Devil is in the details. Maybe French government has good conditions for the aid, but the article is not giving details.
Aid should be exchangeable debt for public companies. No dividends and buybacks. No executive bonuses or options until the debt is paid full. After (5-7) years the remaining debt is exchanged into company stocks in a rate that leaves the government in the neutral position or with small profit. I think it would be OK to give compensation package to executives if it's tied to the profit that the government makes from the aid.
The aid should be available to everyone with same conditions. Not doing so punishes companies with good finances.
Having right incentives as a whole is the issue, not some implementation details.
As others have said, make it convertible debt. It converts to voting shares. I actually like these conditions. If you need the money, you shouldn't be paying dividends or doing buybacks anyway. This real issue is that we need to ban C-suite and BOD compensation from using anything stock related. Then this perverse incentive for buybacks and quarterly numbers fades and people start focusing on building healthy companies.
Companies (and their directors) care about the share price because their owners care about the share price, since they are the shareholders.
If the directors and bosses stopped caring about the share price, the shareholders would be more likely to kick them out and recruit some more co-operative people.
If you want companies to care less about share prices, you'll have to structure companies differently.
This whole issue is overblown. Employees, retirees, and generic Wall Street investors have a preference for buybacks because it leaves equity holders with the ability to put their capital to good use. I don’t want GE to invest in vanity projects if they don’t have good ideas. Buy back shares, return capital to shareholders, and let shareholders invest in something else.
There two sides to a buyback transaction, and saying it creates no value is BS. Someone is SELLING.
If the issue is just using debt to buy equity, then there is some discussion to be had, but even then, the result looks more like a need for a stress test/capital buffer rather than a ban. Alternately, just modify the tax treatment of buybacks to look exactly the same as dividends.
Paying above market is not an "investment," and redistribution is not GE's job. Just collect taxes on those profits and let the government cut whatever checks it feels need to be cut.
This is important, especially for those workers who do not qualify for a 401k.
There is an interesting problem where if workers get a 401k or IRA, then buybacks probably help them by driving asset appreciation in a tax free investment vehicle. BUT, if you don't get that, then appreciating equities doesn't do you any good.
In general, the answer is probably a moderate amount of all proposals. Increasing wages is certainly something that companies should be doing.
Finally, some portions of buybacks are used for equity awards to employees, so it is possible that buybacks might end up as tax-privileged payments to workers, albeit not to the ones who are most dependent on wages.
Yeah, it's called investing in your employees. It is growth, just not for shareholders. Shareholders do not have a divine right to all the benefits a company can produce.
Stocks/dividends/buybacks are a system designed to capture all profits. No surprise and nothing really wrong there, but what annoys me is that shareholders like to pretend that __unless all profit goes into dividends/buybacks, it's a waste and a sign that the company is making poor decisions__, which is not the case. It does not take into account the lives of employees beyond the cost to company. That is also a perfectly reasonable investment for a company to make and, in fact, is one that it has a duty to invest in.
Stock value is reduced because petty shareholders refuse to acknowledge that workers deserve growth from company profit just the same as they do.
Or classify buybacks as a prosecutable form of market manipulation like they were before the rule changes in the 80's that enabled this flavor of unnecessary financial engineering.
What prevents shareholders from just selling their shares? Why does the company have to be the buyer?
A company generating demand for its own stock does not create value, it creates liquidity. I hope you understand the difference.
As for the solution, I think we're on the same page. Government debt should not be used for creating liquidity for shareholders holding a shitty asset.
Nothing prevents shareholders from selling shares. However, if a company does nothing - e.g. no growth, no buybacks, the future value of their stock will decline continually. through buybacks, they can hold those share prices steady, at least. This gives shareholders liquidity as you suggest - shareholders selling without buybacks means that they will push the price down.
There's a line of thinking which says either a) buy all your equity and go private when the innovation runs out, or b) issue bigger and bigger dividends from FCF and then eventually go out with a bang. IMO, those are strategies that should be specific to a business model. E.g. a gas pipeline may love to pay out dividends since the business model is quite steady. A big electronics manufacturer might want to buy back its shares in the hope that it can eventually go private to restructure.
my point is, the mechanic of a buyback is not inherently evil, and does provide value. I agree that the government should not be creating that liquidity. Though, in reality I don't have a specific problem with letting the government issue convertible debt if companies want a long-term counterparty. the irony is that buybacks are often seen as short-termist, but bailouts should have a long-term lens.
The value of the stock going down is the correct behavior if shareholders want to liquidate their holdings. For whatever reason.
Dividends seem also like the correct way to distribute profits back to shareholders. Buybacks on the other hand, I agree, are extremely shortsighted. If not used to go private and restructure the company, buybacks are a tool to provide liquidity to the more well-informed shareholders at the expense of other shareholders. Any sort of public debt financing of buybacks should be completely off the table.
Convertible debt seems like a good structure. If companies want to take the chance on the debt and they fail, the company would be effectively nationalized. In any case, a condition of any such note should be to prevent dividends and buy-backs. Any reasonable investor would probably include such terms.
And yet, if people want to liquidate it does drive the price down, but, the market is about price discovery and valuation - the company may have different beliefs about its value and different preferences, hence buybacks.
Buybacks are just dividends but more flexible for the company. It boosts stock price because it tells investors that the share is more than a speculative vehicle.
