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I think people don't really understand buybacks. The nuances of dividend vs share buybacks can be debated, but at the end of the day, each are just ways to ret

I think people don't really understand buybacks. The nuances of dividend vs share buybacks can be debated, but at the end of the day, each are just ways to return capital to shareholders like pension funds, 401ks etc. They didn't 'spend it' then returned it to investors which is what companies should do unless they have a different way to invest it for better returns.

majormajor 7y ago
There's a third option: building up cash reserves for the inevitable down times. This is one of those "privatized profits, socialized risk" situations. It's not attractive to save money when you know you can get bailed out or go through bankruptcy without too much pain.
- SpicyLemonZest 7y ago
  What amount of cash reserves would have allowed them to survive their business becoming illegal?
  - ogre_codes 7y ago
    If you aren't massively over-leveraged, your survival prospects are much higher under any circumstances. If the airlines had serviced their debt instead of accumulating debt while rewarding shareholders, recovery would be a lot easier. Indulging in debt is the American way. Particularly when you can rely on taxpayer financed government bailouts to smooth out the bumps.
    - smabie 7y ago
      Buying back shares is, in some ways, paying off your debt. Whenever you need money, you can just create more shares and sell them back. The problem is that you lose some diversification benefits: when you need to sell more shares is often (though not always) correlated to a drop in your own stock price. Ideally though, you're inflating the balloon so to speak so you can deflate it when need be. Or you think that your stock is undervalued right now.
      - elliekelly 7y ago
        Except now the airlines need more money and no one is interested in buying those shares.
        mrscottson 7y ago
        C level executives of these companies buyback stock to unlock stock performance bonuses early....they will borrow money to do it if interest rates are low and if they know they will get bailed out during bad times.... All this "we are doing it for shareholders" tripe is nonsense. Buying back stock at all time highs is the most idiotic thing a company can do because it says the business has no better use for said money, which imo is one of the dumbest conclusions a company can come to if growth is the goal (is your R&D department so useless that giving the money back to shareholders is the best allocation choice? Silly)....I'm including companies with a huge war chest like Apple, they are not an exception to this truth. Many companies (run by idiots) have concluded that financial engineering is more useful than R&D, these badly managed companies should be left right in front of the "market firing squad" when the market turns against them inevitably... No bailouts.
      - ogre_codes 7y ago
        > Buying back shares is, in some ways, paying off your debt. So you buy back shares when they are at the 52 week high and sell more shares when they are at the 52 week low... that's brilliant. Share buybacks make sense for companies with strong balance sheets and little/ no debt load. For example: Apple. They make zero sense for companies with weak balance sheets and tons of debts (e.g. Most of the airlines).
  - varjag 7y ago
    Hard to pin down exact figure, but a quarter worth of their normal turnover could probably go a long way. Given that their fleet is grounded, airports rents are suspended and there are no fuel expenses.
    - pmiller2 7y ago
      Moreover, now is actually a good time to buy fuel and stockpile it (if they have the facilities), or use derivatives to take advantage of the situation if not. I am aware that airlines do hedge their fuel costs, but, that requires cash, which they apparently don't have right now.
  - reaperducer 7y ago
    The airlines have more accountants than airplanes. I trust they'd figure it out.
  - MAGZine 7y ago
    ? surely 12 billion dollars that american spent would have extended their runway a day or two.
  - chewbacha 7y ago
    About 50 billion which is what American was asking for. Considering they have posted between $3-15 billion [0] in quarterly profits over the past 10 years, it seems reasonable that they could have saved a rainy day fund _and_ bought back stocks. [0] https://www.macrotrends.net/stocks/charts/AAL/american-airlines-group/gross-margin https://www.macrotrends.net/stocks/charts/AAL/american-airli...
    - EpicEng 7y ago
      You are completely misreading those charts. The interval is 1Y, not one quarter.
    - soared 7y ago
      You want them to save half their money? That makes no sense
      - deleted 7y ago
        [deleted]
      - claudeganon 7y ago
        The current reality would require them to have those reserves as opposed to being bailed out, so by all meaningful definitions, it does, in fact, make sense.
        smabie 7y ago
        No, I don't think it does. Just because an event of very small probability happens does not mean it is rational to waste half your cash preparing for it. What determines the right actions in regards to mitigating risk has little to do with the realized events; instead, it's better to look at the probability of said event. Not saying they shouldn't have saved some cash for a pandemic, but the fact that it's happened isn't an argument for them to have done so.
