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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

• 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?
    • hnarn 7y ago
      "Bailing [a company] out" implies severe issues with the financing of the company, and that without that investment the company would go under. I'm not sure what you mean by "a completely different mechanism", a bailout can definitely happen through acquiring stocks in that company.
      • btrask 7y ago
        What I mean is, simply buying a company's stock does not immediately benefit them. They have to issue new shares to turn their elevated stock price into cash. So if companies simply issued shares, they could raise money and effectively undo all of the buybacks they did. Problem solved, right?
        • hnarn 7y ago
          Yes, assuming anyone will buy the stocks, and at the price you want them to...
          • btrask 7y ago
            Well, they can keep issuing stock until their share price hits $0.00. If they still need money, then maybe the state can step in and start buying some.
            • sp332 7y ago
              If traders credibly believed that a stock's value was going to 0, then the price would already be 0. Just saying in advance that your scheme was about to be implemented would crater the price before any new stock was sold.
    • Taniwha 7y ago
      Plain buying a company's shares gives no money to the company, just to its shareholders Buying new shares from the company in exchange for bailout money dilutes the value of existing shares (not necessarily a bad thing, the investors bet on a company that wasn't prepared for such a downturn). Of course companies that have done stock buybacks could sell stock on the open market with roughly the same effect. Buying debt from a company likely means future dividends will be lower, share prices are also likely to go down. Plain bailing out a company with no payback is essentially an investment in jobs and a healthy economy, I can't see any reason why at the very least it shouldn't be exchanged for equity. Of course in all these cases it's all of us who are doing this collectively (very socialist!) we should expect that companies that are bailed out by the taxpayers repay their bailouts eventually, from that point of view investing in companies that don't pay their fair share of taxes (by playing accounting games, moving profits offshore etc) are particularly poor investments
  • dragonwriter 7y ago
    > Bailing a company out is just a euphemism for making a very high risk investment that the market is unwilling to That depends on the particular form of bailout, which can anything from equity/debt financing as you describe, to a one-off form of bankruptcy, to an outright gift of funds, and often combines elements of all three.
  • celticninja 7y ago
    the bailout should work like a further share issue but with preferential terms, so if you are bailed out to the tune of $1m and your share price is $15 then the government gets 100k shares at $10 each for their $1m.
    • toast0 7y ago
      Most corporate charters would require a shareholder vote to authorize a new class of shares. Some may require a vote of each individual class of shares, including non-voting shares in addition to an overall vote. That takes a lot of time to arrange. A loan contract just needs whatever approval (probably CEO and chief council, maybe the board)
      • celticninja 7y ago
        that's great and all for the companies but perhaps it should be great for the government and ultimately the tax payer. the alternative is your company goes under and your share price is $0. I'm certain that any vote could be expedited if the the alternative is bankruptcy.
  • athenot 7y ago
    > 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. This sounds like it should be a similar mechanism as startups' liquidation preference schemes. Investors that provided capital when others wouldn't are in a position to request that they get paid back in priority. For startups, it's (usually) if it fails. For mature companies, it could be a tweaked form like dividend priority or payback priority. Basically a mechanism to balance out the risk.
    • yowlingcat 7y ago
      This is an excellent analogy and a great point. To take your analogy one step further, when startups raise money that results in a less than clean term sheet stacked to the sky with liquidation preferences, it's a result of investors understanding that the firm doesn't really have a choice, and a statement that the terms of their investment are actually that risky. This situation seems like it ought to be remarkably similar.
  • sudosysgen 7y ago
    Not necessarily. A lot of Bailouts are interest free loans or just outright gifts. I wouldn't oppose them nearly as much if it was the government buying shares at a reasonable price with voting powers, but it's seldom the case.
• sametmax 7y ago
  Investing is privatizing the risks and the benefits. Bailing out is privatizing the benefits but mutualizing the risks. It's taking what favors you from both capitalism and socialism, call that a free market, and pretend it's for the common good. You always win. People says communism didn't work looking at Russia and China. But the ruling class will abuse any system to the point it doesn't look like the original idea at all, if not kept in check. It's true for capitalism as well, as we can see. To me, being able to do this is proof we are still not in a democracy. We enjoy a lot of freedoms, so we are not in a dictature. But we are still not in power. We're just told we are.
