People seem to forget that when a business goes under, there's still something left.
If an airline goes down, the planes are not immediately turned to dust. The pilots and ground crew do not forget how to fly and maintain aircraft.
What happens at bankruptcy is that the claims on various assets are reassigned. The planes will get sold to someone who reckons they know how to run an airline, and the staff are likewise hired by new businesses.
This is worth keeping in mind when considering bailouts, because they tend to keep things in the hands of the same people, sometimes even on not much worse terms. And that's despite having steered the firm into the ground.
Don't forget there's value in this sort of reassignment. Assets and labor get moved around in new configurations that might be better.
> "bailouts ... tend to keep things in the hands of the same people"
yes, this is the crux, a gross unfairness. common folks get harsh punishments, while financiers and corporate executives get away with major thefts and get to keep the fruits of their transgressions.
i'm all for harsher punishments for actions that lead to greater damages to more lives (in this case, taking a little bit from lots of people). with greater power must come even greater responsibility. tear up the corporate veil.
and let's be vigorous in reassigning assets so as to support a functioning market for better management.
There is a middle path, where creditors are converted to shareholders and shareholders are massively diluted.
Effective control of the company will be placed in the hands of people who re-capitalize the company, and they will definitely not let the old management stick around.
Relative to bankruptcy, this has the benefit of allowing the company to continue operating. It also deters future recklessness. Probably should have happened in 2009, but didn't.
While many in a crisis that most harshly affects the poor will agree with you, the US at least has a very "pro business" government which is very unlikely to bite the hand that feeds them (their own hands, really, as many are themselves either come from highly placed positions in business, or are going there, or are very closely connected to them).
If at any time the US comes close to having a government which might threaten to "punish" en-masse (as opposed to a token example here and there) the financiers and corporate executives you speak of, there's likely to be bloody opposition.
I'm reminded of a passage from Jack London's The Iron Heel[1], about a war between the working class and the ruling class, in which the latter answer a threat with these words:
"This, then, is our answer. We have no words to waste on you. When you reach out your vaunted strong hands for our palaces and purpled ease, we will show you what strength is. In roar of shell and shrapnel and in whine of machine-guns will our answer be couched. We will grind you revolutionists down under our heel, and we shall walk upon your faces. The world is ours, we are its lords, and ours it shall remain. As for the host of labor, it has been in the dirt since history began, and I read history aright. And in the dirt it shall remain so long as I and mine and those that come after us have the power. There is the word. It is the king of words--Power. Not God, not Mammon, but Power. Pour it over your tongue till it tingles with it. Power."
Even if a revolution ever does occur, after all the blood spilled (which is certain to be copious), it's the self-serving demagogues and opportunists which will manage to grab on to power, as they always do, and it's unlikely that in the end a more just society will emerge. We'll just enter a different nightmare.
Sure there's value in this sort of reassignment but what usually happens in that case is:
1) Private equity acquires the assets at bargain basement prices and proceeds to squeeze out whatever profits they can. One of the most common ways this is done is by laying off staff.
2) A competitor buys them out, leaving less competition. Also followed by a large layoff to reduce redundancies.
3) The business is reorganized to maximize short-term efficiency, regardless of the cost to others - customers, partners and society at large.
These aren't bad outcomes per se, but I suspect that those that are reflexively against corporate handouts wouldn't be happy about these either. The general point of an industry bailout is to avoid outcomes like this since in crises, these can add to the pain. The actions taken to ensure your own company is financially solvent are often counterproductive if they are all taken by all parties involved. And various markets involved - whether in terms of labor or capital - are also likely not functioning efficiently enough to absorb the resulting dislocations.
And typically bailouts are not great outcomes for the shareholders involved.
Bailouts can be great for the management, but only to the extent that it's also great for most employees. As long as the shareholders (and creditors to a lesser extent) take a big cut, there isn't a huge moral hazard either.
It's true that not all of the value is destroyed, but it is still very inefficient compared to a well functioning business. Whether it's less efficient than bailing folks out is I think an open question. Maybe with a case-by-case answer.
