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French companies benefiting from state aid can't buy back shares

427 points by thg 7y ago

hnarn 7y ago
The same discussion is happening in Sweden.[1] The minister of finance has basically said that (my translation): > The tax payers are taking a risk, so they should also have the possibility to join the rebound, when it comes, and get some of that money back. And regarding dividends: > If you take part of different forms of state financed support, of course it will look bad if you at the same time give out large dividends. [1]: https://www.dn.se/ekonomi/magdalena-andersson-oppnar-for-okat-statligt-agande/ https://www.dn.se/ekonomi/magdalena-andersson-oppnar-for-oka...
raphaelj 7y ago
That makes sense. But what about prioritising partial nationalisation of these companies by injecting cash in exchange for shares? That way it would have no impact on the net public debt, as the gouvernement assets increase at the same rate as the debt.
- oaiey 7y ago
  They would still take away money from companies who needs it more. A company who is able to pay dividend or buy back shares has enough money to run without state support.
- anticensor 7y ago
  > gouvernement French detected. We spell it as "government" in English.
  - zentiggr 7y ago
    And "regering" in Swedish...
redis_mlc 7y ago
Prediction: that won't be a precondition in the USA, and if it was, most companies would decline the aid. You see, buybacks are "that one weird trick" where you can steal from the market, by inflating the EPS and hence your employee stock options, and not go to jail.
- endorphone 7y ago
  There is nothing weird or tricky about buybacks, and the mechanism is pretty obvious and intuitive. A company can issue new shares and raise money when they need it. A company can buyback shares when they have extra money they can't efficiently use (see: AAPL, MSFT, GOOG). There is absolutely nothing nefarious about this mechanism, and if tax treatments vary blame the government (don't hate the playa, etc). Buybacks are only a problem when cash-poor companies do buybacks. Either they're depleting a small contingency reserve, or they're even utilizing debt to do it.
  - rax0m 7y ago
    It does become a problem if the company does buy-backs on the premise that they will get bailed out in the future should something unexpected occur. Too-big-to-fail companies can count on themselves getting bailed out which causes them to keep pumping their stock price without worries.
- neximo64 7y ago
  To play devil's advocate here, how is that any different from increasing your dividends?
  - mcv 7y ago
    My guess would be that it directly increases the value of stock options and unvested equity, which dividends don't. Dividends are good for people who currently hold shares, but not for people who have shares promised to them in the future.
  - bvrlt 7y ago
    You pay taxes on dividends.
Adiqq 7y ago
I'm not from France, but is it controversial at all? If company wants state support, money needs to stay at the company, that's what it is about, right? Do companies in France could abuse this rule in other way?
- mcv 7y ago
  It's only controversial with short-term investors and executives who care more about using free money for some quick profit than about saving jobs.
- venj 7y ago
  We have a long history of companies abusing the government subsidies in France. So when the covid-specific aids were announced 2 weeks ago, there was a big concern that some companies would abuse them. So yes, this announcement was really expected
- eloisant 7y ago
  The controversial part is that initially the government didn't pose any condition at all. There was a huge public backlash, which is why the government changed their plan.
- marcosdumay 7y ago
  I'm not in France either, but it looks like it's newsworthy exactly because some government is doing something right for once.
paol 7y ago
Some opinions on stock buybacks worth reading: https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for... https://www.nytimes.com/2018/08/23/opinion/ban-stock-buybacks.html https://www.nytimes.com/2018/08/23/opinion/ban-stock-buyback...
- ComputerGuru 7y ago
  Skip the NYT article, it is fluff and doesn’t take paying out dividends into account. The HBR article is better (but still only a cursory introduction).
- K0SM0S 7y ago
  Great food for thought, thanks for this. These two paragraphs have all the key concepts IMHO (there's even redundance). You understand this, you have a comprehensive 10,000ft view. > “Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.” > “Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity. [...] because of corporate tax cuts, in 2018 taxpaying households were burdened with about 38% of the combined government and business debt that enabled corporations to do buybacks.” I'm a fierce capitalist, I love human sweat and I admire those who create value. Whether Jane the CEO or Rob who makes delicious cookies, value is value, value is good, value is shared (or should be). Stock buyback is stealing though, plain and simple. It's a legally, cleverly twisted, inverted Robin Hood mechanism at the private level. It's basically everything that's wrong with finance in abstraction of value. Expect tighter regulation promoted by Central Banks in the 2020s or we're heading for another income inequity-snafu. For those who haven't read much economy, the gist is this: not enough income inequity, and society stagnates (underperforms relatively to others under comparable conditions). Too much inequity, and the system chokes on itself (not enough consumer liquidity ⇒ you know...— and if you don't, think: consumer liquidity is the difference between pre-WWII and post-WWII global economies. I'm not an economist and absolutely not an expert (I only did 2 short years of econ in university, and self-taught some financial-survival skills). But this is like 101 to me, the basics of a macro-econ intro. It's not even controversial, or hasn't been since post-Keynes basically.
jylam 7y ago
That's a false statement, Le Maire said that he ask shareholders not to. Companies and shareholders can do what the hell they want.
- moviuro 7y ago
