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I used to criticize the big tech companies for stockpiling dozens of billions of dollars instead of investing them into their businesses, but it's only now I ca

by charia 7y ago

I used to criticize the big tech companies for stockpiling dozens of billions of dollars instead of investing them into their businesses, but it's only now I can see why a move like that was wise. If at all possible, businesses, like people, should keep a rainy day fund. I wonder if all the companies that used their money for stock buybacks are kicking themselves in the foot right now.

NotAnEconomist 7y ago
Why would they? They're not going to have to re-issue shares at a lower price; they're going to get bailed out by the taxpayers. The conditions for government money should be: 1. All current debt is converted into shares, erasing payback preferences and on-going payments to creditors. 2. Companies must issue new shares as collateral to the government at current market rate, in exchange for the money. 3. Rather than repayment, the government will sell the shares on the open market in years 2-6 (a 5 year window). 4. All share buybacks at the company are banned for a period of 10 years. It's okay to nationally support critical businesses, but make the shareholders take it in the wallet for their reckless business practices leading up to this. They took a gamble by buying shares instead of saving -- let them take the hit for losing.
- joe_the_user 7y ago
  Yeah, I'm not fan of "the corporations" but the decisions that would made by various corporations to leverage to the hilt came from the overall market conditions rather than individual enterprise decisions. (not that I think much of the parent's idiosyncratic money-scheme but still).
- pdonis 7y ago
  > make the shareholders take it in the wallet for their reckless business practices The problem is that those business practices weren't decided by the shareholders. The shareholders in most cases are mutual funds holding millions of people's retirement savings. Those people had no say in the business decisions made by the companies; they don't even control which individual stocks the mutual funds invest in. Their retirement savings are not what should be taking the hit.
  - jddj 7y ago
    So where is the accountability, then? Does it fall on whatever % of owners who are active investors? Or are they shielded by the fact that there's a mutual fund present who pledges to simply vote with the board on every decision? Doesn't saying that these are people's retirement savings and so structurally should only ever be allowed to go up in value create perverse incentives and remove all of the responsibility from.. everyone involved? Shareholders benefited massively and accumulated huge rewards from the market leveraging up during the borrow-for-buybacks period, and now in a downturn we're throwing our hands up and saying that we can't let those companies face any negative consequences for taking on that risk because nobody was in control? Or some people were in control, but there were also some who weren't? Something is missing here if a company having passive shareholders means it should do well, business-practices-be-damned.
    - pdonis 7y ago
      > So where is the accountability, then? There isn't any real accountability as far as shareholders being able to hold corporate executives and boards of directors accountable. That is a huge breakage in corporate governance that won't be easily fixed. > saying that these are people's retirement savings and so structurally should only ever be allowed to go up in value Who said that? All I said is that, since the shareholders weren't the ones that made the questionable business decisions, they shouldn't be the ones that are shafted because everyone wants a scapegoat. > perverse incentives There are certainly perverse incentives for corporate executives and boards of directors, but they aren't of the form you describe. It's simpler than that: it's just what I said above, that there is no practical way for shareholders to hold them accountable. > Shareholders benefited massively and accumulated huge rewards from the market leveraging up during the borrow-for-buybacks period And now they are taking the hit from the market tanking. My 401k is down quite a bit. > now in a downturn we're throwing our hands up and saying that we can't let those companies face any negative consequences for taking on that risk because nobody was in control? I'm not saying that. I'm just saying that (a) the shareholders weren't the ones that made the bad decisions, and (b) the shareholders are already taking a hit anyway. If you really want the government to Do Something, it should fix the perverse incentives that corporate executives and boards of directors face. Having real criminal penalties for breaches of fiduciary responsibility, and stricter rules for what companies that take any investment from retirement funds can do, would be a good start.