        deleted 7y ago
        [deleted]
  - objektif 7y ago
    Who made it illegal exactly? And do you think there are no flights atm?
    - pmiller2 7y ago
      It's not precisely illegal. I'm assuming that was a rhetorical device. There are some flight restrictions in place, though. Reduction in flights is also causing a larger than normal number of "ghost flights," which are a pure cost incurred to move people and aircraft around. [0] --- [0]: https://www.cnn.com/travel/article/airport-slots-ghost-flights/index.html https://www.cnn.com/travel/article/airport-slots-ghost-fligh...
  - pmiller2 7y ago
    Take current expenses and multiply by 6, and that's a good start. Standard personal finance advice is for individuals to have 3-6 months worth of expenses on hand for an emergency. Banks frequently require 3-6 months of reserves for commercial real estate loans. Why shouldn't that rule apply to large corporations?
    - EpicEng 7y ago
      >Why shouldn't that rule apply to large corporations? Because it makes little sense to compare a corporation's finances to your own, especially in a low margin industry, and it would completely stifle growth.
      - pmiller2 7y ago
        Then they don’t get to come whining to me for bailouts.
        EpicEng 7y ago
        Apparently they do. It's not nearly as simple as you'd like it to be.
        pmiller2 7y ago
        It literally is that simple. My company had ~6 months worth of expenses stashed away in cash, cash equivalents, and other fairly liquid vehicles, and our net profit was ~4% on over a billion in revenue. Edit: Why should I, as an individual, be held to a higher standard than a group of individuals who have come together in the name of profit (most of which goes to those at the top) and have limited liability in case of failure?
        EpicEng 7y ago
        The stock they bought back is a liquid vehicle. Seeing as your company, whatever that may be, had sixth months put away, I imagine you actually mean "invested" and very little of it was cash. Your operating expenses are extremely high and earnings low. As to why it's a different standard, it's different for the same reason baseball doesn't use the same rules as water polo. Both sports, but very different. I'm not here trying to defend poor management, but it's hard to take your "maintain a massive emergency cash fund" idea seriously.
- ijidak 7y ago
  I would love to see a study that shows how much money publicly traded companies are keeping on hand as a percentage of revenues over the last 75 years. My guess is: (1) The long period of relative peace post WW-II and (2) the collapse of the Soviet Union, and (3) the ever-expanding size and liquidity of global financial markets, have led to slowly dwindling cash reserves for all non-financial, publicly traded companies. (Especially if you exclude the most profitable tech companies) I'd also love to see the trend in cash reserves post 2008 bailouts. That data might help settle this debate. Are companies taking advantage of bailout culture? E.g. there is a social safety net for large companies that doesn't exist for small companies. As that safety net has formed, has that led to no change in net cash reserves, an increase, or a decrease? My guess would be that it has led to a decrease. Because, it seems safe for the largest companies to understand that every 10 years or so, they will need a bailout for unexpected global turmoil. (A war, a man-made disaster, a pandemic, etc.)
  - fapjacks 7y ago
    I'd be willing to bet my next paycheck that cash/credit trends would generally follow the cycle of the broader economy with few surprises -- though I understand viscerally your (very human) impulse to say we'd find cash reserves falling steadily over the years. After all, the reason economic expansion (above and beyond productivity growth) happens is because companies and people are extended credit, and companies and people take credit because they don't have the cash on hand. And of course when this momentum cannot be maintained, recession. To your point, however, I'd also be willing to bet that the largest companies actively consider the current "bailout culture" in decisions concerning their broader strategy.
- spease 7y ago
  Perhaps what’s needed for “too big to fail” businesses is to require them to either have a certain amount of cash reserves on hand, or split up in such a way that the risk is mitigated. This would help prevent an aggressively spending company from out-competing savers through excess spending, buying them out, then going out of business itself when hard times come around.
  - marvin 7y ago
    Just wipe out the shareholders when the time for bailout comes. Owners can choose whether to take bankruptcy or a 90% haircut. (Or, say, X - 10%, where X is the number that state negotiators determines the company will get in a fire sale). This should properly incentivize everyone for the next round. I don't understand why more people don't propose something along these lines.
    - EpicEng 7y ago
      >Just wipe out the shareholders when the time for bailout comes... I don't understand why more people don't propose something along these lines. The answer seems pretty obvious. If you don't believe that any company should be "too big to fail", that's valid, but it's not exactly the situation we have today. Secondly, those shareholders you speak of aren't just a small group of billionaires. Many of these companies make up substantial portions of people's returement savings, not to mention the knock on effects of huge businesses going under.