  Right now, it's your word against Reuter's. Do you have a source?
  - jylam 7y ago
    In French : https://www.lemonde.fr/economie/article/2020/03/28/le-gouvernement-impose-le-blocage-partiel-des-dividendes-en-2020_6034759_3234.html https://www.lemonde.fr/economie/article/2020/03/28/le-gouver... "Enfin, les employeurs bénéficiant du dispositif de chômage partiel, lui aussi financé sur crédits publics, sont appelés à « la plus grande modération » en matière de dividendes."
    - flr03 7y ago
      « Les entreprises qui ont besoin de trésorerie aujourd’hui, en particulier les grandes entreprises, et qui demandent l’aide de l’Etat, ne peuvent pas, ne doivent pas verser de dividendes. Et nous veillerons à ce que ce soit respecté, a souligné M. Le Maire, vendredi, sur BFMTV. Toutes celles qui auraient bénéficié de reports de charges sociales ou fiscales et qui auraient versé des dividendes se verront obligées de rembourser cette avance de trésorerie sur les charges sociales et fiscales, avec une pénalité d’intérêt. » Dans le meme article.
      - jylam 7y ago
        So they can, they will just pay a penalty, which value we don't know. And that's only for guaranteed bonds. Partial unemployement is not part of it.
    - C4stor 7y ago
      That's strictly false. The article clearly states that _initially_ companies were called to moderation, and that _now_ a law project will be passed to strictly forbids this. "Le président de la République Emmanuel Macron a franchi un cap, vendredi matin, lors d’une rencontre téléphonique avec les partenaires sociaux, en annonçant que M. Le Maire soumettrait au premier ministre Edouard Philippe un projet pour encadrer strictement le versement des dividendes. Ils devront être suspendus quand les sociétés bénéficient des reports d’échéances fiscales et sociales"
mooshmoosh 7y ago
Perhaps a better approach would be to require these companies to maintain capital ratios like we do for banks. They could be forced to raise more equity if their debt becomes too large. After all the point should be to prevent them from needing future bailouts. I mean there are other ways to extract money from a company than paying dividends or doing share buy backs. Are they also going to cap salaries for employees? Are they also going to stop companies paying out large fees to related companies? What about investing in expensive but highly speculative projects?
- sfj 7y ago
  Why aren't we letting them fail instead of allowing these idiots to stay in business? Say American Airlines went bust. It's debtors would get its planes and other company assets, who would then in turn sell them to other airlines. A new airline might form to take its place, which would probably be a little more prudent than the last one.
  - ajsnigrutin 7y ago
    In some indistries, that means thousands of people without work, and hundreds of other companies in the supply chain going bankrupt, and even more people without work. Sometimes it's cheaper to bail out the main company, then to deal with the unemployed, many more bankrupt companies etc. But some regulation should be put in place... if a CEO fscked up the company so much, it needed government bailout, they don't deserve a bonus, no matter what their contract says. A good system would also be, to turn a bailout into a 'long-term loan' from the government, and have a mandatory percentage of the companies profits go to repaying the 'loan', with some regulation on internal business (to prevent dumping everything to a new, 'clean' company, and letting the old shell fail).
    - fock 7y ago
      can you explain to me, why we can not regulate the very same companies in the good times then?
btrask 7y ago
Why aren't shareholders on the hook for bailing out their own companies? They have the financial incentive to protect their own investments. Why is bailing out a compay different from "investing" in it? What is an investment besides a non-emergency bailout? Edit: Why don't companies raise money by issuing more stock? Isn't that what the stock matket is for?
- hnarn 7y ago
  > Why is bailing out a compay different from "investing" in it? What is an investment besides a non-emergency bailout? Bailing a company out is just a euphemism for making a very high risk investment that the market is unwilling to do. Putting aside whether that is the correct thing to do or not, the option would likely (in a recession) be mass unemployment, so there's an incentive from the state, that likely wishes to avoid that scenario, that doesn't exist in the same way for "regular" investors. That said, it makes sense that if you pull the emergency lever and request a state bailout, you should pay future dividends back to the state for at least a decent amount of time since they basically gave you a loan that no-one else would.
  - londons_explore 7y ago
    It's a loan with conditions. Not all that unusual. Each company can decide if they accept the conditions or want to reject the loan offer and get their finance elsewhere.
    - hnarn 7y ago
      I agree, and it's not unusual, but presumably if the company could get a better deal from the market they wouldn't be taking the state bailout in the first place.
  - btrask 7y ago
    Okay, but why is buying a company's stock not the same as bailing it out? If you're "investing" in the business, why does money have to be given to them directly, using a completely different mechanism?
bradleyjg 7y ago
I don’t have a big problem with stock buybacks in general. But if companies buy back stock when times are flush they ought to be issuing new stock to raise money when times are lean. Not putting their hands out to the public fisc.
- hnarn 7y ago
  Just for the sake of argument, isn't the argument against buybacks that it may skew the indicators for how well the company is doing? You have earnings and then you have amount of shares: buy some shares from the public, and your "earnings per share" goes up even if the earnings haven't changed. In my view, this is radically different from, for example, buying the whole public stock and going private.
  - bradleyjg 7y ago