Using almost all of your available cash flow to do stock buybacks is, by my understanding, very much against the long term health of the company, in order to inflate stock figures in a way that disproportionately helps the people making that decision. See the airline industry.
It isn't necessarily nefarious but can be. Recent events have shown quite a bit of nefarious activity surrounding this practice which is why there is a call for increased regulation.
Any business decision can be nefarious in some context when it's a bad one. At the same time as recent events may call certain buybacks into question, historical events tell a different story.
For example a common argument to ban buybacks is that they were illegal prior to 1982. We also had no good place to park savings before 1982, where at the same time we had seen enormous inflation the stock markets had been on steady decline since the mid 1960s. People weren't just losing money due to inflation, they had fewer options about where to put it reliably.
And when it comes to regulation I don't know what the best way to do it is other than letting companies that made bad buybacks die, or bail them out by diluting shareholders in some kind of bankruptcy proceeding.
Sure, but changing C-suite compensation from being stock-based won't change the dynamic around buybacks because the buybacks are pushed by the owners not just the management.
Presumably companies with strong finances and other options for financing would not want to take on shareholder-unfriendly terms like a multi-year ban on paying dividends or doing buybacks.
All I can think of is that it sucks to be a pensioner or pension fund manager. Going to be really interesting to see the second quarter consequences of the "buy backs and dividends are evil" movement.
Monstly agree - but dividends that go to every owner aren't unfair per se, a cap on dividends would be very good, though. As for options, depending on the company they can be a hiring incentive, and not being able to grant any may restrict the company going forward - has to be evaluated carefully.
>but dividends that go to every owner aren't unfair per se
If these companies are in such dire straits they need the infusion of cash provided by a government bailout, where did the money to pay dividends come from? Shouldn't they use that money to pay employees and fund their operations?
I've heard arguments for dividends/buybacks in the scenario where the government does a terrible job of picking companies that actually need a bailout and ends up throwing money at a healthy company, in which case the only way for that money to reach decent investment opportunities is for the company to pass on the money to its own investors in the form of buybacks and what not. I don't really agree with the concept since bailouts are supposed to be for keeping big domestic employers alive and not some 10 person juicero startup an ocean away but the money does eventually end up funding someone's job so it's not completely useless.
This is just making a stronger argument for not bailing out corporations at all and giving out more of the money by sending checks to individuals.
If companies need money they can sell shares, and then people have more money to buy the shares with. If that's what they want. If everybody has the money and nobody thinks a particular company is worth saving, why are we saving it?
> 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.
> 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.
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.
> 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.
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.
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)
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.
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.
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.
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.
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?
"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.
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?
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.
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.
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
Because this is NOT a bailout. A bailout implies that those who receive it are potentially at fault, like when someone is bailed out of jail. Banks were bailed out in 2008 because they acted recklessly but had to be saved to limit the damage to the rest of the economy.
Here businesses that may otherwise be perfectly sane are temporarily prevented (or limited) by the state from operating for the public good.
It's analogous to the state paying for the property they seize under eminent domain.
The specific businesses in scope of this post are these that use free cash flow to enrich shareholders and not plan for rainy days. So yes, they are at fault here for not using their cash wisely and being myopic.
The way shares work is a way for a publicly traded company to obtain a loan. It does this by issuing shares which can be bought by investors. Shareholders are not liable except for their initial investment.
After selling shares, these can be traded i.e. on NASDAQ, but any price on the shares there only reflects the public perception of value of any given company. It's a high risk lottery.
This is also the reason that companies pay out large dividends to shareholders. They're obligated by law to payout dividends. Think of it as interest on a loan.
Yes, but I don't see how that contradicts what GP suggests. Shareholders are on the hook for their own investments. Artificially bailing them out takes them off that hook by preventing bankruptcy.
It disincentivizes responsible financial management. Why not spend 95% of profits on buybacks if the government is ready to catch you?
The only thing that makes it a question at all in my view are the potential social consequences of a bunch of huge companies failing at the same time. If it wasn't for that, I'd say let them fail and let the investors pay for it in negative ROI.
I read it that what was being advocated was that shareholders would be compelled to provide additional funds, rather than just standing to lose the amount they had already invested.
The calculation seems to be that it would cost more to the state to have these companies fail or fire most of their employees, have them apply for unemployment, and wait for new companies to emerge/rehire when the tide comes back.
By "cost more" I mean not just in sheer money, but also counting the overall impact on the population.
Equity is by definition limited liability. It has to be. Imagine it’s not, and you own $100 of SPY. That means you indirectly are an Apple shareholder. Should you be responsible for Apple’s debts if they went bankrupt? If you were, how would that even work?
Macroeconomics. Normally they are but when there is a huge shock to the economy like now they don't have the money to bail everyone at once hence either the government steps in or else companies fold and many lose their jobs unnecessarily.
Investing is privatizing the risks and the benefits.
Bailing out is privatizing the benefits but mutualizing the risks.
It's taking what favors you from both capitalism and socialism, call that a free market, and pretend it's for the common good. You always win.
People says communism didn't work looking at Russia and China. But the ruling class will abuse any system to the point it doesn't look like the original idea at all, if not kept in check. It's true for capitalism as well, as we can see.
To me, being able to do this is proof we are still not in a democracy.
We enjoy a lot of freedoms, so we are not in a dictature. But we are still not in power. We're just told we are.