      - fredthomsen 7y ago
        but moral hazard makes the management of these companies worse and worse everytime one gets bailed out
        EpicEng 7y ago
        Not for the banks after 2008. I think far more people should have been arrested, but the reason our banks have enough liquidity to ride this out is due to regulations out in place after the last bailout.
- chrischen 7y ago
  Current tax incentives push companies to spend money (allocate it to productive areas) as much as possible or git hit with corporate income taxes. So generally hoarding money is not only not encouraged, there is a tax penalty for doing so. That’s also why you see so often companies with “no profit”. If a company is operating efficiently, they wouldn’t be turning a profit (they’d have already reinvested profit).
  - wahern 7y ago
    > Current tax incentives push companies to spend money (allocate it to productive areas) as much as possible or git hit with corporate income taxes. Basic profit-seeking capitalism incentivizes companies to either invest in productive areas or to return capital to shareholders so shareholders can invest in more productive areas. Taxes only effect those incentives at the margins, and the past several decades of increasingly corporate-friendly tax reforms don't excuse or justify the decisions that have been made by CFOs. > If a company is operating efficiently, they wouldn’t be turning a profit But what's the timeline for gauging efficiency? Any company needing a public bailout even though they had sufficient profit to cover the issue is manifestly not operating very efficiently. The ones taking on debt to fund buybacks are beyond any sort of reasonable justification from a public policy perspective. We can quibble over the scope of unpredictable downturns, but AFAIU the airlines returned much more capital than would be reasonable in expectations of a 10-year event. 1980s deregulation, 9/11, 2008 recession, and now 2020 pandemic... at some point you can't say that this stuff is "unpredictable" with a straight face. Something always happens, and even if you don't know precisely what or when, it's regular enough that you can substantially insure yourself. There's obvious moral hazard at play here, even though some public support may have been justifiable in this particular case. Even worse, AFAIU once upon a time airline union retirement funds were major purchasers of airline bonds. There was a sort of quid pro at play that more closely aligned unions and airlines during downturns, as unions were more incentivized than usual to return the airline to profitability through cost-cutting measures. The downside was, at least hypothetically, greater moral hazard--more pressure for government bailouts because more low- and middle-class employees were effected. But these days airlines have increasingly spurned unions and these sorts of arrangements, so any bailout directly lines the pockets of wealthy investors. There should be much less urgency to bailout the industry, especially without an equity exchange.
- HashThis 7y ago
  These corporations be forced to raise capital by selling the shares they bought back.
maerF0x0 7y ago
But the fact they do not have the warchest (or insurance) against an event such as this means all those earnings were false. They weren't risk adjusted. Kind of like I can drive around without insurance, but once i crash (or get a ticket) my savings disappear.
Donald 7y ago
American Airlines had negative free cash flow during the last decade yet did $12+ billion in share buy backs. They essentially borrowed money and handed it over to investors. Yet instead of liquidating their assets once their incompetent management hit a sand bar, US tax payers have been required to bail them out with loans and grants.
- jessaustin 7y ago
  Haha maybe they were trying to avoid a leveraged buyout by private equity... by running a leveraged buyout on themselves!
aqme28 7y ago
I think what the OP is arguing is that executives and investors have profited off of this arrangement. If they want to keep that airline afloat, they should have to put money back in. Or here's a simpler mechanism-- the airline should sell stock to the public markets to raise capital. It's the natural response to running out of money because you spent it buying stock. The fact that this is a market downturn is something they'll have to deal with.
supercanuck 7y ago
Pedantic, the argument is essentially dilute those same shareholders by issuing equity shares.
jlarocco 7y ago
Maybe they should ask the investors for the money... Or give the ticket holders stock in the company. I'm tired of corporations doing this, and people making excuses for them. It's all about the free market when they're raking in money and paying off investors, but the second they run into any problem that costs them money they want another bail out or for the government to change the rules in their favor.
stefan_ 7y ago
You make it sound like this was excess money. In fact it was cash flow freed up by leveraging the entire company and loading it up with debt, a ponzi game they were playing with the feds where the feds made the low interest loans happen and the airlines bought back stocks to bring about the desired market bull run. And the executives got paid, seeing how stock (and stock performance) is a big part of their renumeration.
deleted 7y ago
[deleted]
MR4D 7y ago