    If that were so, then the accounting profession has failed at its core responsibility. But I don’t think it has, the information is there for investors to see. If some investors choose to obsessively focus on a single metric, well—-a fool and his money are soon parted.
    - hnarn 7y ago
      I may be a bit daft here but in what way is this related to the work of accountants? The number isn't wrong, there's just context that's easily missed. The "buyer beware" logic can be used for a lot of things ad infinitum, you could argue the same thing about a company straight up lying about certain sales possibilities etc. but that would legally be fraud, so it's not black and white.
      - bradleyjg 7y ago
        It would be a failure if there was no way of telling from the financial statement what was going on.
      - jsight 7y ago
nabla9 7y ago
.. 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.
- batmenace 7y ago
  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.
  - bilbo0s 7y ago
    >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?
    - tomatotomato37 7y ago
      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.
Havoc 7y ago
Could someone explain the sudden anger at share buybacks to me? Media seems to portray it as some sort of evil trick, but I don't see it. It's not that different from distributing divs
- rorykoehler 7y ago
  It's basically rent seeking behavior if you taking public money and then using it to enrich yourself with no benefit to the public. That money could be 1) saved for a rainy day (like now) so they won't have to ask the public for money or 2) reinvested in the company to generate more value. As it is it just sucks value from the economy while also artificially increasing the stock price.
  - smaryjerry 7y ago
    It does the opposite. Buybacks send that money directly back into the economy to the shareholders that sold.
    - madhadron 7y ago
      Into the economy, perhaps, but not generally into circulation. Most shares are held by institutional funds or the wealthy, which is about the least useful place to put money for stimulus.
    - zentiggr 7y ago
      Anything that increases share values or enriches shareholders is going straight into the hands of the 1%, or the funds that hold huge percentages of the market. It's not going out to be respent.
  - greenshackle2 7y ago
    You didn’t explain how this is different from dividends.
    - rorykoehler 7y ago
physicsguy 7y ago
EasyJet in the UK is a prime example of why these restrictions are necessary. Paid out £160 million in dividends, now wants loans on favourable terms...
apexalpha 7y ago
Surely government are getting equity stakes?
stevespang 7y ago
It's called NATIONALIZATION, which is what Mexico and so many others did to the US oil industry who came into their countries in the 40's, 50's and beyond to develop their oil industries - - then told them they were stealing it all, get out. I watched Russia do it to Western oil co's in the 90's, although Putin allowed / allows the oligarchs to control some of the oil industry still.
yalogin 7y ago
Wonder how hhat the conditions for the bailout money in the US is. Do the companies have to pay it back? What about small businesses?
netwanderer3 7y ago
If the government keeps bailing out large corporations, can this eventually form a pattern in which major corporations and industries may collectively and artificially engineer a crash or downturn event to game the system? Once any pattern is formed and determined, there are always some people who will attempt to exploit it, and those people are often the ones who would eventually ruin all the good things for everybody else.
- ooobit 7y ago
  Not without severe repercussions in the market. The dance between supply and demand in a market enforces a number of unavoidable consequences. When an outside influence artificially influences a change in one side, a contraction often occurs in the other. That reaction can often overcorrect. Theoretically, a small downturn in supply could cause a proportional contraction in demand as price rises. But what usually happens is the response is driven both by the proportion of downturn and a measure of future value confidence based on additional factors. Subtle changes can game the system a little, but every change carries an added risk of flight to substitutes. At a low point, the ROI on trying to game market share or other factors quickly narrows.
- fmajid 7y ago
  The term you are looking for is "moral hazard". They won't deliberately cause crashes, because those are not profitable, but they will deliberately make risky bets that benefit them if things go well, and get bailed out if they fail (riskier bets have more upside for the kleptocrats looking out for Number One). Given the odds, crashes are nearly inevitable. This is undistinguishable from deliberate crashes. The policies enacted after the 2008 crisis have actually made the banking sector even more concentrated and increased the likelihood of another such crash caused by moral hazard in the Too Big to Fail financial institutions. The procedures to fight against that, like "living wills", will likely have the same effectiveness as bulletproof vests made of wet toilet paper.
Zenst 7y ago
Much was learned from the banking crisis bailouts and good to see the French are mindful of that and addressing such issues that caused public outrage (rightly so) in a way that will curtail such abuse.
whatever1 7y ago
Investors need to change our market valuation attitude and stop expecting that companies jeopardize their operations/stability so that they give us pennies from their cashier forever. Public companies should not be allowed to pay dividends/buybacks or in other terms to use their savings to keep paying in perpetuity fictional obligations. The initial investors (who are the only ones that physically put money in the balance sheet of the company), are being rewarded by the increase of the share price (like Amazon, Google etc). The shareholders that are coming later, are being rewarding by holding something of value, and their participation in the board can increase/decrease this value. The value of a share of a profitable company will never go to zero, the same way that gold has non-zero value (they are finite). What will happen with that excess money? Option 1 (The capitalist) : Trust the companies that they will handle them properly by planning for a rainy week (apparently nobody does), or investing in their business. Option 2 (The socialist) : Tax heavily the earnings and redistribute them in democratically approved way.