- 8bitsrule 7y ago
  An alternative path: The bailees issue preferred stocks to US taxpayers. In case of failure, the taxpayer collects first. In case of success, they get repaid for their investment.
JMTQp8lwXL 7y ago
It's easier to stockpile billions of dollars when you have no idea what to do with it. The typical business does not have this luxury. Some tech companies are worth more than some country's GDPs. This advice is analogous to a billionaire telling a minimum wage employee to save more.
- edmundsauto 7y ago
  They could have done buybacks instead of cash sitting around.
- thaumasiotes 7y ago
  > Some tech companies are worth more than some country's GDPs. This doesn't mean much. Plenty of people are worth more than some countries' GDPs. Wikipedia's list of countries by GDP goes down to US$42 million.
  - wyre 7y ago
    >This advice is analogous to a billionaire telling a minimum wage employee to save more.
- rumanator 7y ago
  > It's easier to stockpile billions of dollars when you have no idea what to do with it. You are missing the point entirely. A company only stockpiles money if it evaluates all other options, including paying dividends to shareholders, and still decides their best course of action is to not spend it. This is not a decision made passively or by forgetting to make a decision.
  - imtringued 7y ago
    It's hyperbole. "their best course of action is to not spend it." is equivalent to "we have no (better) idea what to do with it"
- bdcravens 7y ago
  Not necessarily at the minimum wage level, but I see a lot of low-income earners with new iPhones or nice cars. Of course corps are operating a different level, but at the end of the day, we all would should try to rid ourselves of debt-mentality.
rjkennedy98 7y ago
you are right that most companies should have a rainy day fund, but tech companies like Apple are way way way past a rainy day fund. Apple is sitting on US treasury department level money.
- mrosett 7y ago
  Each month, the US treasury spends close to 4x (~$370 billion) the stockpile of cash that Apple has accumulated over decades ($100 billion.) It's a whole different level.
- rumanator 7y ago
  I'm not sure you got the point. The argument has nothing to do with the absolute amount of cash an organization amasses. The whole argument is about organizations building up economic reserves that enable them to endure long periods of recession or market downturn or a bad product launch or an earthquake. Some companies might have more cash than most states, but the same argument holds if a fruit vendor stocks up a few thousand euros that enable them to remain in business during a disaster.
- novok 7y ago
  Apple almost died in the 90s, and that organizational trauma persists to this day. That is probably partly one reason why they amassed so much cash, and why they don't pay as well as other SF bigtech companies.
deleted 7y ago
[deleted]
nostromo 7y ago
I agree but I think us folks in tech could be overly confident about our continued employment. Yes, companies have cash, but ad spending has dropped tremendously overnight. https://www.msn.com/en-us/news/other/facebook-twitter-revenue-warnings-point-to-a-sudden-pullback-in-ad-spending/ar-BB11EmLo https://www.msn.com/en-us/news/other/facebook-twitter-revenu... And Apple, well, all of their stores are closed and I highly doubt they're selling a ton of expensive luxury goods right now -- as millions of Americans fear unemployment and a deep recession. Cloud is dependent on large corporate spending, which may be in for a contraction as companies cut back or go under. Startups may find deals harder to land as investors flee to safety. Perhaps we'll look back and see WeWork as peak bubble, and Covid-19 as the impetus for a sever pullback.
- Frost1x 7y ago
  Tech is everywhere so it depends on what industry you're in and how your contributions of tech are funded. With that said, I think were going to see pressure everywhere. As a recent switch to a new employer, I'm concerned, even if our source of revenue currently appears solid.
- Retric 7y ago
  Most companies don’t want to suddenly try to rebuild teams from scratch in 6 months. So generally a furlough is preferred outside of the most generic skills. Giant tech companies are likely more concerned about how long the economic recovery takes and if anything can be done remotely.
- bdcravens 7y ago
  Apple did feel good enough to launch new hardware, which is now available. Seems to me it would have been smarter to wait and feed off the momentum of people wanting to touch the goods immediately after they were announced.