I don't get why this is downvoted. If you want to take part of the benefits of capitalism and maximize your profit, you should be ready to waive some benefits if asking for collective support.
Communism and capitalism do share a weakness: corruption of those with power.
One difference between them is that a dangerous concentration of power is inherent to communism. It's intentional. In capitalism, it's an unintended consequence that can be mitigated by regulations (anti-trust laws, subsidies to startups, etc.)
It's not so much intentional.
In theory the whole vanguard party thing inherent to Leninism & derived political philosophies is supposed to precede communism by first establishing a developed socialist society.
The communist society is supposed to be stateless. The vanguard party generally becomes a corrupted authoritarian mess and never gets close to the theory defined goal but that is not a defined intent for these political theories. One could say that often enough this is because it fails to retain consistent democratic control, faces external opposition and locks down even internal democratic processes[1].
Marx did however allow for peaceful transition in countries with strong democratic institutional structures. (I believe he mentioned the US, UK and Netherlands.) and I suppose a communist could argue against the likelihood of such regression in such a scenario tho that seems doubtfull imo.
While the ideal of capitalism -- the freedom of capital -- may not be everyone's ideal, its proponents often say that it also leads to the freedom of individuals. I disagree, but it's definitely possible to have a regulated capitalist society with high levels of individual prosperity and freedom (e.g. Denmark).
Well, as a Swede I'm aware of a middle-ground social democracy. But that's unrelated to what I asked about. It wasn't capitalism that made Scandinavia social-democratic. It was through hard fought labour struggles and through socialist ideals that drove the capitalist into far reaching concessions under the threat of revolution.
So that doesn't say anything about how it's unintentional, if anything it just underlines it.
Communism and capitalism are economic systems, not governmental systems. You can have a dictatorial capitalist system. You can have a democratic capitalist system. You can have a dictatorial communist system. You can have a democratic communist system.
> Communism and capitalism are economic systems, not governmental systems.
Radical economic egalitarianism implies a (strong) governmental system. If capital can be sold/transferred, capitalism (i.e. concentrated control of the means of production) will naturally recur. If capital cannot be sold/transferred, someone has to decide how it's distributed, and the only body that can do that is a (governmental) central planning authority. That gives the government enormous power, whether it's a dictatorship or not.
> You can have a dictatorial communist system. You can have a democratic communist system.
This is unrelated to what I wrote. The US is essentially an oligopoly, but it's also a democratic republic.
A governmental system is affected by the dynamics of the economic system. After many generations, the governmental system may be utterly different from what was originally established or intended (as is the case in the US).
> If capital can be sold/transferred, capitalism (i.e. concentrated control of the means of production) will naturally recur
Please define "naturally", because I don't see anything natural to that. For me, it's a tautology to say that in a capitalist culture and education environment, capitalism will "naturally" occur. That doesn't convince me that the same human genetic pool (which I guess is the natural part ?) in another environment would behave the same way.
Prediction: that won't be a precondition in the USA, and if it was, most companies would decline the aid.
You see, buybacks are "that one weird trick" where you can steal from the market, by inflating the EPS and hence your employee stock options, and not go to jail.
I agree with the first sentence but not the second; buybacks aren't "stealing from the market", they're returning money to the market but "stealing" from the revenue service. The tax treatment of dividends is less favourable.
Executive total compensation is a wider problem, but shareholders seems generally satisfied with letting boards have almost as much of the company money as they want. Only people who really take it too far like Carlos Ghosn get punished.
> The tax treatment of dividends is less favourable.
They changed this a while back, didn't they? "Qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower." [1]
AFAIK the only tax advantage of dividends now is that you're forced to pay tax every year, rather than being able to pay tax only once when you actually sell your shares. (Do let me know if there's something I'm missing.)
It’s a big difference in practice. Dividends force a taxable event. The event may also force those dividends to be treated as income. The buyback increases the value of held assets. By choosing when to sell you can control the tax rate, the realize gains or losses, and time it in conjunction with other gains/losses to minimize the total tax burden. Those are very real opportunity costs.
So US companies will take government money intended to rescue jobs and businesses, and instead use them for some quick profit for their shareholders and executives.
I think those French conditions are entirely reasonable and sensible.
Zero companies receiving the bailout money are going to buy back stock with it. This whole charade is just a big feel good bit of nonsense for main street.
What people are complaining about is that previously these companies did buy backs. Boeing did buybacks (when they were profitable, though they cancelled them when the 737 MAX disaster began). The airlines did buybacks. Etc.
People are complaining that if these companies all sat on enormous war chests they wouldn't need help now. But that has never happened and will never happen like that because it would be ludicrously inefficient for the market at large.
Don’t forget that the total free cash flow returned via buybacks and dividends wouldn’t have been enough even if they had chosen for inefficient allocation of capital.
No need to predict, that is a precondition for the US airline bailouts: "Airlines receiving aid will also be prohibited from buying back shares of their own stock for a year after the loan is fully paid off and bars them from issuing dividends to shareholders while receiving aid" [0].
It's not stealing from the market, but it's essentially giving away money to shareholders by spending to inflate the stock price.
In a way it's similar to dividends, but not taxes in the same way.
Basically the logic behind the French government reasoning is "we're giving you money to support your business and your employees, not to give it away to shareholders".
Note that this wasn't the initial plan of the French governement, initially the plan was to pose no conditions, just saying "please be responsible in your choice". It's after the public backlash that they finally put conditions.