nraynaud 7y ago
I think if a company wants to buy back, now is the time.
throwawaymanbot 7y ago
guud.
madhadron 7y ago
Most of the commenters here focus on the finances of individual firms. The only reasons for a government to bail out a company are 1) to protect the supply chain of a necessary good or service, 2) as a way of providing a safety net for people that doesn't involve direct payment, 3) a way of maintaining the structure of the economy so it can resume normal operation more quickly after the shock, or 4) a way of giving a handout to a set of wealthy and connected members of society. I think most of us can agree that 1-3 are necessary response to a major disruption and 4 is corruption. For a small business like a dog groomer or a restaurant, we expect the fraction that aren't viable to go out of business with some probability during small economic shocks, and we expect that this will be a small fraction. So we let them go. But in a crisis where an entire sector will be mostly wiped out, such as restaurants in the current pandemic, some attempt at preserving the sector makes sense because otherwise you send shocks through everything connected with it. For example, if a restaurant occupies the bottom floor of an apartment building, and the building's cashflow depends on that space not being unoccupied for more than two months, then you can have a sequence of events that result in mass evictions unless you control those side effects as well. It's probably easier to try to maintain the web of cashflow. Now, you may be able to get side effects that you like in some sectors, such as restaurants turning into food kitchens for the duration as part of the direct injection of cash. On the other hand, a bar or a salon probably just shuts down. But even there, most stylists rent a chair in a salon, so you need to make sure that web of cashflow isn't broken by an owner pocketing it. It still gets very complicated. For some areas like farms we already have large measures in place, since bad seasons tend to affect large swathes of farms. Thus reserve boards, farm subsidies and the like. Others have pointed out that such structural maintenance can be gamed by having a barely-viable company that is too big to fail. Then even small shocks can be turned into structural crises. Someone else suggested requiring capital reserves the way we do for banks, and for large companies that makes sense. If you're that big and structurally risky, you should be required to derisk yourself. One discussion I hope we will be having as a society during and after this is what disaster preparedness looks like. We should have the regulations for what putting the economy on such a footing looks like, run simulations every few years for a week, and have adversarial gaming on an ongoing basis to try to find loopholes and close them.
js2 7y ago
Here's a counter point from a couple economists who say that the most important thing should be preserving jobs and not worrying about preconditions for now: This dramatic spike in jobless claims is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why? Because throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers. Wages are, in effect, socialized for the duration of the crisis. Instead of safeguarding employment, America is relying on beefed-up unemployment benefits to shield laid-off workers from economic hardship. To give just one example, in both the United States and Britain, the government is asking restaurant workers to stay home. But in Britain, workers are receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are guaranteed to get their job back once the shutdown is over. In America, the workers are laid off; they must then file for unemployment insurance and wait for the economy to start up again before they can apply for a new job, and if all goes well, sign a new contract and resume working. And: There is nothing efficient in the destruction of businesses that were viable before the virus outbreak. The crisis cannot be blamed on poorly managed corporations. Government support, in the case of a pandemic, does not create perverse incentives. Bankruptcies redistribute income, but in a chaotic and opaque way. And while bankruptcy might be a way to deal with the economic fallout of the pandemic for large corporations, it is not well adapted to small businesses. Without strong enough government support, many small businesses will have to liquidate. The death of a business has long-term costs: The links between entrepreneurs, workers and customers are destroyed and often need to be rebuilt from scratch. Instead, tax corporations for excess profits later: Windfall profits have a fair, comprehensive and transparent solution: The government should impose excess profits taxes, as it has done several times in the past during periods of crisis. In 1918, all profits made by corporations above and beyond an 8 percent rate of return on their capital were deemed abnormal, and abnormal profits were taxed at progressive rates of up to 80 percent. Similar taxes on excessive profits were applied during World War II and the Korean War. These taxes all had one goal — making sure that no one could benefit outrageously from a situation in which the masses suffered. https://www.nytimes.com/2020/03/30/opinion/coronavirus-economy-saez-zucman.html https://www.nytimes.com/2020/03/30/opinion/coronavirus-econo... However, I'm not sure what would prevent the Hollywood accounting trick in that scenario.
adultSwim 7y ago
As we pump trillions into companies, at minimum, we should get an ownership stake
tim333 7y ago
I'm not sure "can't buy back shares" is the right policy economically. Buying back shares is just a way to give profits to shareholders like paying dividends or similar. What they should do is companies benefiting from state aid have to give a lot of shares or options to the state in return. Maybe near 100% in bad cases.