I disagree on one very key fundamental point: Buybacks increase the share price, which is a typical metric for executives. This leads to a situation where it is in the interest of the exec to increase buybacks in order to drive the price up, even if the company performance is not that good. Personally, I'm neutral except for this one thing.
somethoughts 7y ago
I think the idea is that stock buybacks can be the same as dividends for an investor who want cashflow from their shares if the investor sells a probationally equivalent amount of shares that were bought back by the company during the stock buyback period. The challenge is that most investors don't bother to do such tracking. And thus most investors are buying stock at prices much higher than they would have originally bought it at.
- dmurray 7y ago
  They can be the same for that investor, and better (for tax purposes) for an investor who doesn't want that cash flow and would prefer to reinvest. The enormous majority of US publicly-traded stock is held by institutions who have the resources to monitor the buybacks and sell off stock, if that's what they wanted. Buybacks aren't a scheme where companies or hedge funds make money off careless retail investors.
- smabie 7y ago
  It doesn't matter that they are buying at a higher price, theoretically stock buybacks should have no affect on the market value of the company. All it does is increase shareholder equity and buy the same amount decrease the number of floating shares. The problem is that retail money only looks at the price of the stock without any context for the company as a whole.
  - somethoughts 7y ago
    There is a very real issue if the company pays too high a price for its share buybacks. Taken in the extreme case of the corona virus there is a very real difference if the company (say the airlines) did a buyback of a set amount of shares in January 2020 versus if the company did a buyback of the exact amount of shares buyback today, post corona virus crash.
objektif 7y ago
I think you seem to not understand how corporate governance should work. The goal of corporations is to maximize long term shareholder value. Not to bump up stock price so that stock options of their CEOs can be exercised.
adrr 7y ago
They could have paid off debts. I am pretty sure some even use debt to purchase stocks in their buy back programs. I don’t get why we are bailing them out. 60% of people down own a single share stock including 401Ks, IRAs etc. Adding some much liquidity into the economy through q-easing will increase inflation in the long run and harm the middle the class.
acchow 7y ago
The moral hazard is that companies with many employees think they are "too big to fail". They don't feel the need to keep cash reserves so instead leverage themselves up to the eyeballs because when a recession hits the government will just bail them out. This is what everyone means by "privatize profits, socialize losses". Pay back all profits as dividends/buybacks and when losses mount from a recession then get bailed out by the government.
fra 7y ago
In exchange for that return on investments, investors bear risk. That risk has now come due, investors should be getting a haircut. IMO the bailout should take the form of an equity investment from the government. Investors get diluted, but the company survives. Government gets a profit if things go well. Privatizing profit and mutualizing risks is an insane moral hazard, we have to shake it off.
- TheSoftwareGuy 7y ago
  Hmm.. maybe this is a chance to kickstart a US Sovereign Wealth fund. If all the bailouts are in the form of buying an equity stake, we simply put all that equity in a portfolio, and rebalance it when things stabilize. Presto, that's a sovereign wealth fund right there.
  - stallmanite 7y ago
    I really like this proposal. Is there a reason it’s not being seriously considered?
- dmoy 7y ago
  What you're describing is exactly how tarp bailouts of 2008 worked - government bought preferred stock. It was then promptly bought back over the next couple of years. Truly getting rid of the mutualizing of risks would be letting the companies just collapse. But for various reasons (wanting banks, plane flights), we've decided to not do that.
  - fra 7y ago
    I think if you severely dilute (or even wipe out) the shareholders you've gotten rid of the moral hazard. This happened with some of the car companies, and I don't think they're too eager to go through it again.
caseyf7 7y ago
Theoretically they may be equivalent, but they are not equivalent when executive bonuses are tied to increasing earnings-per-share and stock price.
RobLach 7y ago
They can invest it into a cash reserve to combat the existential risk to the company from a global disaster which halts airline travel. Investors are too short-term focused and states are too corporate welfare dealing for that to be enticing though.
ericmcer 7y ago
Dividends don’t create as much of a false sense of success/growth though. Buyback programs are way more extensive than dividends as well. At this point buybacks and corporate bonds seem like a middleman between executives pockets and the federal reserve.
joe_the_user 7y ago
It don't think the difference between buyback and dividends actually matter to the important part of the parent's argument. The main thing is that airlines transfered their capital to their shareholders. So now they have very little. If they want to keep operating, they will have to ask for some more capital, maybe from their shareholders, maybe from others.