Raising the value of a stock doesn’t make the shareholders money unless they sell their holdings (although it might incentivize doing that) as compared to dividends which encourage holding on to your investments so long as they pay out nicely.
The real beneficiaries of buybacks are executives and employees with vested stocks. They both lose money on dividends and directly benefit from the contraction in available shares.
Only if the company doing the buybacks pays out dividends in the first place. (UAL doesn’t.) But the cost of buying out those shares is significantly more than the slight increase in dividends yields in all cases.
One aspect of this that the GP noted but has not been addressed, is the following. If you are an executive of the company you very likely have stock options which allow you to buy stock at a preferred (already set) price. Then you support a stock buyback, which inflates the price of the stock, making your options even more attractive. When you exercise the options, you purchase stock directly from the company and the difference essentially comes from the existing stockholders.
I wouldn't necessarily refer to this as "stealing" but it is a sneaky way to increase your compensation as an executive. It also causes a conflict of interest when a company is deciding whether to issue dividends or do a stock buyback.
I see buybacks just as an alternative to dividends. They do mean more valuable options, but I wouldn't call them "steal[ing] from the market" since they give shareholders more ownership of the company. I actually prefer buybacks to dividends because record keeping for DRIP can be messy, but more importantly, dividends are taxed as income, while gains from buybacks will see the lower capital gains rate (if you hold for a year). That's the real reason no actual shareholder seems to mind buybacks.
It's exactly the same as a dividend, except the tax consequences are opt-in for shareholders. Only those who sell their shares are affected, unlike dividends which are equivalent to forcing all shareholders to sell an equal portion.
Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math.
In the article it says this rule applies to dividends, too. So at least it's not pure pandering.
The rage against buybacks is how many are funded - through debt. Boards are gearing their companies to the hilt to fund shareholder returns (in whatever form), to the point the ship itself is rendered unable to whether significant storms.
If bailouts are normalized, there is no disincentive against such reckless behavior. I would like there to be permanent cash buffers to fund 1 year HR costs before any form of shareholder returns are allowed.
Fine, but then rage against that debt regardless of whether it's used for dividends or buybacks. Focusing such hate on buybacks per se is still confused.
Also, it might be worth probing the cause of bizarrely low rates, or wondering if it's a good idea for a high corporate tax rate that distorts behavior so much. (If you're going to reply that the effective corporate tax rate is actually low because they engage in complex schemes X, Y, Z, to reduce their effective rate, then you're agreeing it's distortive and encourages socially-wasteful activity.)
Your company makes 2 million profit per month. You don't want to sit on the cash for 12 months just to pay out 24 million, you want to give the money to shareholders immediately. That's a pure liquidity problem so the answer is to just get a dirt cheap loan.
In a year's time, weirdly there isn't 24 million cash profit to pay off the "cheap loan" and the company go bankrupt. In hindsight it's obvious the "profit" was illusionary. Your million dollar "performance" pay for orchestrating this is securely in your personal bank account, the auditor's million dollar "consultancy fee" in theirs, and employees, the tax man, and shareholders are left with nothing. Yet another "success" for capitalism.
Yes... except the risk of this happening is theoretically priced into the interest rate on the loan. If it’s dirt-cheap it must also be a low-probability scenario. (Not that I necessarily disagree with you on principle.)
That's the theory, but that assumes all stakeholders aligned incentives (or it ignores employees as stakeholders). In the real world it is far easier to fire lots of employees than it is to stop paying the bank loan. So being only sort-of wrong by giving a company a loan they can't quite afford to pay back doesn't hurt the bank at all - they still get their money.
The entity "pricing" the consequences has few consequences if they get it wrong, so why wouldn't they err on the side of doing more business and making more money?
>"Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math."
No, the issue people have is not with the buybacks themselves but the massive debt binge many companies went on in order to buy these shares back. It's precisely because people have done the math.
> Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math.
No, a lot of it is from people who aren't too keen on capitalism or the means by which corporations return capital to the capitalist class in general, and particularly when it is “tax efficient”.
> Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math
Or from people who do exactly realize this and have though through the math. I mean, its not like there is no reason why dividends tend to be taxed ...
well, that's not how it should work or is intended.
if my monthly paycheck is 13k eur before taxes and i live of 5k easily, i cannot say, take only 5k and pay taxes on that and for the other 8k give me stocks untaxed, and i will probably pay some tax when i sell the stocks (and different rules applay).
My guess would be that it directly increases the value of stock options and unvested equity, which dividends don't. Dividends are good for people who currently hold shares, but not for people who have shares promised to them in the future.
In my opinion that is absolutely illogical because share prices can skyrocket even with weak fundamentals. Dividends should be taxed less because companies can't hype up their stocks to pay out a higher dividend (hype would actually decrease yields). Each dollar that is paid out as a dividend had to be earned by the company.
There is nothing weird or tricky about buybacks, and the mechanism is pretty obvious and intuitive.
A company can issue new shares and raise money when they need it.
A company can buyback shares when they have extra money they can't efficiently use (see: AAPL, MSFT, GOOG).
There is absolutely nothing nefarious about this mechanism, and if tax treatments vary blame the government (don't hate the playa, etc).
Buybacks are only a problem when cash-poor companies do buybacks. Either they're depleting a small contingency reserve, or they're even utilizing debt to do it.