pbourke 7y ago
> I wonder if all the companies that used their money for stock buybacks are kicking themselves in the foot right now. The outside shareholders of these companies: absolutely The executives and board: lol, no
- lotsofpulp 7y ago
  Why is that? Did the executives and board sell their equity for cash prior to the drop in stock prices?
  - pbourke 7y ago
    When presented with the opportunity to either accrue savings, reinvest in the business, or inflate the stock price the executives and boards of these companies chose the latter. This happened to also be a decision that benefited them personally, since the majority of their compensation is in equity. Draw your own conclusions.
mrfusion 7y ago
Just to play devils advocate. Wouldn’t that be a large dead weight loss if every corporation had six months of operating expenses sitting around in low interest accounts? In total it could be as large as half the worlds GDP?
- edoceo 7y ago
  Don't leave it in low interest account? It's likely millions of $$$, so index fund would be a likely storage for a lot of it
  - refurb 7y ago
    Doesn't seem like a good idea to keep your rainy day fund in an index. When things go to crap, you're going to take a huge hit before you can turn it into cash.
  - Armisael16 7y ago
    If trillions of dollars come out of index funds their value is going to crash, even if nothing else is happening. Large corporations aren’t like people - they can easily move markets on accident.
  - imtringued 7y ago
    You're probably missing a lot of financial basics if you have to ask this. The reason why we have stock buybacks and dividends is so that the investors can allocate the money any way they'd like. Instead of letting Apple sit on $100 billion and hoping they are smart enough to invest the money wisely you instead pay that excess money out and then you are free to invest this money into more apple shares, an index fund, bonds or even use it yourself. If you want to invest into a holding company that does nothing but own other companies then you can choose a company that specializes into that and that company is definitively not Apple. Why is it better for the investor to allocate the money than Apple? Well, it is pretty obvious. Apple has a different risk profile. If it keeps money for a rainy day like covid-19 then the value of the assets it owns must not be correlated with the "disaster" that it is supposed to help you against. An index fund under performs during covid-19 so it's an awful choice for a rainy day fund. Meanwhile investors probably don't care about rainy day funds for day to day phone manufacturing. They might be interested in high risk VC investments that lead to a lot of dead companies but a few unicorns. They might be interested in low risk bonds because they are reaching retirement age. That's information that Apple doesn't have and therefore it will never make a good decision on your behalf.
ryanmercer 7y ago
>I used to criticize the big tech companies for stockpiling dozens of billions of dollars instead of investing them into their businesses, but it's only now I can see why a move like that was wise. I'm a member of the Church of Jesus Christ of Latter-day Saints (Mormon). Around December a 'whistle blower' came forth claiming, with extremely limited information available to him, that the Church had as much as 100 billion dollars invested to the press and the IRS [1]. People crawled out of the woodwork to try and vilify the Church for having a considerable amount of money invested legally via one or more investment funds. Fast forward 3 months, the Church is having to recall missionaries and send them back to their countries of residence, Church buildings are closed worldwide until further notice, the Bishops' Storehouse system that helps local communities via food distribution have added shifts to meet demand for food as unemployment numbers are sky rocketing. We told the world we save for a rainy day, as we were being accused in December this virus was beginning to spread in China. Now here we are in March with a cushion to keep the Church running while tithes likely dip considerably with unemployment rising as well as being able to assist members and non-members as the global economy grinds to a halt. The media and those opposed to the Church were quick to rip us apart in December for having a cushion, now they are nowhere to be found when we're in a position to help ourselves and others with that cushion. Perfect example to go with your comment. [1] https://www.washingtonpost.com/investigations/mormon-church-has-misled-members-on-100-billion-tax-exempt-investment-fund-whistleblower-alleges/2019/12/16/e3619bd2-2004-11ea-86f3-3b5019d451db_story.html https://www.washingtonpost.com/investigations/mormon-church-...