majormajor 7y ago

There's a third option: building up cash reserves for the inevitable down times. This is one of those "privatized profits, socialized risk" situations. It's not attractive to save money when you know you can get bailed out or go through bankruptcy without too much pain.

SpicyLemonZest 7y ago
What amount of cash reserves would have allowed them to survive their business becoming illegal?
- ogre_codes 7y ago
  If you aren't massively over-leveraged, your survival prospects are much higher under any circumstances. If the airlines had serviced their debt instead of accumulating debt while rewarding shareholders, recovery would be a lot easier. Indulging in debt is the American way. Particularly when you can rely on taxpayer financed government bailouts to smooth out the bumps.
  - smabie 7y ago
    Buying back shares is, in some ways, paying off your debt. Whenever you need money, you can just create more shares and sell them back. The problem is that you lose some diversification benefits: when you need to sell more shares is often (though not always) correlated to a drop in your own stock price. Ideally though, you're inflating the balloon so to speak so you can deflate it when need be. Or you think that your stock is undervalued right now.
    - elliekelly 7y ago
      Except now the airlines need more money and no one is interested in buying those shares.
      - mrscottson 7y ago
        C level executives of these companies buyback stock to unlock stock performance bonuses early....they will borrow money to do it if interest rates are low and if they know they will get bailed out during bad times.... All this "we are doing it for shareholders" tripe is nonsense. Buying back stock at all time highs is the most idiotic thing a company can do because it says the business has no better use for said money, which imo is one of the dumbest conclusions a company can come to if growth is the goal (is your R&D department so useless that giving the money back to shareholders is the best allocation choice? Silly)....I'm including companies with a huge war chest like Apple, they are not an exception to this truth. Many companies (run by idiots) have concluded that financial engineering is more useful than R&D, these badly managed companies should be left right in front of the "market firing squad" when the market turns against them inevitably... No bailouts.
    - ogre_codes 7y ago
      > Buying back shares is, in some ways, paying off your debt. So you buy back shares when they are at the 52 week high and sell more shares when they are at the 52 week low... that's brilliant. Share buybacks make sense for companies with strong balance sheets and little/ no debt load. For example: Apple. They make zero sense for companies with weak balance sheets and tons of debts (e.g. Most of the airlines).
- varjag 7y ago
  Hard to pin down exact figure, but a quarter worth of their normal turnover could probably go a long way. Given that their fleet is grounded, airports rents are suspended and there are no fuel expenses.
  - pmiller2 7y ago
    Moreover, now is actually a good time to buy fuel and stockpile it (if they have the facilities), or use derivatives to take advantage of the situation if not. I am aware that airlines do hedge their fuel costs, but, that requires cash, which they apparently don't have right now.
- reaperducer 7y ago
  The airlines have more accountants than airplanes. I trust they'd figure it out.
- MAGZine 7y ago
  ? surely 12 billion dollars that american spent would have extended their runway a day or two.
- chewbacha 7y ago
  About 50 billion which is what American was asking for. Considering they have posted between $3-15 billion [0] in quarterly profits over the past 10 years, it seems reasonable that they could have saved a rainy day fund _and_ bought back stocks. [0] https://www.macrotrends.net/stocks/charts/AAL/american-airlines-group/gross-margin https://www.macrotrends.net/stocks/charts/AAL/american-airli...
  - EpicEng 7y ago
    You are completely misreading those charts. The interval is 1Y, not one quarter.
  - soared 7y ago
    You want them to save half their money? That makes no sense
    - deleted 7y ago
      [deleted]
    - claudeganon 7y ago
      The current reality would require them to have those reserves as opposed to being bailed out, so by all meaningful definitions, it does, in fact, make sense.
      - smabie 7y ago
        No, I don't think it does. Just because an event of very small probability happens does not mean it is rational to waste half your cash preparing for it. What determines the right actions in regards to mitigating risk has little to do with the realized events; instead, it's better to look at the probability of said event. Not saying they shouldn't have saved some cash for a pandemic, but the fact that it's happened isn't an argument for them to have done so.
        deleted 7y ago
        [deleted]
- objektif 7y ago
  Who made it illegal exactly? And do you think there are no flights atm?
  - pmiller2 7y ago
    It's not precisely illegal. I'm assuming that was a rhetorical device. There are some flight restrictions in place, though. Reduction in flights is also causing a larger than normal number of "ghost flights," which are a pure cost incurred to move people and aircraft around. [0] --- [0]: https://www.cnn.com/travel/article/airport-slots-ghost-flights/index.html https://www.cnn.com/travel/article/airport-slots-ghost-fligh...
- pmiller2 7y ago
  Take current expenses and multiply by 6, and that's a good start. Standard personal finance advice is for individuals to have 3-6 months worth of expenses on hand for an emergency. Banks frequently require 3-6 months of reserves for commercial real estate loans. Why shouldn't that rule apply to large corporations?
  - EpicEng 7y ago
    >Why shouldn't that rule apply to large corporations? Because it makes little sense to compare a corporation's finances to your own, especially in a low margin industry, and it would completely stifle growth.
    - pmiller2 7y ago
      Then they don’t get to come whining to me for bailouts.
      - EpicEng 7y ago
        Apparently they do. It's not nearly as simple as you'd like it to be.
        pmiller2 7y ago
        It literally is that simple. My company had ~6 months worth of expenses stashed away in cash, cash equivalents, and other fairly liquid vehicles, and our net profit was ~4% on over a billion in revenue. Edit: Why should I, as an individual, be held to a higher standard than a group of individuals who have come together in the name of profit (most of which goes to those at the top) and have limited liability in case of failure?
        EpicEng 7y ago