It does become a problem if the company does buy-backs on the premise that they will get bailed out in the future should something unexpected occur. Too-big-to-fail companies can count on themselves getting bailed out which causes them to keep pumping their stock price without worries.
But what about prioritising partial nationalisation of these companies by injecting cash in exchange for shares? That way it would have no impact on the net public debt, as the gouvernement assets increase at the same rate as the debt.
They would still take away money from companies who needs it more. A company who is able to pay dividend or buy back shares has enough money to run without state support.
I don’t have a big problem with stock buybacks in general. But if companies buy back stock when times are flush they ought to be issuing new stock to raise money when times are lean. Not putting their hands out to the public fisc.
For that reason business managers may want to hold on to cash rather than buying back shares and investors may want to buy shares in companies run by such managers. If we bail out all the grasshoppers then what incentive is there to be an ant?
I don’t know that we can or should regulate how much cash every single business in the country keeps on hand. Financial institutions that pose systemic risks, sure, but if a cruise company goes out of business because it was mismanaged (i.e. didn’t keep enough cash on hand) is that really something regulation should have prevented?
The argument made elsewhere on this thread was that if the cruise liner employs thousands of people then yes it makes sense to have some sort of rules in place to stop them over-leveraging (or similar) to the point where their failure has knock on effects to the greater community/society.
Another argument is that we cannot guarantee letting them fail will happen due to political influence etc so it is better to put in place rules to stop bad behavior in the first place as there is always a risk of corruption when it comes to bailouts.
But if a cruise line fails surely it won't be long before someone buys their assets (maybe a better managed competitor or new entrant) and they will still need to employ people to run those ships.
> Lean times are absolutely the worst time to issue new shares though. The downward trend could spiral out of control if that was put into practice.
Yeah, but that's kinda the point. If a company wants to buy high, sell low, that's their choice. But if they want to waste their cash buying high (and dodging taxes on dividends), they shouldn't expect to be able to successfully get easy money from the public when they need it.
Just for the sake of argument, isn't the argument against buybacks that it may skew the indicators for how well the company is doing? You have earnings and then you have amount of shares: buy some shares from the public, and your "earnings per share" goes up even if the earnings haven't changed.
In my view, this is radically different from, for example, buying the whole public stock and going private.
If that were so, then the accounting profession has failed at its core responsibility. But I don’t think it has, the information is there for investors to see. If some investors choose to obsessively focus on a single metric, well—-a fool and his money are soon parted.
I may be a bit daft here but in what way is this related to the work of accountants? The number isn't wrong, there's just context that's easily missed. The "buyer beware" logic can be used for a lot of things ad infinitum, you could argue the same thing about a company straight up lying about certain sales possibilities etc. but that would legally be fraud, so it's not black and white.
It isn't accountants. It is all the financial advice and teaching that focuses on Price to Earnings as a meaningful way to measure valuations at the exclusion of a lot of other equally meaningful metrics.
As long as companies are free to choose their accountants, there is an intrinsic conflict of interest. It gets even worse when the accountancies offer other professional services like IT consulting.
I'm not from France, but is it controversial at all? If company wants state support, money needs to stay at the company, that's what it is about, right? Do companies in France could abuse this rule in other way?
We have a long history of companies abusing the government subsidies in France. So when the covid-specific aids were announced 2 weeks ago, there was a big concern that some companies would abuse them.
If the government keeps bailing out large corporations, can this eventually form a pattern in which major corporations and industries may collectively and artificially engineer a crash or downturn event to game the system?
Once any pattern is formed and determined, there are always some people who will attempt to exploit it, and those people are often the ones who would eventually ruin all the good things for everybody else.
They won't deliberately cause crashes, because those are not profitable, but they will deliberately make risky bets that benefit them if things go well, and get bailed out if they fail (riskier bets have more upside for the kleptocrats looking out for Number One).
Given the odds, crashes are nearly inevitable. This is undistinguishable from deliberate crashes.
The policies enacted after the 2008 crisis have actually made the banking sector even more concentrated and increased the likelihood of another such crash caused by moral hazard in the Too Big to Fail financial institutions. The procedures to fight against that, like "living wills", will likely have the same effectiveness as bulletproof vests made of wet toilet paper.
The dance between supply and demand in a market enforces a number of unavoidable consequences. When an outside influence artificially influences a change in one side, a contraction often occurs in the other. That reaction can often overcorrect. Theoretically, a small downturn in supply could cause a proportional contraction in demand as price rises. But what usually happens is the response is driven both by the proportion of downturn and a measure of future value confidence based on additional factors. Subtle changes can game the system a little, but every change carries an added risk of flight to substitutes.
At a low point, the ROI on trying to game market share or other factors quickly narrows.
Skip the NYT article, it is fluff and doesn’t take paying out dividends into account. The HBR article is better (but still only a cursory introduction).
These two paragraphs have all the key concepts IMHO (there's even redundance). You understand this, you have a comprehensive 10,000ft view.
> “Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.”
> “Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity. [...] because of corporate tax cuts, in 2018 taxpaying households were burdened with about 38% of the combined government and business debt that enabled corporations to do buybacks.”
I'm a fierce capitalist, I love human sweat and I admire those who create value. Whether Jane the CEO or Rob who makes delicious cookies, value is value, value is good, value is shared (or should be).
Stock buyback is stealing though, plain and simple. It's a legally, cleverly twisted, inverted Robin Hood mechanism at the private level. It's basically everything that's wrong with finance in abstraction of value.
