Bailouts, Bankruptcy, or Nationalization

Discussion in 'West Mall' started by Musburger1, Mar 23, 2020.

  1. Musburger1

    Musburger1 2,500+ Posts

    Well the Fed is going to buy bad corporate debt. If not, many large corporations would go under....as they are supposed to do in a free market capitalist system. So there are three ways to handle such situations.

    1. Bailouts - This is the route the United States is taking. It's not up to Congress. This power has been delegated to the unelected group of bankers that comprise the Federal Reserve. The powerful get bailed out, just as the banks did a decade ago. Moral hazard is encouraged. Little guys in trouble fail. The bankers decide who gets bailed out.

    2. Bankruptcy. This is the preferred method of a capitalist economy. The argument against is that certain companies are simply too big to fail; that all Americans will suffer if these corporations aren't bailed out.

    3. Nationalization. This is also a bailout, the difference is that ownership is taken away from current management and placed in the hands of government. The argument against this is that governments with all their inefficiency, bureaucracy , and red tape does a poor job. The argument for this is that the present system has morphed into a system where private owners use their own companies to extract wealth from the corporation for their own personal gain by encouraging risky, and reckless behavior for which they are not held accountable.

    So which path do you prefer? We are going to get choice #1, but what are your thoughts?
     
  2. iatrogenic

    iatrogenic 1,000+ Posts

    1. If the bailout is a loan that has to be repaid, I’m good with it.
    2. I’m good with this as well. To me, too big to fail is a lie.
    3.Nationalization is a ridiculously bad idea. I disagree that companies are not held accountable. The market will do that deed. Just look at the turnover in the “Fortune” 500 over the past 30 years.
     
    • Like Like x 1
  3. Austin_Bill

    Austin_Bill 1,000+ Posts

    When you have whole countries like China stealing from our companies we have to protect them. I would always say that we should let the market work itself out, however, with such external forces we need the feds to do their part to protect our international companies. So I say take nothing off the table but we need to make sure all of these companies must be held accountable for bad decisions.
     
  4. Chop

    Chop 2,500+ Posts

    Looking at it on a case-by-case basis, the case of Boeing should be closely considered. Boeing and Airbus dominate the world’s large commercial aircraft market. Airbus is very heavily subsidized and propped up by the EU and Euro countries. If Boeing goes under, we lose an important industry and Airbus gets a global monopoly in the large commercial aircraft industry. Bad outcome. I think if we nationalized Boeing, it would produce worse planes and do so inefficiently. NASA uses private industry and contractors/subcontractors quite a bit. They put a man on the moon 50 years ago, so public-private partnerships have worked here before. That’s not the same as nationalizing the industry. I don’t see a better alternative at this point than to hold our noses and bail out Boeing—with conditions.

    My biggest issue with bailouts is the company using any portion of the $ for stock buyouts. No public $ for companies to manipulate their stock value.
     
  5. Horn6721

    Horn6721 Half of seeming clever is keeping your mouth shut.

    Chop
    According to Trump and McConnell companies will not be able to do stock buybacks OR give themselves big bonuses
     
  6. Chop

    Chop 2,500+ Posts

    Better get some strong language in there and have the lawyers comb it over with a fine toothed comb before anything is signed. This is all being rushed through on an ultra fast track. The Dems were making some noise about Mnuchin possibly being able to waive the no stock buyback provisions.
     
  7. Statalyzer

    Statalyzer 10,000+ Posts

    Too big to fail is a self-fulfilling prophecy in a way, if we keep bailing them out then we foster dependency on having assurances on future bailouts.

    While generally against corporate welfare, there is an objective difference I see if the government has forced a business to partially or totally shut down using emergency powers.
     
    • Agree Agree x 2
  8. Mr. Deez

    Mr. Deez 10,000+ Posts

    Looks like we're going to get bailouts with some cash to individuals to get the public to go along.
     
  9. Chop

    Chop 2,500+ Posts

    If a ‘too big to fail’ company can be bailed out with public $, it can be broken up into a number of smaller companies by the public. Just saying. Of course, if they don’t want the public meddling in their business, they don’t have to take the public $. The difficult issue is if the government, in large part, created the conditions necessitating a bailout. Also, if you break up Boeing, then Airbus and the Euros are now at a huge advantage in the international marketplace. Difficult and complex decisions indeed.
     
