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.
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.)
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.
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.
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.
>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.
> Many of these companies make up substantial portions of people's returement savings
If those people did the prudent thing, and invested into an index fund, as opposed to picking stocks of companies that are being ran irresponsibly, their retirement savings would, on aggregate, be fine.
I'd rather not have everyone else's retirement-savings-to-be bail out those bad investments.
>If those people did the prudent thing, and invested into an index fund, as opposed to picking stocks of companies that are being ran irresponsibly, their retirement savings would, on aggregate, be fine.
Index funds go down with the market... but perhaps more importantly, there _has_ been a massive shift to index/ETF trading. You know what that did? Pumped up the market as a whole. Now individual business assessment is less valuable because businesses with crap fundamentals go up and up and up due to index buying. Just another bubble.
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.
Sure, but you're talking about regulation of the companies, not the management within the companies themselves. I think the parent comment's point stands.
I believe they did that for banks after the 2008 crisis, maybe it should apply more widely. But still I'm not sure it'd make a huge difference given the scale of disruption caused by a global shutdown like we're seeing as a result of covid-19.
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.
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.
> 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).
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.
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?
>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.
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?
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.
3-6 months worth of operating expenses is in no way a “massive emergency cash fund.” Around half of that 6 months worth was in cash or cash equivalents (I don’t remember the exact numbers offhand), not shares or other investments.
You’re actually proving my point when you say our expenses are high relative to net profits. If we can do it, and still be growing at an adequate pace (we grew earnings at, IIRC, 8% last year), what can’t other companies? Before, you claimed it would stifle growth We have way more software engineers on staff than financial engineers. I find it hard to believe we can do this and other companies can’t. You haven’t given me any reason why they can’t, either.
And, BTW, if repurchased stock is so liquid, why are these airlines crying now? It’s because either they didn’t adequately insure against a systemic risk to their business, or they canceled the shares.
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.
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.
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.
That data looks wildly inaccurate and does not pass a sanity check at all. Take a look at anything from AAL's investor relations' page and it does not reconcile to anything like 3-15bn quarterly profit ever.
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.
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.
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]
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).
> 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.
> 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.
By your definition any company that didn't see the coronavirus pandemic coming would be not operating efficiently, but the reality is even if your company was operating efficiently your company may be killed by it.
That's like saying a healthy person shouldn't need to be put on a ventilator because if they took care of their body well they wouldn't need it, but the reality is this virus is not something anyone could have prepared for.
It is not at all out of line to say "the airlines should not have spent $45B (or whatever the amount was) on stock buybacks, they should have saved a reasonable amount in anticipation of the next crisis" even if this particular crisis is much worse than anyone would have been able to anticipate a year ago.
Even if they had only kept, say, $20B of that money—reducing their buybacks by less than half—that would surely be $20B they would not now be asking us taxpayers to spot them, and it's possible they would even be able to make a different kind of plan using that $20B to stretch them over at least some significant part of the gap.
Moral hazard isn't the only issue with union retirement funds buying stock: you want to mitigate the risk of being laid off or forced to retire and having your fund lose value at the same time. An airline employee with a retirement fund that consists of the same airline's stock is a very bad idea from a risk standpoint: you ideally want your fund and your job to be uncorrelated in order to reduce the volatility of your income stream.