Expect tighter regulation promoted by Central Banks in the 2020s or we're heading for another income inequity-snafu. For those who haven't read much economy, the gist is this: not enough income inequity, and society stagnates (underperforms relatively to others under comparable conditions). Too much inequity, and the system chokes on itself (not enough consumer liquidity ⇒ you know...— and if you don't, think: consumer liquidity is the difference between pre-WWII and post-WWII global economies.
I'm not an economist and absolutely not an expert (I only did 2 short years of econ in university, and self-taught some financial-survival skills). But this is like 101 to me, the basics of a macro-econ intro. It's not even controversial, or hasn't been since post-Keynes basically.
Perhaps a better approach would be to require these companies to maintain capital ratios like we do for banks. They could be forced to raise more equity if their debt becomes too large. After all the point should be to prevent them from needing future bailouts.
I mean there are other ways to extract money from a company than paying dividends or doing share buy backs.
Are they also going to cap salaries for employees? Are they also going to stop companies paying out large fees to related companies? What about investing in expensive but highly speculative projects?
Why aren't we letting them fail instead of allowing these idiots to stay in business? Say American Airlines went bust. It's debtors would get its planes and other company assets, who would then in turn sell them to other airlines. A new airline might form to take its place, which would probably be a little more prudent than the last one.
In some indistries, that means thousands of people without work, and hundreds of other companies in the supply chain going bankrupt, and even more people without work. Sometimes it's cheaper to bail out the main company, then to deal with the unemployed, many more bankrupt companies etc.
But some regulation should be put in place... if a CEO fscked up the company so much, it needed government bailout, they don't deserve a bonus, no matter what their contract says. A good system would also be, to turn a bailout into a 'long-term loan' from the government, and have a mandatory percentage of the companies profits go to repaying the 'loan', with some regulation on internal business (to prevent dumping everything to a new, 'clean' company, and letting the old shell fail).
> In some indistries, that means thousands of people without work, and hundreds of other companies in the supply chain going bankrupt, and even more people without work.
A popular counter-argument is that governments should plan to spend money on unemployment relief for individuals if it looks like a lot of big companies won’t make it. Let companies fail but cushion the blow for people affected.
Unemployment relief is a temporary solution because people are usually single skilled. For example an airplane engineer doesn't easily get a new job in another industry.
Wouldn't former AA employees find jobs in the new company formed by whoever bought up the assets formerly owned by AA? Why would they need to change industries? The need for airlines won't go away.
> if a CEO fscked up the company so much, it needed government bailout, they don't deserve a bonus, no matter what their contract says
What the CEO really is, is a marionette for the shareholders. That's why all the CEOs act in the same way and that's why they always get their bonuses. Also they got lots of bonuses in the previous year for running these schemes.
In good times, companies work "at capacity" and all the problems are between the owners and the managers. If managers fsck up, the owners will deal with them, or lose their own money. If something fails, people will still excpect those products, other companies will take the workers, etc. (so if you're a pilot, AA goes under, people will still need to travel, so other companies will need more pilots). In the time of crisis (like now), (almost) noone flies, and no company needs pilots (neither their own, nor new employees). In some countries (eg. mine, slovenia), the government has also forbiden flights (and other modes of public transport). In this case, where you have a successful company, and the government says you're not allowed to do your core business, but also not allowed to lay off employees, and they still expect all the taxes, dues and paycheks paid, ...'something' has to be done (either bailouts, or special laws (like here now), where you don't have to pay some government fees, can put workers to "wait for work" (less pay, but still employed), etc.).
You think that bailing all these companies out has no effect on how companies run their business going forward? And you claim I have an “innocent view of the world”...
You are speaking about an industry where the margins are so thin that small fluctuations in petrol price or minor geopolitical events are enough to make a dozen companies brankrupt every 2 month.
Also yes, hoping that the coronavirus make them suddenly resilient, it's pretty innocent :)
I wasn't talking about a specific industry. And even if I was, a dozen passenger airlines go broke every two months? I'd like to request a citation on that one.
And I wrote more prudent, not “suddenly resilient”. Why don't you argue against what I actually wrote, rather then a straw man you made up?
There’s thinking long term, and then there’s thinking “what if the government shuts down the economy over a once in a hundred year pandemic?” There might not even be an airline industry next time this happens. I honestly think it’s totally unreasonable for the public to limit the finger at these companies and said “you should have planned”
I definitely agree. Companies should be allowed to go bust more! Especially if they're in trouble because they didn't maintain a safety net of capital.
Unfortunately companies are often able to convince politicians, and the public that they're critically important, or too big to fail. They say that many other companies depend on them, and if they're allowed to go bust they will be "the next lehman brothers" with many other companies cascading and failing.
So I think bailouts are going to continue be a thing indefinitely. And if we can't stop bailouts from happening, making them come with conditions - like safer capital ratios - that make bailouts less likely in the future would be a good thing.
That makes no sense. Do you want future quarantines to fail because the last one needlessly destroyed too many businesses? If people realize that a quarantine will lose them their jobs they sure aren't going to comply and will just ignore future quarantines.
Informing hundreds of thousands of people that a government enforced quarantine took away their job permanently isn't a good way to keep a government. If the government instead helps them stay on pay roll, life goes on
It's probably much more expensive.
The difference is between a loan which will likely be paid back versus paying the salaries of thousands of people for who knows how long.