427 points by thg 7y ago

The same discussion is happening in Sweden.[1] The minister of finance has basically said that (my translation): > The tax payers are taking a risk, so they should also have the possibility to join the rebound, when it comes, and get some of that money back. And regarding dividends: > If you take part of different forms of state financed support, of course it will look bad if you at the same time give out large dividends. [1]: https://www.dn.se/ekonomi/magdalena-andersson-oppnar-for-okat-statligt-agande/ https://www.dn.se/ekonomi/magdalena-andersson-oppnar-for-oka...

raphaelj 7y ago

That makes sense. But what about prioritising partial nationalisation of these companies by injecting cash in exchange for shares? That way it would have no impact on the net public debt, as the gouvernement assets increase at the same rate as the debt.

oaiey 7y ago
They would still take away money from companies who needs it more. A company who is able to pay dividend or buy back shares has enough money to run without state support.
anticensor 7y ago
> gouvernement French detected. We spell it as "government" in English.
- zentiggr 7y ago
  And "regering" in Swedish...

redis_mlc 7y ago

Prediction: that won't be a precondition in the USA, and if it was, most companies would decline the aid. You see, buybacks are "that one weird trick" where you can steal from the market, by inflating the EPS and hence your employee stock options, and not go to jail.

endorphone 7y ago
There is nothing weird or tricky about buybacks, and the mechanism is pretty obvious and intuitive. A company can issue new shares and raise money when they need it. A company can buyback shares when they have extra money they can't efficiently use (see: AAPL, MSFT, GOOG). There is absolutely nothing nefarious about this mechanism, and if tax treatments vary blame the government (don't hate the playa, etc). Buybacks are only a problem when cash-poor companies do buybacks. Either they're depleting a small contingency reserve, or they're even utilizing debt to do it.
- rax0m 7y ago
  It does become a problem if the company does buy-backs on the premise that they will get bailed out in the future should something unexpected occur. Too-big-to-fail companies can count on themselves getting bailed out which causes them to keep pumping their stock price without worries.
neximo64 7y ago
To play devil's advocate here, how is that any different from increasing your dividends?
- mcv 7y ago
  My guess would be that it directly increases the value of stock options and unvested equity, which dividends don't. Dividends are good for people who currently hold shares, but not for people who have shares promised to them in the future.
- bvrlt 7y ago
  You pay taxes on dividends.

Adiqq 7y ago

I'm not from France, but is it controversial at all? If company wants state support, money needs to stay at the company, that's what it is about, right? Do companies in France could abuse this rule in other way?

mcv 7y ago
It's only controversial with short-term investors and executives who care more about using free money for some quick profit than about saving jobs.
venj 7y ago
We have a long history of companies abusing the government subsidies in France. So when the covid-specific aids were announced 2 weeks ago, there was a big concern that some companies would abuse them. So yes, this announcement was really expected
eloisant 7y ago
The controversial part is that initially the government didn't pose any condition at all. There was a huge public backlash, which is why the government changed their plan.
marcosdumay 7y ago
I'm not in France either, but it looks like it's newsworthy exactly because some government is doing something right for once.

paol 7y ago

Some opinions on stock buybacks worth reading: https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for... https://www.nytimes.com/2018/08/23/opinion/ban-stock-buybacks.html https://www.nytimes.com/2018/08/23/opinion/ban-stock-buyback...

ComputerGuru 7y ago
Skip the NYT article, it is fluff and doesn’t take paying out dividends into account. The HBR article is better (but still only a cursory introduction).
K0SM0S 7y ago
Great food for thought, thanks for this. These two paragraphs have all the key concepts IMHO (there's even redundance). You understand this, you have a comprehensive 10,000ft view. > “Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.” > “Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity. [...] because of corporate tax cuts, in 2018 taxpaying households were burdened with about 38% of the combined government and business debt that enabled corporations to do buybacks.” I'm a fierce capitalist, I love human sweat and I admire those who create value. Whether Jane the CEO or Rob who makes delicious cookies, value is value, value is good, value is shared (or should be). Stock buyback is stealing though, plain and simple. It's a legally, cleverly twisted, inverted Robin Hood mechanism at the private level. It's basically everything that's wrong with finance in abstraction of value. Expect tighter regulation promoted by Central Banks in the 2020s or we're heading for another income inequity-snafu. For those who haven't read much economy, the gist is this: not enough income inequity, and society stagnates (underperforms relatively to others under comparable conditions). Too much inequity, and the system chokes on itself (not enough consumer liquidity ⇒ you know...— and if you don't, think: consumer liquidity is the difference between pre-WWII and post-WWII global economies. I'm not an economist and absolutely not an expert (I only did 2 short years of econ in university, and self-taught some financial-survival skills). But this is like 101 to me, the basics of a macro-econ intro. It's not even controversial, or hasn't been since post-Keynes basically.

