4 ms·

> 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 euphemis

by 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
  - hnarn 7y ago
    > Of course in all these cases it's all of us who are doing this collectively (very socialist!) "Very" seems like a generous adjective since actual socialism would require the company to be run by the employees. It's more like "almost" socialism.
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.

by hnarn 7y ago

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
- hnarn 7y ago
  > Of course in all these cases it's all of us who are doing this collectively (very socialist!) "Very" seems like a generous adjective since actual socialism would require the company to be run by the employees. It's more like "almost" socialism.

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.