Do The Right Thing

Consider this. The US gov’t lost $11 billion on the GM bailout. No surprise, the company had $100 billion of losses in the decade leading up to the crisis. The US airlines industry has contributed over $64 million in political “contributions” split evenly between dems and repubs, since 1990. Who do you think the industry was seeking to gain an advantage over. The decision is already made. This explains the whimsical attitude toward risk.

What started in the housing industry, has spread throughout ‘institutional’ or large asset corporate America. And we’re suppose to be the leaders of the ‘free’ world. These trees of greed need shaken. And fruits of power redistributed. Clawing back stock based compensation, of say over $5m a year, is a start. Regardless, financial engineering has ‘de’-choiced Americans - mortgaging decisions (power), savings (capital) and stewardship (property) for a super elite ‘managerial class’. Enough. That thinking is worse than magical, it’s become predatory and dangerous. Do the right thing, indeed.

My only caveat is that in the current regime, we will end up with Don Jr. and Eric as COB of two major airlines.

So I’m admittedly a novice at all this, but isn’t there a remedy called bankruptcy? The airlines have done this repeatedly over the years (and dumped their pension obligations on the PBGC btw) and they kept flying and had few cancellations that I can remember. Shareholders wiped out as they should be. Creditors get company. New stock issued. Reset button hit. Other than the fact that it’ll never happen because the players that stand to lose under that scenario are too well connected, please tell me what’s wrong with that process in this situation?

There’s an enormous amount of collateral damage if you go the BK route, and it throws everything into court, where anything can happen and everything happens slowly. All the same, I think that’s the right course for airlines that can’t raise new equity, like (I suspect) American.

Hi Ben,

Do I have permission to share this post with the congressional leadership (I use that term VERY loosely) from Michigan? I’d like to use it to vent my supreme distaste for any bailout short of the terms you list in the post. I’m still fuming from the TARP bailout in 2008. My “friends” at Bank of America took that handout, which of course I with the rest of the business people in the US paid for, then turned around and pulled my loan because our organization did not fit their “box”. Thank God for the hometown bank (Northbrook Bank of Illinois) who came to our rescue and allowed me to continue to run my company and employ 100 other families. I’d love to shove a bailout right up the asses of BA and their cohort airlines (and the “too big to fail” banks too!).

Please do!!

Thanks for the impressive blocking and tackling on this. I’d like to share this with Vermont’s delegation.

Point #4 does not go far enough. The only way to make sure this never happens again is to disallow dividends, buybacks, AND increased net debt for EACH AND EVERY corporation that is Too Big To Fail until each one achieves a level of liquidity that would allow it to survive for a year without raising incremental capital. Once a company achieve this level of liquidity it can allocate capital however it wants. Until that point, it is both unjust and economically harmful to allow systemically important companies to operate with leverage that almost guarantees some of them will require bailouts every 10 years.

The irony of this policy is that buybacks are so horribly timed that there is a chance it would actually increase shareholder returns over the long term by encouraging countercyclical rather than pro-cyclical buybacks.

Bravo and Thank You!! As a Vermonter who does not want Bernie as President, I nonetheless feel connected to him on some issues. Your piece speaks to one of those connections, and I’d bet that many others across the political spectrum feel similar. Perhaps a few mini-revolutions tailored to specific situations would be appropriate.

This is so good, Ben, thanks! We used to say - back in the days where 'alternative data sets" meant hand-entering things - that there was a “return to tedium”. I’m sure it was tedious to put those numbers together but it really was worth it. I’m sending your recommendations to Barbara Lee now (did you ever think you and her would be on the same side?).

Am I hearing an echo of the past- “too big to fail?” And exactly what conditions have resulted in companies like the airlines having these oligarchic, market monopolies in the first place? Just like our approach to healthcare and (poor) preparation for pandemics, we celebrate the fruits of allowing consolidation through regulatory manipulation and political power until we crash and pay for it with pain and cost, not just inconvenience and supposed “diminished” liberty. Let’s fix this! I like your proposal and want to send it to my representatives as well and hold them accountable and unable to plead ignorance. Thank you! PS- I am more of a fan of the SW Airlines approach, too.

Thanks, Kevin! (and no re: Barbara Lee!)

Reflecting on this conversation this week, I couldn’t help but think “How quaint”. Discussing the rules that should apply to certain Coronavirus bailouts now seems so passé. Why in the world would a company opt for a bailout with strings attached when the Fed has effectively nationalized the corporate bond market, offering covenant-free loans with immediate forbearance to anyone and everyone? And for those who would argue that the Fed is not buying junk, covenant-lite or leveraged loans, I would only reply “Yet” or as Ben likes to say “you’re just not paying attention”. I can imagine the ratings agencies, who even before the virus were woefully behind the curve on properly reflecting risk in the corporate credit market, will be under significant pressure to not downgrade (in fact, I think I heard Cramer say they should stop downgrading this past week).

No wonder BA stock doubled this week. Why in the world would they take the bailout when they have access to PMCCF? And while I appreciate the tutorial by Mr. Horan on how the bankruptcy process can be just as fraught with peril as a bailout (sigh, I guess no system filled by corrupt people is beyond corruption), I do feel that the process is at least fairer to the most people in society and contains less moral hazard than a nationalization of the corporate debt market. And I haven’t even mentioned the rest of the Fed’s alphabet soup of SPVs or the suspension of the FOIA (accountability anyone? Ha ha ha!)

I think Oppenheimer was misquoted (and by extension, Vishnu mistranslated). I think what he said was “Now I am become debt, the destroyer of worlds”.