jylam 7y ago

That's a false statement, Le Maire said that he ask shareholders not to. Companies and shareholders can do what the hell they want.

moviuro 7y ago
Right now, it's your word against Reuter's. Do you have a source?
- jylam 7y ago
  In French : https://www.lemonde.fr/economie/article/2020/03/28/le-gouvernement-impose-le-blocage-partiel-des-dividendes-en-2020_6034759_3234.html https://www.lemonde.fr/economie/article/2020/03/28/le-gouver... "Enfin, les employeurs bénéficiant du dispositif de chômage partiel, lui aussi financé sur crédits publics, sont appelés à « la plus grande modération » en matière de dividendes."
  - flr03 7y ago
    « Les entreprises qui ont besoin de trésorerie aujourd’hui, en particulier les grandes entreprises, et qui demandent l’aide de l’Etat, ne peuvent pas, ne doivent pas verser de dividendes. Et nous veillerons à ce que ce soit respecté, a souligné M. Le Maire, vendredi, sur BFMTV. Toutes celles qui auraient bénéficié de reports de charges sociales ou fiscales et qui auraient versé des dividendes se verront obligées de rembourser cette avance de trésorerie sur les charges sociales et fiscales, avec une pénalité d’intérêt. » Dans le meme article.
    - jylam 7y ago
      So they can, they will just pay a penalty, which value we don't know. And that's only for guaranteed bonds. Partial unemployement is not part of it.
  - C4stor 7y ago
    That's strictly false. The article clearly states that _initially_ companies were called to moderation, and that _now_ a law project will be passed to strictly forbids this. "Le président de la République Emmanuel Macron a franchi un cap, vendredi matin, lors d’une rencontre téléphonique avec les partenaires sociaux, en annonçant que M. Le Maire soumettrait au premier ministre Edouard Philippe un projet pour encadrer strictement le versement des dividendes. Ils devront être suspendus quand les sociétés bénéficient des reports d’échéances fiscales et sociales"

mooshmoosh 7y ago

Perhaps a better approach would be to require these companies to maintain capital ratios like we do for banks. They could be forced to raise more equity if their debt becomes too large. After all the point should be to prevent them from needing future bailouts. I mean there are other ways to extract money from a company than paying dividends or doing share buy backs. Are they also going to cap salaries for employees? Are they also going to stop companies paying out large fees to related companies? What about investing in expensive but highly speculative projects?

sfj 7y ago
Why aren't we letting them fail instead of allowing these idiots to stay in business? Say American Airlines went bust. It's debtors would get its planes and other company assets, who would then in turn sell them to other airlines. A new airline might form to take its place, which would probably be a little more prudent than the last one.
- ajsnigrutin 7y ago
  In some indistries, that means thousands of people without work, and hundreds of other companies in the supply chain going bankrupt, and even more people without work. Sometimes it's cheaper to bail out the main company, then to deal with the unemployed, many more bankrupt companies etc. But some regulation should be put in place... if a CEO fscked up the company so much, it needed government bailout, they don't deserve a bonus, no matter what their contract says. A good system would also be, to turn a bailout into a 'long-term loan' from the government, and have a mandatory percentage of the companies profits go to repaying the 'loan', with some regulation on internal business (to prevent dumping everything to a new, 'clean' company, and letting the old shell fail).
  - fock 7y ago
    can you explain to me, why we can not regulate the very same companies in the good times then?

btrask 7y ago

Why aren't shareholders on the hook for bailing out their own companies? They have the financial incentive to protect their own investments. Why is bailing out a compay different from "investing" in it? What is an investment besides a non-emergency bailout? Edit: Why don't companies raise money by issuing more stock? Isn't that what the stock matket is for?

hnarn 7y ago
> Why is bailing out a compay different from "investing" in it? What is an investment besides a non-emergency bailout? Bailing a company out is just a euphemism for making a very high risk investment that the market is unwilling to do. Putting aside whether that is the correct thing to do or not, the option would likely (in a recession) be mass unemployment, so there's an incentive from the state, that likely wishes to avoid that scenario, that doesn't exist in the same way for "regular" investors. That said, it makes sense that if you pull the emergency lever and request a state bailout, you should pay future dividends back to the state for at least a decent amount of time since they basically gave you a loan that no-one else would.
- londons_explore 7y ago
  It's a loan with conditions. Not all that unusual. Each company can decide if they accept the conditions or want to reject the loan offer and get their finance elsewhere.
  - hnarn 7y ago
    I agree, and it's not unusual, but presumably if the company could get a better deal from the market they wouldn't be taking the state bailout in the first place.
- btrask 7y ago
  Okay, but why is buying a company's stock not the same as bailing it out? If you're "investing" in the business, why does money have to be given to them directly, using a completely different mechanism?

bradleyjg 7y ago

I don’t have a big problem with stock buybacks in general. But if companies buy back stock when times are flush they ought to be issuing new stock to raise money when times are lean. Not putting their hands out to the public fisc.