        The stock they bought back is a liquid vehicle. Seeing as your company, whatever that may be, had sixth months put away, I imagine you actually mean "invested" and very little of it was cash. Your operating expenses are extremely high and earnings low. As to why it's a different standard, it's different for the same reason baseball doesn't use the same rules as water polo. Both sports, but very different. I'm not here trying to defend poor management, but it's hard to take your "maintain a massive emergency cash fund" idea seriously.
ijidak 7y ago
I would love to see a study that shows how much money publicly traded companies are keeping on hand as a percentage of revenues over the last 75 years. My guess is: (1) The long period of relative peace post WW-II and (2) the collapse of the Soviet Union, and (3) the ever-expanding size and liquidity of global financial markets, have led to slowly dwindling cash reserves for all non-financial, publicly traded companies. (Especially if you exclude the most profitable tech companies) I'd also love to see the trend in cash reserves post 2008 bailouts. That data might help settle this debate. Are companies taking advantage of bailout culture? E.g. there is a social safety net for large companies that doesn't exist for small companies. As that safety net has formed, has that led to no change in net cash reserves, an increase, or a decrease? My guess would be that it has led to a decrease. Because, it seems safe for the largest companies to understand that every 10 years or so, they will need a bailout for unexpected global turmoil. (A war, a man-made disaster, a pandemic, etc.)
- fapjacks 7y ago
  I'd be willing to bet my next paycheck that cash/credit trends would generally follow the cycle of the broader economy with few surprises -- though I understand viscerally your (very human) impulse to say we'd find cash reserves falling steadily over the years. After all, the reason economic expansion (above and beyond productivity growth) happens is because companies and people are extended credit, and companies and people take credit because they don't have the cash on hand. And of course when this momentum cannot be maintained, recession. To your point, however, I'd also be willing to bet that the largest companies actively consider the current "bailout culture" in decisions concerning their broader strategy.
spease 7y ago
Perhaps what’s needed for “too big to fail” businesses is to require them to either have a certain amount of cash reserves on hand, or split up in such a way that the risk is mitigated. This would help prevent an aggressively spending company from out-competing savers through excess spending, buying them out, then going out of business itself when hard times come around.
- marvin 7y ago
  Just wipe out the shareholders when the time for bailout comes. Owners can choose whether to take bankruptcy or a 90% haircut. (Or, say, X - 10%, where X is the number that state negotiators determines the company will get in a fire sale). This should properly incentivize everyone for the next round. I don't understand why more people don't propose something along these lines.
  - EpicEng 7y ago
    >Just wipe out the shareholders when the time for bailout comes... I don't understand why more people don't propose something along these lines. The answer seems pretty obvious. If you don't believe that any company should be "too big to fail", that's valid, but it's not exactly the situation we have today. Secondly, those shareholders you speak of aren't just a small group of billionaires. Many of these companies make up substantial portions of people's returement savings, not to mention the knock on effects of huge businesses going under.
    - fredthomsen 7y ago
      but moral hazard makes the management of these companies worse and worse everytime one gets bailed out
      - EpicEng 7y ago
        Not for the banks after 2008. I think far more people should have been arrested, but the reason our banks have enough liquidity to ride this out is due to regulations out in place after the last bailout.
chrischen 7y ago
Current tax incentives push companies to spend money (allocate it to productive areas) as much as possible or git hit with corporate income taxes. So generally hoarding money is not only not encouraged, there is a tax penalty for doing so. That’s also why you see so often companies with “no profit”. If a company is operating efficiently, they wouldn’t be turning a profit (they’d have already reinvested profit).
- wahern 7y ago
  > Current tax incentives push companies to spend money (allocate it to productive areas) as much as possible or git hit with corporate income taxes. Basic profit-seeking capitalism incentivizes companies to either invest in productive areas or to return capital to shareholders so shareholders can invest in more productive areas. Taxes only effect those incentives at the margins, and the past several decades of increasingly corporate-friendly tax reforms don't excuse or justify the decisions that have been made by CFOs. > If a company is operating efficiently, they wouldn’t be turning a profit But what's the timeline for gauging efficiency? Any company needing a public bailout even though they had sufficient profit to cover the issue is manifestly not operating very efficiently. The ones taking on debt to fund buybacks are beyond any sort of reasonable justification from a public policy perspective. We can quibble over the scope of unpredictable downturns, but AFAIU the airlines returned much more capital than would be reasonable in expectations of a 10-year event. 1980s deregulation, 9/11, 2008 recession, and now 2020 pandemic... at some point you can't say that this stuff is "unpredictable" with a straight face. Something always happens, and even if you don't know precisely what or when, it's regular enough that you can substantially insure yourself. There's obvious moral hazard at play here, even though some public support may have been justifiable in this particular case. Even worse, AFAIU once upon a time airline union retirement funds were major purchasers of airline bonds. There was a sort of quid pro at play that more closely aligned unions and airlines during downturns, as unions were more incentivized than usual to return the airline to profitability through cost-cutting measures. The downside was, at least hypothetically, greater moral hazard--more pressure for government bailouts because more low- and middle-class employees were effected. But these days airlines have increasingly spurned unions and these sorts of arrangements, so any bailout directly lines the pockets of wealthy investors. There should be much less urgency to bailout the industry, especially without an equity exchange.
HashThis 7y ago
These corporations be forced to raise capital by selling the shares they bought back.