Also, good luck taking a plane in the few months following the crisis. Creating back airlines from the ground up is far from instant, even if you have the planes and crews just laying around.
The salaries will end up back in the economy, low paid workers are unlikely to hoard their bailouts because they need food/shelter/etc. It’s also likely that airlines in chapter 11 would be acquired/restructured as a unit, not necessarily sold for parts.
EasyJet in the UK is a prime example of why these restrictions are necessary. Paid out £160 million in dividends, now wants loans on favourable terms...
"Enfin, les employeurs bénéficiant du dispositif de chômage partiel, lui aussi financé sur crédits publics, sont appelés à « la plus grande modération » en matière de dividendes."
The article clearly states that _initially_ companies were called to moderation, and that _now_ a law project will be passed to strictly forbids this.
"Le président de la République Emmanuel Macron a franchi un cap, vendredi matin, lors d’une rencontre téléphonique avec les partenaires sociaux, en annonçant que M. Le Maire soumettrait au premier ministre Edouard Philippe un projet pour encadrer strictement le versement des dividendes. Ils devront être suspendus quand les sociétés bénéficient des reports d’échéances fiscales et sociales"
> French companies benefiting from state aid can't buy back shares
You stated "That's a false statement"
However it is in fact a true statement, since a law is effectively passed to forbid the very thing the post title describes.
Hence stating "That's a false statement" is "strictly false", and quoting a part of an article that explains that the exact thing you're quoting is now outdated doesn't make it less false somehow.
If you want to mean that companies "can" still buy back shares, although it's now illegal, well, that's just refusing to give the post title an honest interpretation of what it means.
It cannot be clearer :
"Ils devront être suspendus quand les sociétés bénéficient des reports d’échéances fiscales et sociales".
The three words "devront être suspendus" explicitly indicates it will be illegal. And the terms "les sociétés bénéficiant des reports d’échéances fiscales et sociales" say that any company benefiting at least from the most basic state-funded help package (related to COVID) is targeted.
> Toutes celles qui auraient bénéficié de reports de charges sociales ou fiscales et qui auraient versé des dividendes se verront obligées de rembourser cette avance de trésorerie sur les charges sociales et fiscales, avec une pénalité d’intérêt.
So, he asked the all companies whose employees are being partially payed by the state to be very moderate in paying dividends. But they will force all companies which are getting direct aid from the state to stop paying dividends, or pay back the aid they got, with interest.
But the Reuters article isn't talking about that. It is talking about the companies receiving direct state aid, which will not be permitted to pay dividends, under penalty of paying the money back to the state, with interest. So the Reuters article is absolutely correct. You are just dismissing an unrelated claim.
assuming that investment is at an uncommercial nice low interest rate, the companies have just been given a nice option there...
Ramp up risk in your businesses operations, and you'll either make a lot of profit or loss. If you make profit, pay back the governments loan and give the rest to shareholders. If you make a big loss, close up shop and the government looses out.
« Les entreprises qui ont besoin de trésorerie aujourd’hui, en particulier les grandes entreprises, et qui demandent l’aide de l’Etat, ne peuvent pas, ne doivent pas verser de dividendes. Et nous veillerons à ce que ce soit respecté, a souligné M. Le Maire, vendredi, sur BFMTV. Toutes celles qui auraient bénéficié de reports de charges sociales ou fiscales et qui auraient versé des dividendes se verront obligées de rembourser cette avance de trésorerie sur les charges sociales et fiscales, avec une pénalité d’intérêt. »
J'invite (...) toutes les entreprises qui ont accès aujourd'hui au chômage partiel, c'est-à-dire qui ont leurs salariés payés par l'Etat, à faire preuve de la plus grande modération en matière de versement de dividendes"
Instead of saving cash for emergencies or investing in new equipment, research or product lines, the cash is just 'wasted' on manipulating a share price in order to boost quarterly targets.
A lot of the time, management is then rewarded for the increased share price, which doesn't necessarily reflect the performance of the business in terms of their ouput, number of widgets sold or whatever.
It's basically rent seeking behavior if you taking public money and then using it to enrich yourself with no benefit to the public. That money could be 1) saved for a rainy day (like now) so they won't have to ask the public for money or 2) reinvested in the company to generate more value. As it is it just sucks value from the economy while also artificially increasing the stock price.
Anything that increases share values or enriches shareholders is going straight into the hands of the 1%, or the funds that hold huge percentages of the market. It's not going out to be respent.
Into the economy, perhaps, but not generally into circulation. Most shares are held by institutional funds or the wealthy, which is about the least useful place to put money for stimulus.
There are some tax and option-price related differences between dividends and buybacks in normal times, but for most of the current discussions those differences are irrelevant.
I agree that some of these recent stories about evil buybacks feels like fabricated outrage. For requesting state aid, buybacks are largely the same as dividends: if you need public support, you should definitely not do buybacks after that, just as you should pay dividends.
Whether you believe they shouldn't have done buybacks in the past, ever, should not be much different than whether they should have paid out dividends in the past. Higher level, it's about what kind of equity buffers companies should retain in normal times.
They also make executives' stock options more valuable, and in most cases the grants don't have clauses to reprice their options to account for that. In other words, a form of embezzlement.
I'm not sure "can't buy back shares" is the right policy economically. Buying back shares is just a way to give profits to shareholders like paying dividends or similar.