hnarn 7y ago
Just for the sake of argument, isn't the argument against buybacks that it may skew the indicators for how well the company is doing? You have earnings and then you have amount of shares: buy some shares from the public, and your "earnings per share" goes up even if the earnings haven't changed. In my view, this is radically different from, for example, buying the whole public stock and going private.
- bradleyjg 7y ago
  If that were so, then the accounting profession has failed at its core responsibility. But I don’t think it has, the information is there for investors to see. If some investors choose to obsessively focus on a single metric, well—-a fool and his money are soon parted.
  - hnarn 7y ago
    I may be a bit daft here but in what way is this related to the work of accountants? The number isn't wrong, there's just context that's easily missed. The "buyer beware" logic can be used for a lot of things ad infinitum, you could argue the same thing about a company straight up lying about certain sales possibilities etc. but that would legally be fraud, so it's not black and white.
    - bradleyjg 7y ago
      It would be a failure if there was no way of telling from the financial statement what was going on.
    - jsight 7y ago

nabla9 7y ago

.. 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.

batmenace 7y ago
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.
- bilbo0s 7y ago
  >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?
  - tomatotomato37 7y ago
    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.

Havoc 7y ago

Could someone explain the sudden anger at share buybacks to me? Media seems to portray it as some sort of evil trick, but I don't see it. It's not that different from distributing divs

rorykoehler 7y ago
It's basically rent seeking behavior if you taking public money and then using it to enrich yourself with no benefit to the public. That money could be 1) saved for a rainy day (like now) so they won't have to ask the public for money or 2) reinvested in the company to generate more value. As it is it just sucks value from the economy while also artificially increasing the stock price.
- smaryjerry 7y ago
  It does the opposite. Buybacks send that money directly back into the economy to the shareholders that sold.
  - madhadron 7y ago
    Into the economy, perhaps, but not generally into circulation. Most shares are held by institutional funds or the wealthy, which is about the least useful place to put money for stimulus.
  - zentiggr 7y ago
    Anything that increases share values or enriches shareholders is going straight into the hands of the 1%, or the funds that hold huge percentages of the market. It's not going out to be respent.
- greenshackle2 7y ago
  You didn’t explain how this is different from dividends.
  - rorykoehler 7y ago

physicsguy 7y ago

EasyJet in the UK is a prime example of why these restrictions are necessary. Paid out £160 million in dividends, now wants loans on favourable terms...

apexalpha 7y ago

Surely government are getting equity stakes?

stevespang 7y ago

It's called NATIONALIZATION, which is what Mexico and so many others did to the US oil industry who came into their countries in the 40's, 50's and beyond to develop their oil industries - - then told them they were stealing it all, get out. I watched Russia do it to Western oil co's in the 90's, although Putin allowed / allows the oligarchs to control some of the oil industry still.

yalogin 7y ago

Wonder how hhat the conditions for the bailout money in the US is. Do the companies have to pay it back? What about small businesses?

netwanderer3 7y ago

If the government keeps bailing out large corporations, can this eventually form a pattern in which major corporations and industries may collectively and artificially engineer a crash or downturn event to game the system? Once any pattern is formed and determined, there are always some people who will attempt to exploit it, and those people are often the ones who would eventually ruin all the good things for everybody else.

ooobit 7y ago
Not without severe repercussions in the market. The dance between supply and demand in a market enforces a number of unavoidable consequences. When an outside influence artificially influences a change in one side, a contraction often occurs in the other. That reaction can often overcorrect. Theoretically, a small downturn in supply could cause a proportional contraction in demand as price rises. But what usually happens is the response is driven both by the proportion of downturn and a measure of future value confidence based on additional factors. Subtle changes can game the system a little, but every change carries an added risk of flight to substitutes. At a low point, the ROI on trying to game market share or other factors quickly narrows.
fmajid 7y ago
The term you are looking for is "moral hazard". They won't deliberately cause crashes, because those are not profitable, but they will deliberately make risky bets that benefit them if things go well, and get bailed out if they fail (riskier bets have more upside for the kleptocrats looking out for Number One). Given the odds, crashes are nearly inevitable. This is undistinguishable from deliberate crashes. The policies enacted after the 2008 crisis have actually made the banking sector even more concentrated and increased the likelihood of another such crash caused by moral hazard in the Too Big to Fail financial institutions. The procedures to fight against that, like "living wills", will likely have the same effectiveness as bulletproof vests made of wet toilet paper.