Seriously. All the talk about markets this and that but when the market acts and these companies go bankrupt mostly because of their own incompetence, it's time for a bailout. It's absurd. Either you let the market run its course or make this available to everyone. If United can get a bailout small businesses should too so neither should fear bankruptcy. If that's not palatable, then let all these businesses fail. That's part of the system and it seems to be there for good reasons.
You do lose the inherent value in the organization. Planes and humans don't create value on their own they have to be organized into a system. That system falls apart when a company is sold off for parts. Sometimes it makes sense if the organization is dysfunctional, but being a victim of a worldwide economic shutdown is not what I would call dysfunctional.
> You do lose the inherent value in the organization. Planes and humans don't create value on their own they have to be organized into a system.
Isn't the problem in that system itself, and thus the collapse of that particular system is a net-benefit. A better run company will absorb these sell-offs and reassign priorities.
Yeah, but the point is not to save the airline, it's to prevent a cascading effect. Not that i support thid bailout one bit. Unlike 2008 i don't see airlines going under cascadig beyond US regional commercial flights not being available for a few months. Cargo will be fine, anything international will be fine.
Most companies are worth far more than the value of their assets.
Take Google or Microsoft for instance. If either of these companies were split apart, and the assets were sold at auction how much would those assets be worth compared to the market cap of the company?
That seems non-comparable. Google and Microsoft have a lot of value in IP and mindshare, plus various monopolies. American and Delta (for example) are 100% fungible.
This is not what would happen in a bankruptcy in the airlines industry. They would file for Chapter 11 which lets them re-negotiate with creditors instead of having to liquidate everything. Who are the creditors? Pilots union, flight attendant union, etc. Sometimes the airlines don't own all their planes, they lease them from a holding company. The airlines would say "take an 10% haircut on benefits the next 5 years or else we will liquidate and you'll get nothing". Then they'll re-emerge from bankruptcy with a healthier balance sheet with future liabilities lowered and a better cash flow.
Pilots aren't easily replaceable and you need a certain amount of flight attendants minimum for every flight.
Clearly a strike would be effective - look what's happening now. They barely can handle 1 month without asking for a bailout. Even more so in an economic recession.
Let them liquidate. It's no different than before.
> What happens at bankruptcy is that the claims on various assets are reassigned. The planes will get sold to someone who reckons they know how to run an airline, and the staff are likewise hired by new businesses.
Alternatively, it would be possible to create a worker cooperative from the failing business. The managers who created the mess would be ousted and the actual employees could decide what to do with the rest.
if the workers want to buy the stock up while it's cheap or bankrupt then why not? The whole point of a bankruptcy is that the company literally is worth less than zero.. Whoever buys it would owe the bank a ton of money and have to pay the bank out of their own pocket until they become profitable. Workers are free to do that, but if no one wants to do that, then the bank steps in and takes ownership.
Unfortunately the bankruptcy process is extremely slow and costly. A lot of built-up value like institutional knowledge is destroyed.
Bailing-in creditors and diluting shareholders is fast and cheap by comparison. This is particularly true when the business is likely to continue operations similar to those in place at the time of insolvency. Bankruptcy works for Theranos or Pets.com, but not so much for airlines in 2020.
> Bailing-in creditors and diluting shareholders is fast and cheap by comparison.
I agree, whether the planes go through bankruptcy to a new player or the old ownership is radically changed, it allows to things to take a different course. With big dilution you can imagine the new owner essentially having bought the business before bankruptcy.
iiuc, these assets are valued at approx 10% of the previous value.
while materials such as aluminum do not rapidly decline, their meta-information does: for airlines: certifications, inspections and other legal requirements. in other businesses assets are perishable. basically a lot of momentum is lost.
There's also a fairly good argument for this in the line of trains and highways. Planes aren't physically trapped on one course, but pretty much every nation heavily regulates who can fly where, when. Airports are often state-controlled, and even private ones need state approval to add new runways or flights.
What we have now is one of the ridiculous "private non-market" arrangements. When airlines in Europe fly empty planes to stop the government from taking their flight slots away, that's not the fault of the companies, but it's also not a functional market we should expect efficiencies from.
