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Step 1: Make money for 10 years. Step 2: Spend 96% of that money on stock buybacks. Step 3: Encounter difficulty Step 4: Ask for $50 Billion in grants and loans
by neaden 7y ago
Step 1: Make money for 10 years.
Step 2: Spend 96% of that money on stock buybacks.
Step 3: Encounter difficulty
Step 4: Ask for $50 Billion in grants and loans so you don't go broke.
Imagine if you or I tried to pull something like this.
- spking 7y agoRight, you and I get to pay the interest on all those grants and bailouts for decades to come. I think it's called "privatized upside, socialized downside".
- salawat 7y agoNote that the stock buybacks were favored because they were a more tax favorable way of returning money to investors than via dividends as I understand it; and if the corporation did build up a rainy day fund, shareholders may have justifiably been upset at the lack of dividend. In short, it may be more complicated than it necessarily seems at first blush; then again, what I just typed is a cargo cult parrot of the current business zeitgeist. I will admit that I too ascribe to maintaining a rainy day fund as part of responsible operational stewardship given I see the purpose of a corporation to be providing a societal solution first, and generating/disseminating profit second, therefore I favor strategies that result in an operation that can keep chugging along even if something unexpected hits vs an absolute min/max on profit. Then again, I don't have many successful individual business ventures to my name, so... yeah. Take it with a grain of salt. I can definitely tell you a handful of ways not to do it though!
- neaden 7y agoI think the problem comes in when you know you are going to get a bailout if something catastrophic happens. If the Airlines had to pay into a mandatory insurance for this sort of thing it would be different, or if they were just going to be allowed to fail. But the Airlines want the best of both worlds.
- toomuchtodo 7y agoMandatory insurance would've been corporate taxes, with the government stepping in during a crisis.
- neaden 7y agoI was more thinking something like the National Flood Insurance program. Corporate taxes would be similar if the airlines and other bailoutable industries had to pay a higher rate to compensate, but right now they don't.
- toomuchtodo 7y agoWe agree, we're just arguing semantics I think. I'd support the idea of a specific program airlines paid into under a federal office that would then provide relief during catastrophic events.
- cjbenedikt 7y agohttps://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+harvardbusiness+%28HBR.org%29 https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...
- salawat 7y agoNice. >Stock buybacks done as open-market repurchases emerged as a major use of corporate funds in the mid-1980s after the Securities and Exchange Commission adopted Rule 10b-18, which gives corporate executives a safe harbor against stock-price manipulation charges that otherwise might have applied. The 1980's, every damn time. I swear the 80's may as well be called the decade of economic time bomb construction. They are also preaching to the choir with stock buybacks being toxic. The incentives really never seemed to line up as anything approaching good for anybody but someone trying to time the market. It is interesting that the behavior would have previously been classified as market manipulation prior to the 80's rule change.
- chewz 7y agoStock buybucks and dividends are OK. But when company needs money it is up to shareholders, bondholders, credit markets to re-capitalize the company (if they think it makes business sense).
- linuxftw 7y agoThis is exactly why low to zero interest rates are always a terrible idea. It incentivizes reckless borrowing, doing dumb things with the money like buy backs, then when money dries up, we have a major problem. All entirely predictable. All these companies should go bankrupt. No more 0% rates.
- darkarmani 7y ago> shareholders may have justifiably been upset at the lack of dividend. Then they priced their purchase of stock wrong. Maybe they should "un-stock buyback" instead of asking the gov't for money?
- mattkrause 7y agoExactly. You want money from the government? Give 'em (or really, us) shares. American Airlines, if you will. (The GM bailout was done this way and actually worked pretty well, right?)
- Armisael16 7y agoThe airlines bought back ~$12.5B of stock over the last decade[1]. That’ll put a dent in $50B, but wouldn’t nearly cover the current shortfall...