  10. iatrogenic

    iatrogenic 1,000+ Posts

    Why should stock buybacks be prohibited?
     
  11. Chop

    Chop 2,500+ Posts

    With public funds? If a company wants to buy back it’s own stock with its own funds, or issue more shares, there’s nothing wrong with that. But if it takes public bailout money, it shouldn’t use our $ to drive up / manipulate its share price by doing buy backs. The emergency bailout $ from the public comes with strings and should be used to keep the business afloat during very difficult times—not to drive up share prices by buying back stock.

    Of course, if the company wants to use its own $ to buy back shares, it’s still a free country (mostly). Taking public $ to do that is a different story.
     
    • Agree Agree x 2
  12. iatrogenic

    iatrogenic 1,000+ Posts

    So driving up share price is a bad thing and doesn't help keep the business afloat during difficult times?
     
  13. Statalyzer

    Statalyzer 10,000+ Posts

    Not necessarily a bad thing, but not the in realm of something government emergency measures should be used for?
     
  14. iatrogenic

    iatrogenic 1,000+ Posts

    You have to consider why the stock price would increase because of the buyback before criticizing the buyback. I doubt many have, but I know the criticism gets parroted quite a bit.
     
  15. Monahorns

    Monahorns 2,500+ Posts

    Buybacks don't strengthen the business. They just allow the high ups to make more money short term because their compensation packages are tied to stock price.

    Long term buybacks hurt business because that money wasn't invested in the company. That money doesn't have to be given to increase wages. It can fund research and development or new equipment, equipment upgrades, and repair.

    Every company has needs to do those things. If instead the money is tied up in stocks then it isn't improving the strength of the economy.
     
    • Like Like x 1
    • Agree Agree x 1
  16. Monahorns

    Monahorns 2,500+ Posts

    • Like Like x 2
  17. Chop

    Chop 2,500+ Posts

    Stock buybacks function as the opposite of capital raises. It lowers the amount of cash the business has on hand, so that hardly keeps the business afloat. It's also effectively a transfer of public funds to private shareholders--about the clearest form of "corporate welfare", largely from the working stiffs (or at least the ones who pay taxes) to the ownership class, out there. The better idea is to use the bailout $ for operations, payroll, rent, op-ex, etc. to get through the tough times, not to manipulate the stock price up to bonus the shareholders at the public's expense. I'd prefer our public $ not be used for corporate share buy backs. I would think most folks would agree, but there are counter-arguments.

    The best counter-arguments I can muster for the sake of argument (and I don't agree with them] are as follows: the company's stock has been hammered so hard that the market treats it like the plague. Lender's won't touch it, suppliers won't give credit, it's COD only, and even customers are wary of buying the products of a near-bankrupt entity. Stabilizing the stock might get some market confidence back in the ailing company. It also might allow the company to do some effective equity capital raises at higher share prices. [to me, that's not a very convincing argument to use public $] And stabilizing the stock market as a whole to prevent complete collapse may be another argument, although if an otherwise good company's shares drop off a cliff, investors looking for value often sweep in and buy it back out of the abyss.
     
    • Like Like x 1
    Last edited: Mar 25, 2020
  18. Chop

    Chop 2,500+ Posts

    It's stock market supply and demand. In a buy-back, the company executes massive buy orders that significantly outweigh the sell orders on the market driving up the stock price. With momentum trading and all the algorithms trading the markets, such a spike in share price may result in a further increase in share price even after the buyback concludes. If the company is doing private buybacks with its shareholders, you can bet its buying the shares at or above current market value. It's the opposite of dilution.
     
  19. humahuma

    humahuma 250+ Posts

    Mmmmm I didn’t read everything you said, but if a company is paying a dividend per share and they buy back shares doesn’t that mean they have more money. You loan me money at 0% and I am paying a dividend at 3% if I buy back shares I make 3% as a company.