I'm not a fan of "regulate markets into dysfunction then nationalize them", but if the fundamental restraints on travel are too severe to let the market function freely, privatization stops making much sense.
And like, in this case, it's not even a violation of capitalistic principals: if you need money from investors, you sell shares and ownership to investors, and in this case the investor is the people as represented by the government. If you make risk public, then profits should be public too.
Can tell you don't have much experience of bankruptcy. Okay, airlines go bankrupt...presumably, airports go bankrupt too...simple, the various assets are "reassigned"...true.
One big problem: if an airline is bankrupt, what airport is going to give them a slot? I can tell you: no airport, because they will lose that money in bankruptcy. Likewise: what airline will land at a bankrupt airport? Again, no airline.
What you are saying is that we should stop all flights into and out and within the US for a period of months (probably years) whilst these cases go through court (and it will probably take years)...is that realistic? Likewise, you appear not to realise how difficult it will be to fire millions of staff and rehire them at other companies. Bankruptcy is neutral in terms of assets, it is not neutral in terms of cost...it is very very very costly.
This isn't a hard problem. You are completely wrong that bailouts "keep things in the hands of the same people". This is what largely happened in the US...because the US led insolvent companies go bankrupt (mostly but not always i.e. Fannie/Freddie) most of the companies that were "bailed out" weren't insolvent. But, irregardless, it is very easy to create a package that forces losses...very very easy.
I agree with you. Companies that gorged on debt should be punished. It is very easy to do this with new equity issues, preferred issues, etc. without bankruptcy. This should only be, however, for companies that have substantial net debt positions (where I am, one or two airlines were buying back shares but they had/have net cash positions...the issue isn't repurchasing shares, that is just a tax-efficient return of capital, it is being under-capitalised and expecting someone else to capitalise you for free).
When one makes personal attacks like, "Can tell you don't have much experience of bankruptcy," it is imperative that you actually know more than the person being attacked.
Many, if not most, US airlines have been through bankruptcies before (https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_i...). Typically, large ones are not grounded; companies go into receivership, where they continue operations as normally as possible while the bankruptcy is settled.
Most US airports are public infrastructure. JFK is owned by the City of New York and operated by the Port Authority. O'Hare, Denver, and ATL are owned by Chicago, Denver, and Atlanta, respectively. LAX is "owned and operated by Los Angeles World Airports (LAWA), an agency of the government of Los Angeles." Public institutions such as cities can go into bankruptcy, but it's difficult.
> One big problem: if an airline is bankrupt, what airport is going to give them a slot? I can tell you: no airport, because they will lose that money in bankruptcy. Likewise: what airline will land at a bankrupt airport? Again, no airline.
Why would both of these be true? Normally you don't want to sell to a bankrupt customer, or at least you don't give them credit. But you would definitely buy from a bankrupt supplier if they have something you need.
Some airports pay airlines, but mostly the cash flows the other way, so the airline should be happy to land at the bankrupt airport.
The least we can demand for these bailouts is that executive bonus of last years will be returned. These companies don't deserve bailouts and should all go into chapter 11.
We got all severely fucked last time. Boeing bought for $52 billion shares back and now they want $60?
I hope Donald Trump is going to push his Tough guy act now. If he says no to all the bailouts he is going to be remembered as the best president ever.
Realistically it’s because they’re not going to sell low, but they may just fire a ton of people, max profits, and then sell. There’s a balance of funding to dissuade making that decision, especially when there’s a natural disaster occurring that does have some expiration date.
Boeing unfortunately has to be bailed out, if we as a world want airplane as a method of transportation. It’s only Boeing and Airbus, there are no others.
Management should be punished excessively as a warning to others, though I do not expect them to be punished at all.
> Boeing unfortunately has to be bailed out, if we as a world want airplane as a method of transportation. It’s only Boeing and Airbus, there are no others.
Somehow I suspect that if the earth swallowed every employee of Boeing and Airbus, and every plane ever produced by either, there would be more airplanes and more airplane manufacturers soon enough.
If you let the corporation go bankrupt, the shares become worthless. But the assets remain, and can be taken over by new owners, who can keep producing airplanes etc.