by charia 7y ago

NotAnEconomist 7y ago

Why would they? They're not going to have to re-issue shares at a lower price; they're going to get bailed out by the taxpayers. The conditions for government money should be: 1. All current debt is converted into shares, erasing payback preferences and on-going payments to creditors. 2. Companies must issue new shares as collateral to the government at current market rate, in exchange for the money. 3. Rather than repayment, the government will sell the shares on the open market in years 2-6 (a 5 year window). 4. All share buybacks at the company are banned for a period of 10 years. It's okay to nationally support critical businesses, but make the shareholders take it in the wallet for their reckless business practices leading up to this. They took a gamble by buying shares instead of saving -- let them take the hit for losing.

joe_the_user 7y ago
Yeah, I'm not fan of "the corporations" but the decisions that would made by various corporations to leverage to the hilt came from the overall market conditions rather than individual enterprise decisions. (not that I think much of the parent's idiosyncratic money-scheme but still).
pdonis 7y ago
> make the shareholders take it in the wallet for their reckless business practices The problem is that those business practices weren't decided by the shareholders. The shareholders in most cases are mutual funds holding millions of people's retirement savings. Those people had no say in the business decisions made by the companies; they don't even control which individual stocks the mutual funds invest in. Their retirement savings are not what should be taking the hit.
- jddj 7y ago
  So where is the accountability, then? Does it fall on whatever % of owners who are active investors? Or are they shielded by the fact that there's a mutual fund present who pledges to simply vote with the board on every decision? Doesn't saying that these are people's retirement savings and so structurally should only ever be allowed to go up in value create perverse incentives and remove all of the responsibility from.. everyone involved? Shareholders benefited massively and accumulated huge rewards from the market leveraging up during the borrow-for-buybacks period, and now in a downturn we're throwing our hands up and saying that we can't let those companies face any negative consequences for taking on that risk because nobody was in control? Or some people were in control, but there were also some who weren't? Something is missing here if a company having passive shareholders means it should do well, business-practices-be-damned.
  - pdonis 7y ago
    > So where is the accountability, then? There isn't any real accountability as far as shareholders being able to hold corporate executives and boards of directors accountable. That is a huge breakage in corporate governance that won't be easily fixed. > saying that these are people's retirement savings and so structurally should only ever be allowed to go up in value Who said that? All I said is that, since the shareholders weren't the ones that made the questionable business decisions, they shouldn't be the ones that are shafted because everyone wants a scapegoat. > perverse incentives There are certainly perverse incentives for corporate executives and boards of directors, but they aren't of the form you describe. It's simpler than that: it's just what I said above, that there is no practical way for shareholders to hold them accountable. > Shareholders benefited massively and accumulated huge rewards from the market leveraging up during the borrow-for-buybacks period And now they are taking the hit from the market tanking. My 401k is down quite a bit. > now in a downturn we're throwing our hands up and saying that we can't let those companies face any negative consequences for taking on that risk because nobody was in control? I'm not saying that. I'm just saying that (a) the shareholders weren't the ones that made the bad decisions, and (b) the shareholders are already taking a hit anyway. If you really want the government to Do Something, it should fix the perverse incentives that corporate executives and boards of directors face. Having real criminal penalties for breaches of fiduciary responsibility, and stricter rules for what companies that take any investment from retirement funds can do, would be a good start.
8bitsrule 7y ago
An alternative path: The bailees issue preferred stocks to US taxpayers. In case of failure, the taxpayer collects first. In case of success, they get repaid for their investment.

JMTQp8lwXL 7y ago

It's easier to stockpile billions of dollars when you have no idea what to do with it. The typical business does not have this luxury. Some tech companies are worth more than some country's GDPs. This advice is analogous to a billionaire telling a minimum wage employee to save more.

edmundsauto 7y ago
They could have done buybacks instead of cash sitting around.
thaumasiotes 7y ago
> Some tech companies are worth more than some country's GDPs. This doesn't mean much. Plenty of people are worth more than some countries' GDPs. Wikipedia's list of countries by GDP goes down to US$42 million.
- wyre 7y ago
  >This advice is analogous to a billionaire telling a minimum wage employee to save more.
rumanator 7y ago
> It's easier to stockpile billions of dollars when you have no idea what to do with it. You are missing the point entirely. A company only stockpiles money if it evaluates all other options, including paying dividends to shareholders, and still decides their best course of action is to not spend it. This is not a decision made passively or by forgetting to make a decision.
- imtringued 7y ago
  It's hyperbole. "their best course of action is to not spend it." is equivalent to "we have no (better) idea what to do with it"
bdcravens 7y ago
Not necessarily at the minimum wage level, but I see a lot of low-income earners with new iPhones or nice cars. Of course corps are operating a different level, but at the end of the day, we all would should try to rid ourselves of debt-mentality.

rjkennedy98 7y ago

you are right that most companies should have a rainy day fund, but tech companies like Apple are way way way past a rainy day fund. Apple is sitting on US treasury department level money.

mrosett 7y ago
Each month, the US treasury spends close to 4x (~$370 billion) the stockpile of cash that Apple has accumulated over decades ($100 billion.) It's a whole different level.
rumanator 7y ago
I'm not sure you got the point. The argument has nothing to do with the absolute amount of cash an organization amasses. The whole argument is about organizations building up economic reserves that enable them to endure long periods of recession or market downturn or a bad product launch or an earthquake. Some companies might have more cash than most states, but the same argument holds if a fruit vendor stocks up a few thousand euros that enable them to remain in business during a disaster.
novok 7y ago
Apple almost died in the 90s, and that organizational trauma persists to this day. That is probably partly one reason why they amassed so much cash, and why they don't pay as well as other SF bigtech companies.

deleted 7y ago

[deleted]

nostromo 7y ago

I agree but I think us folks in tech could be overly confident about our continued employment. Yes, companies have cash, but ad spending has dropped tremendously overnight. https://www.msn.com/en-us/news/other/facebook-twitter-revenue-warnings-point-to-a-sudden-pullback-in-ad-spending/ar-BB11EmLo https://www.msn.com/en-us/news/other/facebook-twitter-revenu... And Apple, well, all of their stores are closed and I highly doubt they're selling a ton of expensive luxury goods right now -- as millions of Americans fear unemployment and a deep recession. Cloud is dependent on large corporate spending, which may be in for a contraction as companies cut back or go under. Startups may find deals harder to land as investors flee to safety. Perhaps we'll look back and see WeWork as peak bubble, and Covid-19 as the impetus for a sever pullback.

