribute profits back to shareholders. Buybacks on the other hand, I agree, are extremely shortsighted. If not used to go private and restructure the company, buybacks are a tool to provide liquidity to the more well-informed shareholders at the expense of other shareholders. Any sort of public debt financing of buybacks should be completely off the table.

Convertible debt seems like a good structure. If companies want to take the chance on the debt and they fail, the company would be effectively nationalized. In any case, a condition of any such note should be to prevent dividends and buy-backs. Any reasonable investor would probably include such terms.

Agree with you!

And yet, if people want to liquidate it does drive the price down, but, the market is about price discovery and valuation - the company may have different beliefs about its value and different preferences, hence buybacks.

> Buy back shares, return capital to shareholders, and let shareholders invest in something else.

Or GE could invest in increasing wages, particularly for the lowest-paid workers. Return capital to the actual producers of the capital.

This is important, especially for those workers who do not qualify for a 401k.

There is an interesting problem where if workers get a 401k or IRA, then buybacks probably help them by driving asset appreciation in a tax free investment vehicle. BUT, if you don't get that, then appreciating equities doesn't do you any good.

In general, the answer is probably a moderate amount of all proposals. Increasing wages is certainly something that companies should be doing.

Finally, some portions of buybacks are used for equity awards to employees, so it is possible that buybacks might end up as tax-privileged payments to workers, albeit not to the ones who are most dependent on wages.

That'd permanently increase the expenses and reduce the dividends and stock value?

(So maybe therefore the CEOs won't increase the wages unless people start resigning?)

Yeah, it's called investing in your employees. It is growth, just not for shareholders. Shareholders do not have a divine right to all the benefits a company can produce.

Stocks/dividends/buybacks are a system designed to capture all profits. No surprise and nothing really wrong there, but what annoys me is that shareholders like to pretend that __unless all profit goes into dividends/buybacks, it's a waste and a sign that the company is making poor decisions__, which is not the case. It does not take into account the lives of employees beyond the cost to company. That is also a perfectly reasonable investment for a company to make and, in fact, is one that it has a duty to invest in.

Stock value is reduced because petty shareholders refuse to acknowledge that workers deserve growth from company profit just the same as they do.

Paying above market is not an "investment," and redistribution is not GE's job. Just collect taxes on those profits and let the government cut whatever checks it feels need to be cut.

Or classify buybacks as a prosecutable form of market manipulation like they were before the rule changes in the 80's that enabled this flavor of unnecessary financial engineering.

Buybacks are just dividends but more flexible for the company. It boosts stock price because it tells investors that the share is more than a speculative vehicle.

Returning value to shareholders isn't nefarious.

Using almost all of your available cash flow to do stock buybacks is, by my understanding, very much against the long term health of the company, in order to inflate stock figures in a way that disproportionately helps the people making that decision. See the airline industry.

It isn't necessarily nefarious but can be. Recent events have shown quite a bit of nefarious activity surrounding this practice which is why there is a call for increased regulation.

Any business decision can be nefarious in some context when it's a bad one. At the same time as recent events may call certain buybacks into question, historical events tell a different story.

For example a common argument to ban buybacks is that they were illegal prior to 1982. We also had no good place to park savings before 1982, where at the same time we had seen enormous inflation the stock markets had been on steady decline since the mid 1960s. People weren't just losing money due to inflation, they had fewer options about where to put it reliably.

And when it comes to regulation I don't know what the best way to do it is other than letting companies that made bad buybacks die, or bail them out by diluting shareholders in some kind of bankruptcy proceeding.

> I think it would be OK to give compensation package to executives if it's tied to the profit that the government makes from the aid.

That still has the perverse incentive of gambling with other people’s money.

Presumably companies with strong finances and other options for financing would not want to take on shareholder-unfriendly terms like a multi-year ban on paying dividends or doing buybacks.

No - but then they don't need the aid, so it's fine if they don't take it.

Presumably they could refinance the debt by issuing new debt to work around the dividend and buyback rules.

All I can think of is that it sucks to be a pensioner or pension fund manager. Going to be really interesting to see the second quarter consequences of the "buy backs and dividends are evil" movement.

Monstly agree - but dividends that go to every owner aren't unfair per se, a cap on dividends would be very good, though. As for options, depending on the company they can be a hiring incentive, and not being able to grant any may restrict the company going forward - has to be evaluated carefully.

>but dividends that go to every owner aren't unfair per se

If these companies are in such dire straits they need the infusion of cash provided by a government bailout, where did the money to pay dividends come from? Shouldn't they use that money to pay employees and fund their operations?

I've heard arguments for dividends/buybacks in the scenario where the government does a terrible job of picking companies that actually need a bailout and ends up throwing money at a healthy company, in which case the only way for that money to reach decent investment opportunities is for the company to pass on the money to its own investors in the form of buybacks and what not. I don't really agree with the concept since bailouts are supposed to be for keeping big domestic employers alive and not some 10 person juicero startup an ocean away but the money does eventually end up funding someone's job so it's not completely useless.

This is just making a stronger argument for not bailing out corporations at all and giving out more of the money by sending checks to individuals.

If companies need money they can sell shares, and then people have more money to buy the shares with. If that's what they want. If everybody has the money and nobody thinks a particular company is worth saving, why are we saving it?

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