At least that's the bankruptcy theory. Real world bankruptcy may well have a lot more friction.
Feel free to educate me on how the real world works here!
You can let the purely virtual "company" frame go bust (and the top management - would that really be a problem in such a case, and not the main purpose of such an action?) - and immediately use the assets and people to build new ones with minimal disruption. The factories don't have to be stopped for a single minute.
Not to mention that maybe letting them get so big was a mistake in the first place? Based on petty power games of "leaders" (in politics, finance and business) and not on technical necessities.
Buy it out and nationalise it if it is that important to the country. Anything else is lining shareholders and no assurance staff of these entities still won't feel the brunt.
> Management should be punished excessively as a warning to others, though I do not expect them to be punished at all.
"Management" is a group of ordinary people who are doing their jobs - trying to maximize profits for their employers. I'm not going to sit here and say my job is any different. I'm writing code so my employer will make money, not anyone else.
What specifically are you going to punish management for?
That they get propped up is a major reason no competitors appear. No one thinks it's wise to try to invest a huge sum, when their competitors are entities backed by governments.
It wouldn't be that long for new companies to pop up if the only two players collapsed. People can just buy the existing facilities for making parts and assembly.
Sick companies have to die in order for capitalism to survive. In the long term people will lose trust in this system because every new bailout puts pressure on everybody in the system for generations. No bailouts of companies over 250 people ever again.
Embraer obviously isn't quite a Boeing or Airbus but their E-Jets seem like viable narrow-body jets. Now if the argument is that the USA isn't ok with all of the big jet manufacturers being foreign, then yeah, they have to bail Boeing out.
Obama's biggest fault was that he didn't sell the American people on the inarguably excellent deal he got on the bailouts. The American people did profit off of those and most people don't know that because he didn't make a big deal about it.
Conversely, Trump, if he knows nothing else, knows how to focus doggedly on what's going to excite his base. If he can sell his base on the idea of loan-sharking Boeing (which is a legitimate strategy), then he'll come out looking like a winner, despite the fact that he'll have done the exact same thing as Obama.
Taxpayers lost $10.2 billion. Are those the bailouts you're talking about.
There was a brief period where loans were paid back profitably but everyone crowing about profits was ignoring that the rest of the loans were booked against stock which was heavily underwater and later liquidated at substantial losses.
I don't know who The Balance is but these numbers seem consistent from other sources I just looked at.
Please correct me if I have this wrong (not being snarky) -- what I think I know is comprised of varied articles spread across years.
The only tough guy act that Trump will play is for election support. He'll gladly bail out any company that supports his reelection, and play tough guy to any company that doesn't.
And there are no possible circumstances where he'll be remembered as the best president ever. He's fighting for 44th place.
>He'll gladly bail out any company that supports his reelection, and play tough guy to any company that doesn't.
A more generous reading of this strategy is that Trump will do what the people want. I fail to see how that's any worse than someone in Washington saying they know what's best, or tat we need to "tighten our belts".
>He's fighting for 44th place.
In a survey of Californians maybe. You're sorely mistaken if you don't think Trump is popular, and might be surprised (again) in November. Will the Democrats blame the Russians again?
Trump will bail out any company that has a large blue collar workforce. I really doubt they will be tough on the bailout terms, either. The onus of the failure will be put onto Covid-19 rather than any kind of mismanagement or misconduct or buy backs.
1) Hoping Trump will have a backbone when facing corporate cronies
2) Hoping that executives will skip bonuses, after seeing what happened to Wall Street in 2008
If he's not crucified by his base for letting the disease go rampant, he won't get crucified for anything else. In any rational country his approval ratings would be in the teens, not the forties, right now.
His base will be more worried about their 401k/IRA/pension benefits. Everyone talks the talk about bailouts, but once it hits their accounts they are all for it.
The generic reference of "Wall Street" in the title, but then not referring to financial firms but transportation, manufacturing and other firms located across the country seems to be a misuse of the term. Like many other things the meaning drifts into "things I don't like".
