> 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.
Why is bailing out a compay different from "investing" in it? What is an investment besides a non-emergency bailout?
Edit: Why don't companies raise money by issuing more stock? Isn't that what the stock matket is for?