maerF0x0 7y ago

But the fact they do not have the warchest (or insurance) against an event such as this means all those earnings were false. They weren't risk adjusted. Kind of like I can drive around without insurance, but once i crash (or get a ticket) my savings disappear.

Donald 7y ago

American Airlines had negative free cash flow during the last decade yet did $12+ billion in share buy backs. They essentially borrowed money and handed it over to investors. Yet instead of liquidating their assets once their incompetent management hit a sand bar, US tax payers have been required to bail them out with loans and grants.

jessaustin 7y ago
Haha maybe they were trying to avoid a leveraged buyout by private equity... by running a leveraged buyout on themselves!

aqme28 7y ago

I think what the OP is arguing is that executives and investors have profited off of this arrangement. If they want to keep that airline afloat, they should have to put money back in. Or here's a simpler mechanism-- the airline should sell stock to the public markets to raise capital. It's the natural response to running out of money because you spent it buying stock. The fact that this is a market downturn is something they'll have to deal with.

supercanuck 7y ago

Pedantic, the argument is essentially dilute those same shareholders by issuing equity shares.

jlarocco 7y ago

Maybe they should ask the investors for the money... Or give the ticket holders stock in the company. I'm tired of corporations doing this, and people making excuses for them. It's all about the free market when they're raking in money and paying off investors, but the second they run into any problem that costs them money they want another bail out or for the government to change the rules in their favor.

stefan_ 7y ago

You make it sound like this was excess money. In fact it was cash flow freed up by leveraging the entire company and loading it up with debt, a ponzi game they were playing with the feds where the feds made the low interest loans happen and the airlines bought back stocks to bring about the desired market bull run. And the executives got paid, seeing how stock (and stock performance) is a big part of their renumeration.