It's a metonym, and you're right it refers to finance. But, many corporations over the past 30 years have kind of evolved into financial companies. Look at GE. The criticism, relevant to this very article, is that (many) companies focus far too much on maximizing shareholder value, at the expense of other investments.
It’s not the transportation firms who are owed the money, my understanding is the airlines took on debt to financial institutions (to buyback stock, held by other financial institutions), and the bailout money would ultimately go to those obligations to financial institutions (“wallstreet” here).
Wouldn't it make the most sense then for the Bailout to be mostly for equity at the current price? They have stock, they want cash, they sell the stock. American Taxpayer holds onto the stock for a while, fixes the company, and then sells for profit.
That of course is if the American Taxpayer wants to save that business.
I think this is the answer. If they want additional runway, they should dilute. It's fine for the government to act as a buyer of last resort in the event that it believes the market is responding irrationally. But it should still get a steep discount. The government can sell the assets back into the market when it believes the situation has stabilized.
Maybe don’t sell it but put the holdings into a big sovereign wealth fund? The wealth fund can rebalance its holdings later, and can work as an infrastructure bank or similar in future to support the country’s ongoing development.
The last bundle of financial bailouts included the Government taking an equity position in companies. They made profit when they sold the stock. One example is the ownership stake they took in Citigroup.
>The main sources of that revenue are $23.1 billion through dividend or interest payments, $19.7 billion from sales of equity or other assets that Treasury acquired (mostly stock in Citigroup); and $9.63 billion through stock warrants which Treasury received as part of most of the investments. When companies pay back the TARP investment, the warrants are either sold back to the company or auctioned off.
This seems like a logical solution to me. It's gonna look funny though, between government owning all the companies and handing out $1000 to all Americans, Trump will be the surprise socialist candidate.
This gets to one of the fundamental limits of for profit operation of businesses, different scales of firm have different incentives. For American Airlines it made logical sense to do stock buybacks, but if the whole of society was in control of American Airlines they would've prioritized service and just paid to keep the operation on life support during the downturn.
"Prior to 1982, stock buybacks were considered market manipulation and were illegal under SEC rules. Whether buybacks should be outright illegal or not, they are a sign that a company thinks so little of its own products, services, and market potential that its capital should be diverted from growth and towards financial engineering."
Performance based compensation, were share value is the key measure/indicator for performance, leads to this kind of culture.
There are legitimate reasons for stock buybacks, but when they're being used for nothing more than short-term increases (in share prices), then that says something about the system.
That 3-6 month projection of operating expenses goes out the window once an emergency happens. Business require many more things to sustain itself. The recommendation is good for every day people because the actual cost to keep a healthy human sustained is actually pretty cheap (food, water, shelter). A business does not have human needs, it might need oil, metal, ores, chemicals, etc. to do its job. If the prices of those things spike dramatically, your 3-6 month emergency fund could quickly turn into 1-3 months.
> If the prices of those things spike dramatically,
Futures contracts have existed for a very long time for exactly this reason. [0] It's up to management to use them responsibly. For an example from the last crisis, Ford managed to avoid needing a bailout while GM and Chrysler took part in one. Management makes a difference. I'd want to steer out of a situation where management uses government to finance its carelessness.
Have prices spiked dramatically? The only variable costs to an airline that I can think of are fuel and parts. With worldwide travel demand evaporating, it seems unlikely to me that either of those things are in short supply.
We need a way to include "black swan readiness" in corporate finance / valuation. Historically, it's not something investors have cared about, so corporations haven't done it.
In terms of a company having a healthy balance sheet, there are many well known metrics that can signal that a company is at higher risk of bankruptcy.
The Altman Z score was defined over 50 years ago and can be approximately competed using the standard accounting data that public corporations are required to report to investors.
I'll push back a bit: there are ways of measuring/ estimating some of these. If you read an old school book on value investment, some of these ideas may be covered. Why not use them when considering how to invest wealth?
One is good (gas prices), but I'm skeptical that the other is even a black swan. Global pandemics have happened before (Spanish Flu), and airplanes have been grounded for a week in recent history followed by weak demand (9/11), but last I checked, planes have still been flying.
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If an airline goes down, the planes are not immediately turned to dust. The pilots and ground crew do not forget how to fly and maintain aircraft.