Frost1x 7y ago
Tech is everywhere so it depends on what industry you're in and how your contributions of tech are funded. With that said, I think were going to see pressure everywhere. As a recent switch to a new employer, I'm concerned, even if our source of revenue currently appears solid.
Retric 7y ago
Most companies don’t want to suddenly try to rebuild teams from scratch in 6 months. So generally a furlough is preferred outside of the most generic skills. Giant tech companies are likely more concerned about how long the economic recovery takes and if anything can be done remotely.
bdcravens 7y ago
Apple did feel good enough to launch new hardware, which is now available. Seems to me it would have been smarter to wait and feed off the momentum of people wanting to touch the goods immediately after they were announced.

pbourke 7y ago

> I wonder if all the companies that used their money for stock buybacks are kicking themselves in the foot right now. The outside shareholders of these companies: absolutely The executives and board: lol, no

lotsofpulp 7y ago
Why is that? Did the executives and board sell their equity for cash prior to the drop in stock prices?
- pbourke 7y ago
  When presented with the opportunity to either accrue savings, reinvest in the business, or inflate the stock price the executives and boards of these companies chose the latter. This happened to also be a decision that benefited them personally, since the majority of their compensation is in equity. Draw your own conclusions.

mrfusion 7y ago

Just to play devils advocate. Wouldn’t that be a large dead weight loss if every corporation had six months of operating expenses sitting around in low interest accounts? In total it could be as large as half the worlds GDP?

edoceo 7y ago
Don't leave it in low interest account? It's likely millions of $$$, so index fund would be a likely storage for a lot of it
- refurb 7y ago
  Doesn't seem like a good idea to keep your rainy day fund in an index. When things go to crap, you're going to take a huge hit before you can turn it into cash.
- Armisael16 7y ago
  If trillions of dollars come out of index funds their value is going to crash, even if nothing else is happening. Large corporations aren’t like people - they can easily move markets on accident.
- imtringued 7y ago
  You're probably missing a lot of financial basics if you have to ask this. The reason why we have stock buybacks and dividends is so that the investors can allocate the money any way they'd like. Instead of letting Apple sit on $100 billion and hoping they are smart enough to invest the money wisely you instead pay that excess money out and then you are free to invest this money into more apple shares, an index fund, bonds or even use it yourself. If you want to invest into a holding company that does nothing but own other companies then you can choose a company that specializes into that and that company is definitively not Apple. Why is it better for the investor to allocate the money than Apple? Well, it is pretty obvious. Apple has a different risk profile. If it keeps money for a rainy day like covid-19 then the value of the assets it owns must not be correlated with the "disaster" that it is supposed to help you against. An index fund under performs during covid-19 so it's an awful choice for a rainy day fund. Meanwhile investors probably don't care about rainy day funds for day to day phone manufacturing. They might be interested in high risk VC investments that lead to a lot of dead companies but a few unicorns. They might be interested in low risk bonds because they are reaching retirement age. That's information that Apple doesn't have and therefore it will never make a good decision on your behalf.

ryanmercer 7y ago

>I used to criticize the big tech companies for stockpiling dozens of billions of dollars instead of investing them into their businesses, but it's only now I can see why a move like that was wise. I'm a member of the Church of Jesus Christ of Latter-day Saints (Mormon). Around December a 'whistle blower' came forth claiming, with extremely limited information available to him, that the Church had as much as 100 billion dollars invested to the press and the IRS [1]. People crawled out of the woodwork to try and vilify the Church for having a considerable amount of money invested legally via one or more investment funds. Fast forward 3 months, the Church is having to recall missionaries and send them back to their countries of residence, Church buildings are closed worldwide until further notice, the Bishops' Storehouse system that helps local communities via food distribution have added shifts to meet demand for food as unemployment numbers are sky rocketing. We told the world we save for a rainy day, as we were being accused in December this virus was beginning to spread in China. Now here we are in March with a cushion to keep the Church running while tithes likely dip considerably with unemployment rising as well as being able to assist members and non-members as the global economy grinds to a halt. The media and those opposed to the Church were quick to rip us apart in December for having a cushion, now they are nowhere to be found when we're in a position to help ourselves and others with that cushion. Perfect example to go with your comment. [1] https://www.washingtonpost.com/investigations/mormon-church-has-misled-members-on-100-billion-tax-exempt-investment-fund-whistleblower-alleges/2019/12/16/e3619bd2-2004-11ea-86f3-3b5019d451db_story.html https://www.washingtonpost.com/investigations/mormon-church-...