deleted 7y ago

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MR4D 7y ago

I disagree on one very key fundamental point: Buybacks increase the share price, which is a typical metric for executives. This leads to a situation where it is in the interest of the exec to increase buybacks in order to drive the price up, even if the company performance is not that good. Personally, I'm neutral except for this one thing.

somethoughts 7y ago

I think the idea is that stock buybacks can be the same as dividends for an investor who want cashflow from their shares if the investor sells a probationally equivalent amount of shares that were bought back by the company during the stock buyback period. The challenge is that most investors don't bother to do such tracking. And thus most investors are buying stock at prices much higher than they would have originally bought it at.

dmurray 7y ago
They can be the same for that investor, and better (for tax purposes) for an investor who doesn't want that cash flow and would prefer to reinvest. The enormous majority of US publicly-traded stock is held by institutions who have the resources to monitor the buybacks and sell off stock, if that's what they wanted. Buybacks aren't a scheme where companies or hedge funds make money off careless retail investors.
smabie 7y ago
It doesn't matter that they are buying at a higher price, theoretically stock buybacks should have no affect on the market value of the company. All it does is increase shareholder equity and buy the same amount decrease the number of floating shares. The problem is that retail money only looks at the price of the stock without any context for the company as a whole.
- somethoughts 7y ago
  There is a very real issue if the company pays too high a price for its share buybacks. Taken in the extreme case of the corona virus there is a very real difference if the company (say the airlines) did a buyback of a set amount of shares in January 2020 versus if the company did a buyback of the exact amount of shares buyback today, post corona virus crash.

objektif 7y ago

I think you seem to not understand how corporate governance should work. The goal of corporations is to maximize long term shareholder value. Not to bump up stock price so that stock options of their CEOs can be exercised.

adrr 7y ago

They could have paid off debts. I am pretty sure some even use debt to purchase stocks in their buy back programs. I don’t get why we are bailing them out. 60% of people down own a single share stock including 401Ks, IRAs etc. Adding some much liquidity into the economy through q-easing will increase inflation in the long run and harm the middle the class.

acchow 7y ago

The moral hazard is that companies with many employees think they are "too big to fail". They don't feel the need to keep cash reserves so instead leverage themselves up to the eyeballs because when a recession hits the government will just bail them out. This is what everyone means by "privatize profits, socialize losses". Pay back all profits as dividends/buybacks and when losses mount from a recession then get bailed out by the government.

fra 7y ago

In exchange for that return on investments, investors bear risk. That risk has now come due, investors should be getting a haircut. IMO the bailout should take the form of an equity investment from the government. Investors get diluted, but the company survives. Government gets a profit if things go well. Privatizing profit and mutualizing risks is an insane moral hazard, we have to shake it off.

TheSoftwareGuy 7y ago
Hmm.. maybe this is a chance to kickstart a US Sovereign Wealth fund. If all the bailouts are in the form of buying an equity stake, we simply put all that equity in a portfolio, and rebalance it when things stabilize. Presto, that's a sovereign wealth fund right there.
- stallmanite 7y ago
  I really like this proposal. Is there a reason it’s not being seriously considered?
dmoy 7y ago
What you're describing is exactly how tarp bailouts of 2008 worked - government bought preferred stock. It was then promptly bought back over the next couple of years. Truly getting rid of the mutualizing of risks would be letting the companies just collapse. But for various reasons (wanting banks, plane flights), we've decided to not do that.
- fra 7y ago
  I think if you severely dilute (or even wipe out) the shareholders you've gotten rid of the moral hazard. This happened with some of the car companies, and I don't think they're too eager to go through it again.

caseyf7 7y ago

Theoretically they may be equivalent, but they are not equivalent when executive bonuses are tied to increasing earnings-per-share and stock price.

RobLach 7y ago

They can invest it into a cash reserve to combat the existential risk to the company from a global disaster which halts airline travel. Investors are too short-term focused and states are too corporate welfare dealing for that to be enticing though.

ericmcer 7y ago

Dividends don’t create as much of a false sense of success/growth though. Buyback programs are way more extensive than dividends as well. At this point buybacks and corporate bonds seem like a middleman between executives pockets and the federal reserve.

joe_the_user 7y ago

It don't think the difference between buyback and dividends actually matter to the important part of the parent's argument. The main thing is that airlines transfered their capital to their shareholders. So now they have very little. If they want to keep operating, they will have to ask for some more capital, maybe from their shareholders, maybe from others.