    Doesn’t matter I think the bill has no buy backs or bonuses in it.
     
    Last edited: Mar 26, 2020
  20. Monahorns

    Monahorns 2,500+ Posts

    If you buy new stocks, that gives money to a corporation.

    In a stock buy back, the corporation receives no new money. You take cash and send that to the previous owner. The previous owner gets cash. The corporation gets a "piece of paper". The piece of paper can be sold later for cash. Usually the people receiving the cash later or corporate execs who sell their stocks.
     
    • Agree Agree x 1
  21. Chop

    Chop 2,500+ Posts

    Take a company trading at $40 that has been paying a $0.50 quarterly dividend for a while. Now the virus crash hits and they're desperate for cash. For short term liquidity (what is needed most in a crash like this), it's a lot worse to buy back a $40 share than to pay a $0.50 dividend on that share. Of course, in a liquidity crunch, the company can simply suspend its dividend. Many companies are doing just that.
     
  22. Monahorns

    Monahorns 2,500+ Posts

    One thing that is WAY worse than stock buy backs is bailouts and UBI.

    It will hollow out your economy like nobody's business.
     
  23. iatrogenic

    iatrogenic 1,000+ Posts

    The net result is the same. The corporation did not have to pay the 3% dividend on the repurchased shares (treasury shares), so they are ahead by the same amount.
     
  24. Chop

    Chop 2,500+ Posts

    Not really. The company pays out many times the dollar amount of the dividend to purchase the shares back, thereby losing valuable cash. Lack of short term liquidity is often what takes a struggling company under. If the company is hurting, it can lower or suspend the dividend. There’s a lot of that going around.
     
    • Agree Agree x 1
  25. SabreHorn

    SabreHorn 5,000+ Posts

    Cash is king. Too many entities confuse sales with cash.
     
    • Agree Agree x 1
  26. iatrogenic

    iatrogenic 1,000+ Posts

    The argument was never about a lack of liquidity. iIt was whether or not stock buybacks should occur with government supplied funds.
     
  27. SabreHorn

    SabreHorn 5,000+ Posts

    I lived this movie before. The funds need to be in various forms - grants, loan guarantees (not the SBA ****), debentures (transferable, salable, convertiible), bonds.

    I have always preferred bonds, but any new concept in the bond market is never investigated and affords the holder to make plenty of money. Two best examples were the old Maritime construction and then the Pollution Control Revenue Bonds - nothing like a 9.5% tax free municipal bond with the full faith and guarantee of Royal Dutch Shell particularly in a 7% market, but when the market dropped to 5%, we sold for 164 after having bought them or 92. I'll always have a fondness for St John Reserve, Louisiana.

    But you see there is no one in the federal government smart enough or creative enough to turn this into a money maker for the taxpayer.
     
  28. iatrogenic

    iatrogenic 1,000+ Posts

    Not sure what you are referring to concerning the “form the funds” need to be in.

    About that taxpayer. I guess neither the thousands of companies receiving forgivable SBA loans are taxpayers, nor the individuals receiving checks, nor those receiving greater unemployment, extended FMLA, or many of the other goodies in the recent Covid related legislation are taxpayers. As a taxpayer, how much did your taxes skyrocket as a result?
     
  29. SabreHorn

    SabreHorn 5,000+ Posts

    If any of the existing government agencies or employees are involved in these programs, I won't live long enough to see any attempts to clean up. If FEMA or SBA are involved, no money goes out for two years or until a Senator lowers the hammer.

    Taxpayer? Who do you think is ultimately going to pay this $4 trillion? It will be a financial fiasco, which will be mismanaged and full of typical federal incompetence. Can you say "gross negligence". boys and girls?
     
  30. iatrogenic

    iatrogenic 1,000+ Posts

    Inefficiency in government is certainly the norm. If the SBA doesn’t approve the bank loans under the streamlined approval process adopted, this will be a failure.

    I’m guessing the vast majority of taxpayers will receive a direct or indirect benefit. In 2016 there were 5.6million taxpayer firms in the U.S. 99.7% of them had under 500 employees. Those are the ones benefitting (theoretically) from this legislation.
     

Share This Page