What happens at bankruptcy is that the claims on various assets are reassigned. The planes will get sold to someone who reckons they know how to run an airline, and the staff are likewise hired by new businesses.
This is worth keeping in mind when considering bailouts, because they tend to keep things in the hands of the same people, sometimes even on not much worse terms. And that's despite having steered the firm into the ground.
Don't forget there's value in this sort of reassignment. Assets and labor get moved around in new configurations that might be better.
yes, this is the crux, a gross unfairness. common folks get harsh punishments, while financiers and corporate executives get away with major thefts and get to keep the fruits of their transgressions.
i'm all for harsher punishments for actions that lead to greater damages to more lives (in this case, taking a little bit from lots of people). with greater power must come even greater responsibility. tear up the corporate veil.
and let's be vigorous in reassigning assets so as to support a functioning market for better management.
Effective control of the company will be placed in the hands of people who re-capitalize the company, and they will definitely not let the old management stick around.
Relative to bankruptcy, this has the benefit of allowing the company to continue operating. It also deters future recklessness. Probably should have happened in 2009, but didn't.
If at any time the US comes close to having a government which might threaten to "punish" en-masse (as opposed to a token example here and there) the financiers and corporate executives you speak of, there's likely to be bloody opposition.
I'm reminded of a passage from Jack London's The Iron Heel[1], about a war between the working class and the ruling class, in which the latter answer a threat with these words:
"This, then, is our answer. We have no words to waste on you. When you reach out your vaunted strong hands for our palaces and purpled ease, we will show you what strength is. In roar of shell and shrapnel and in whine of machine-guns will our answer be couched. We will grind you revolutionists down under our heel, and we shall walk upon your faces. The world is ours, we are its lords, and ours it shall remain. As for the host of labor, it has been in the dirt since history began, and I read history aright. And in the dirt it shall remain so long as I and mine and those that come after us have the power. There is the word. It is the king of words--Power. Not God, not Mammon, but Power. Pour it over your tongue till it tingles with it. Power."
Even if a revolution ever does occur, after all the blood spilled (which is certain to be copious), it's the self-serving demagogues and opportunists which will manage to grab on to power, as they always do, and it's unlikely that in the end a more just society will emerge. We'll just enter a different nightmare.
[1] - https://en.wikipedia.org/wiki/The_Iron_Heel
1) Private equity acquires the assets at bargain basement prices and proceeds to squeeze out whatever profits they can. One of the most common ways this is done is by laying off staff.
2) A competitor buys them out, leaving less competition. Also followed by a large layoff to reduce redundancies.
3) The business is reorganized to maximize short-term efficiency, regardless of the cost to others - customers, partners and society at large.
These aren't bad outcomes per se, but I suspect that those that are reflexively against corporate handouts wouldn't be happy about these either. The general point of an industry bailout is to avoid outcomes like this since in crises, these can add to the pain. The actions taken to ensure your own company is financially solvent are often counterproductive if they are all taken by all parties involved. And various markets involved - whether in terms of labor or capital - are also likely not functioning efficiently enough to absorb the resulting dislocations.
And typically bailouts are not great outcomes for the shareholders involved. Bailouts can be great for the management, but only to the extent that it's also great for most employees. As long as the shareholders (and creditors to a lesser extent) take a big cut, there isn't a huge moral hazard either.
Isn't the problem in that system itself, and thus the collapse of that particular system is a net-benefit. A better run company will absorb these sell-offs and reassign priorities.
Deleted Comment
Take Google or Microsoft for instance. If either of these companies were split apart, and the assets were sold at auction how much would those assets be worth compared to the market cap of the company?
Clearly a strike would be effective - look what's happening now. They barely can handle 1 month without asking for a bailout. Even more so in an economic recession.
Let them liquidate. It's no different than before.
There is a way out of this joke. Keep your heads up and don't give up.
Alternatively, it would be possible to create a worker cooperative from the failing business. The managers who created the mess would be ousted and the actual employees could decide what to do with the rest.