  • smt88 7y ago
    Communism and capitalism do share a weakness: corruption of those with power. One difference between them is that a dangerous concentration of power is inherent to communism. It's intentional. In capitalism, it's an unintended consequence that can be mitigated by regulations (anti-trust laws, subsidies to startups, etc.)
    • sametmax 7y ago
      > One difference between them is that a dangerous concentration of power is inherent to communism You mean in opposition to a system that promotes the concentration of capital, which is power ? Or do you think non capitalist systems don't have laws and a group of dictators must be at the top?
      • adwn 7y ago
        > Or do you think non capitalist systems don't have laws and a group of dictators must be at the top? Empirically, for 100% of the sample size, socialist systems always turned into dictatorships after a few years at most.
        • lucian1900 7y ago
          That is indeed what US and Western European media have been repeating for decades. It doesn’t necessarily match the people’s experience.
• deleted 7y ago
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• arethuza 7y ago
  But isn't the whole point of limited liability is that shareholders aren't "on the hook" for anything other than the money they have already invested?
  • boomlinde 7y ago
    Yes, but I don't see how that contradicts what GP suggests. Shareholders are on the hook for their own investments. Artificially bailing them out takes them off that hook by preventing bankruptcy. It disincentivizes responsible financial management. Why not spend 95% of profits on buybacks if the government is ready to catch you? The only thing that makes it a question at all in my view are the potential social consequences of a bunch of huge companies failing at the same time. If it wasn't for that, I'd say let them fail and let the investors pay for it in negative ROI.
    • arethuza 7y ago
      I read it that what was being advocated was that shareholders would be compelled to provide additional funds, rather than just standing to lose the amount they had already invested.
• himinlomax 7y ago
  Because this is NOT a bailout. A bailout implies that those who receive it are potentially at fault, like when someone is bailed out of jail. Banks were bailed out in 2008 because they acted recklessly but had to be saved to limit the damage to the rest of the economy. Here businesses that may otherwise be perfectly sane are temporarily prevented (or limited) by the state from operating for the public good. It's analogous to the state paying for the property they seize under eminent domain.
  • foob4r 7y ago
    The specific businesses in scope of this post are these that use free cash flow to enrich shareholders and not plan for rainy days. So yes, they are at fault here for not using their cash wisely and being myopic.
• 8fingerlouie 7y ago
  Shareholders are already on the hook. The way shares work is a way for a publicly traded company to obtain a loan. It does this by issuing shares which can be bought by investors. Shareholders are not liable except for their initial investment. After selling shares, these can be traded i.e. on NASDAQ, but any price on the shares there only reflects the public perception of value of any given company. It's a high risk lottery. This is also the reason that companies pay out large dividends to shareholders. They're obligated by law to payout dividends. Think of it as interest on a loan.
  • deleted 7y ago
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  • gdhbcc 7y ago
    Thats not true at all, companies are in no way obligated to pay dividends
• hrktb 7y ago
  The calculation seems to be that it would cost more to the state to have these companies fail or fire most of their employees, have them apply for unemployment, and wait for new companies to emerge/rehire when the tide comes back. By "cost more" I mean not just in sheer money, but also counting the overall impact on the population.
• formercoder 7y ago
  Equity is by definition limited liability. It has to be. Imagine it’s not, and you own $100 of SPY. That means you indirectly are an Apple shareholder. Should you be responsible for Apple’s debts if they went bankrupt? If you were, how would that even work?
• rv-de 7y ago
  I think you just figured out that the mantra of free markets being self-organizing is a lie.
• tim333 7y ago
  Macroeconomics. Normally they are but when there is a huge shock to the economy like now they don't have the money to bail everyone at once hence either the government steps in or else companies fold and many lose their jobs unnecessarily.