Zenst 7y ago

Much was learned from the banking crisis bailouts and good to see the French are mindful of that and addressing such issues that caused public outrage (rightly so) in a way that will curtail such abuse.

whatever1 7y ago

Investors need to change our market valuation attitude and stop expecting that companies jeopardize their operations/stability so that they give us pennies from their cashier forever. Public companies should not be allowed to pay dividends/buybacks or in other terms to use their savings to keep paying in perpetuity fictional obligations. The initial investors (who are the only ones that physically put money in the balance sheet of the company), are being rewarded by the increase of the share price (like Amazon, Google etc). The shareholders that are coming later, are being rewarding by holding something of value, and their participation in the board can increase/decrease this value. The value of a share of a profitable company will never go to zero, the same way that gold has non-zero value (they are finite). What will happen with that excess money? Option 1 (The capitalist) : Trust the companies that they will handle them properly by planning for a rainy week (apparently nobody does), or investing in their business. Option 2 (The socialist) : Tax heavily the earnings and redistribute them in democratically approved way.

nraynaud 7y ago

I think if a company wants to buy back, now is the time.

throwawaymanbot 7y ago

guud.

madhadron 7y ago

Most of the commenters here focus on the finances of individual firms. The only reasons for a government to bail out a company are 1) to protect the supply chain of a necessary good or service, 2) as a way of providing a safety net for people that doesn't involve direct payment, 3) a way of maintaining the structure of the economy so it can resume normal operation more quickly after the shock, or 4) a way of giving a handout to a set of wealthy and connected members of society. I think most of us can agree that 1-3 are necessary response to a major disruption and 4 is corruption. For a small business like a dog groomer or a restaurant, we expect the fraction that aren't viable to go out of business with some probability during small economic shocks, and we expect that this will be a small fraction. So we let them go. But in a crisis where an entire sector will be mostly wiped out, such as restaurants in the current pandemic, some attempt at preserving the sector makes sense because otherwise you send shocks through everything connected with it. For example, if a restaurant occupies the bottom floor of an apartment building, and the building's cashflow depends on that space not being unoccupied for more than two months, then you can have a sequence of events that result in mass evictions unless you control those side effects as well. It's probably easier to try to maintain the web of cashflow. Now, you may be able to get side effects that you like in some sectors, such as restaurants turning into food kitchens for the duration as part of the direct injection of cash. On the other hand, a bar or a salon probably just shuts down. But even there, most stylists rent a chair in a salon, so you need to make sure that web of cashflow isn't broken by an owner pocketing it. It still gets very complicated. For some areas like farms we already have large measures in place, since bad seasons tend to affect large swathes of farms. Thus reserve boards, farm subsidies and the like. Others have pointed out that such structural maintenance can be gamed by having a barely-viable company that is too big to fail. Then even small shocks can be turned into structural crises. Someone else suggested requiring capital reserves the way we do for banks, and for large companies that makes sense. If you're that big and structurally risky, you should be required to derisk yourself. One discussion I hope we will be having as a society during and after this is what disaster preparedness looks like. We should have the regulations for what putting the economy on such a footing looks like, run simulations every few years for a week, and have adversarial gaming on an ongoing basis to try to find loopholes and close them.

js2 7y ago

Here's a counter point from a couple economists who say that the most important thing should be preserving jobs and not worrying about preconditions for now: This dramatic spike in jobless claims is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why? Because throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers. Wages are, in effect, socialized for the duration of the crisis. Instead of safeguarding employment, America is relying on beefed-up unemployment benefits to shield laid-off workers from economic hardship. To give just one example, in both the United States and Britain, the government is asking restaurant workers to stay home. But in Britain, workers are receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are guaranteed to get their job back once the shutdown is over. In America, the workers are laid off; they must then file for unemployment insurance and wait for the economy to start up again before they can apply for a new job, and if all goes well, sign a new contract and resume working. And: There is nothing efficient in the destruction of businesses that were viable before the virus outbreak. The crisis cannot be blamed on poorly managed corporations. Government support, in the case of a pandemic, does not create perverse incentives. Bankruptcies redistribute income, but in a chaotic and opaque way. And while bankruptcy might be a way to deal with the economic fallout of the pandemic for large corporations, it is not well adapted to small businesses. Without strong enough government support, many small businesses will have to liquidate. The death of a business has long-term costs: The links between entrepreneurs, workers and customers are destroyed and often need to be rebuilt from scratch. Instead, tax corporations for excess profits later: Windfall profits have a fair, comprehensive and transparent solution: The government should impose excess profits taxes, as it has done several times in the past during periods of crisis. In 1918, all profits made by corporations above and beyond an 8 percent rate of return on their capital were deemed abnormal, and abnormal profits were taxed at progressive rates of up to 80 percent. Similar taxes on excessive profits were applied during World War II and the Korean War. These taxes all had one goal — making sure that no one could benefit outrageously from a situation in which the masses suffered. https://www.nytimes.com/2020/03/30/opinion/coronavirus-economy-saez-zucman.html https://www.nytimes.com/2020/03/30/opinion/coronavirus-econo... However, I'm not sure what would prevent the Hollywood accounting trick in that scenario.

adultSwim 7y ago

As we pump trillions into companies, at minimum, we should get an ownership stake

tim333 7y ago

I'm not sure "can't buy back shares" is the right policy economically. Buying back shares is just a way to give profits to shareholders like paying dividends or similar. What they should do is companies benefiting from state aid have to give a lot of shares or options to the state in return. Maybe near 100% in bad cases.