What they should do is companies benefiting from state aid have to give a lot of shares or options to the state in return. Maybe near 100% in bad cases.
Much was learned from the banking crisis bailouts and good to see the French are mindful of that and addressing such issues that caused public outrage (rightly so) in a way that will curtail such abuse.
Most of the commenters here focus on the finances of individual firms. The only reasons for a government to bail out a company are 1) to protect the supply chain of a necessary good or service, 2) as a way of providing a safety net for people that doesn't involve direct payment, 3) a way of maintaining the structure of the economy so it can resume normal operation more quickly after the shock, or 4) a way of giving a handout to a set of wealthy and connected members of society. I think most of us can agree that 1-3 are necessary response to a major disruption and 4 is corruption.
For a small business like a dog groomer or a restaurant, we expect the fraction that aren't viable to go out of business with some probability during small economic shocks, and we expect that this will be a small fraction. So we let them go. But in a crisis where an entire sector will be mostly wiped out, such as restaurants in the current pandemic, some attempt at preserving the sector makes sense because otherwise you send shocks through everything connected with it. For example, if a restaurant occupies the bottom floor of an apartment building, and the building's cashflow depends on that space not being unoccupied for more than two months, then you can have a sequence of events that result in mass evictions unless you control those side effects as well. It's probably easier to try to maintain the web of cashflow.
Now, you may be able to get side effects that you like in some sectors, such as restaurants turning into food kitchens for the duration as part of the direct injection of cash. On the other hand, a bar or a salon probably just shuts down. But even there, most stylists rent a chair in a salon, so you need to make sure that web of cashflow isn't broken by an owner pocketing it. It still gets very complicated. For some areas like farms we already have large measures in place, since bad seasons tend to affect large swathes of farms. Thus reserve boards, farm subsidies and the like.
Others have pointed out that such structural maintenance can be gamed by having a barely-viable company that is too big to fail. Then even small shocks can be turned into structural crises. Someone else suggested requiring capital reserves the way we do for banks, and for large companies that makes sense. If you're that big and structurally risky, you should be required to derisk yourself.
One discussion I hope we will be having as a society during and after this is what disaster preparedness looks like. We should have the regulations for what putting the economy on such a footing looks like, run simulations every few years for a week, and have adversarial gaming on an ongoing basis to try to find loopholes and close them.
Investors need to change our market valuation attitude and stop expecting that companies jeopardize their operations/stability so that they give us pennies from their cashier forever. Public companies should not be allowed to pay dividends/buybacks or in other terms to use their savings to keep paying in perpetuity fictional obligations. The initial investors (who are the only ones that physically put money in the balance sheet of the company), are being rewarded by the increase of the share price (like Amazon, Google etc). The shareholders that are coming later, are being rewarding by holding something of value, and their participation in the board can increase/decrease this value. The value of a share of a profitable company will never go to zero, the same way that gold has non-zero value (they are finite).
What will happen with that excess money? Option 1 (The capitalist) : Trust the companies that they will handle them properly by planning for a rainy week (apparently nobody does), or investing in their business. Option 2 (The socialist) : Tax heavily the earnings and redistribute them in democratically approved way.
Here's a counter point from a couple economists who say that the most important thing should be preserving jobs and not worrying about preconditions for now:
This dramatic spike in jobless claims is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why? Because throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers. Wages are, in effect, socialized for the duration of the crisis.
Instead of safeguarding employment, America is relying on beefed-up unemployment benefits to shield laid-off workers from economic hardship. To give just one example, in both the United States and Britain, the government is asking restaurant workers to stay home. But in Britain, workers are receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are guaranteed to get their job back once the shutdown is over. In America, the workers are laid off; they must then file for unemployment insurance and wait for the economy to start up again before they can apply for a new job, and if all goes well, sign a new contract and resume working.
And: There is nothing efficient in the destruction of businesses that were viable before the virus outbreak. The crisis cannot be blamed on poorly managed corporations. Government support, in the case of a pandemic, does not create perverse incentives. Bankruptcies redistribute income, but in a chaotic and opaque way. And while bankruptcy might be a way to deal with the economic fallout of the pandemic for large corporations, it is not well adapted to small businesses. Without strong enough government support, many small businesses will have to liquidate. The death of a business has long-term costs: The links between entrepreneurs, workers and customers are destroyed and often need to be rebuilt from scratch.
Instead, tax corporations for excess profits later:
Windfall profits have a fair, comprehensive and transparent solution: The government should impose excess profits taxes, as it has done several times in the past during periods of crisis. In 1918, all profits made by corporations above and beyond an 8 percent rate of return on their capital were deemed abnormal, and abnormal profits were taxed at progressive rates of up to 80 percent. Similar taxes on excessive profits were applied during World War II and the Korean War. These taxes all had one goal — making sure that no one could benefit outrageously from a situation in which the masses suffered.
Devil is in the details. Maybe French government has good conditions for the aid, but the article is not giving details.
Aid should be exchangeable debt for public companies. No dividends and buybacks. No executive bonuses or options until the debt is paid full. After (5-7) years the remaining debt is exchanged into company stocks in a rate that leaves the government in the neutral position or with small profit. I think it would be OK to give compensation package to executives if it's tied to the profit that the government makes from the aid.
The aid should be available to everyone with same conditions. Not doing so punishes companies with good finances.
Having right incentives as a whole is the issue, not some implementation details.