Bailing-in creditors and diluting shareholders is fast and cheap by comparison. This is particularly true when the business is likely to continue operations similar to those in place at the time of insolvency. Bankruptcy works for Theranos or Pets.com, but not so much for airlines in 2020.
I agree, whether the planes go through bankruptcy to a new player or the old ownership is radically changed, it allows to things to take a different course. With big dilution you can imagine the new owner essentially having bought the business before bankruptcy.
while materials such as aluminum do not rapidly decline, their meta-information does: for airlines: certifications, inspections and other legal requirements. in other businesses assets are perishable. basically a lot of momentum is lost.
Dead Comment
And while we're at it, let's make the internet a utility.
What we have now is one of the ridiculous "private non-market" arrangements. When airlines in Europe fly empty planes to stop the government from taking their flight slots away, that's not the fault of the companies, but it's also not a functional market we should expect efficiencies from.
I'm not a fan of "regulate markets into dysfunction then nationalize them", but if the fundamental restraints on travel are too severe to let the market function freely, privatization stops making much sense.
One big problem: if an airline is bankrupt, what airport is going to give them a slot? I can tell you: no airport, because they will lose that money in bankruptcy. Likewise: what airline will land at a bankrupt airport? Again, no airline.
What you are saying is that we should stop all flights into and out and within the US for a period of months (probably years) whilst these cases go through court (and it will probably take years)...is that realistic? Likewise, you appear not to realise how difficult it will be to fire millions of staff and rehire them at other companies. Bankruptcy is neutral in terms of assets, it is not neutral in terms of cost...it is very very very costly.
This isn't a hard problem. You are completely wrong that bailouts "keep things in the hands of the same people". This is what largely happened in the US...because the US led insolvent companies go bankrupt (mostly but not always i.e. Fannie/Freddie) most of the companies that were "bailed out" weren't insolvent. But, irregardless, it is very easy to create a package that forces losses...very very easy.
I agree with you. Companies that gorged on debt should be punished. It is very easy to do this with new equity issues, preferred issues, etc. without bankruptcy. This should only be, however, for companies that have substantial net debt positions (where I am, one or two airlines were buying back shares but they had/have net cash positions...the issue isn't repurchasing shares, that is just a tax-efficient return of capital, it is being under-capitalised and expecting someone else to capitalise you for free).
Many, if not most, US airlines have been through bankruptcies before (https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_i...). Typically, large ones are not grounded; companies go into receivership, where they continue operations as normally as possible while the bankruptcy is settled.
Most US airports are public infrastructure. JFK is owned by the City of New York and operated by the Port Authority. O'Hare, Denver, and ATL are owned by Chicago, Denver, and Atlanta, respectively. LAX is "owned and operated by Los Angeles World Airports (LAWA), an agency of the government of Los Angeles." Public institutions such as cities can go into bankruptcy, but it's difficult.
Why would both of these be true? Normally you don't want to sell to a bankrupt customer, or at least you don't give them credit. But you would definitely buy from a bankrupt supplier if they have something you need.
Some airports pay airlines, but mostly the cash flows the other way, so the airline should be happy to land at the bankrupt airport.
We got all severely fucked last time. Boeing bought for $52 billion shares back and now they want $60?
I hope Donald Trump is going to push his Tough guy act now. If he says no to all the bailouts he is going to be remembered as the best president ever.
These industries have already priced in that they can do whatever the hell they want, completely fall apart and they will get bailed out.
They know that:
1. They are needed, or seen as needed by politicians
2. The appetite for true nationalization of industries is extremely low in the US, so they will get bailed out instead of taken over by govt.
They were playing a speculative game and bought high, now they have to sell low.
OOPS
Management should be punished excessively as a warning to others, though I do not expect them to be punished at all.
Somehow I suspect that if the earth swallowed every employee of Boeing and Airbus, and every plane ever produced by either, there would be more airplanes and more airplane manufacturers soon enough.
For now, give them a loan, as much as they need, interest free for 10 years. No more bonuses nor stock buybacks until the loan has been repaid.
No one has to be bailed out. They can take out loans, issue new shares, or file for bankruptcy. The government should not be bailing anyone out.
At least that's the bankruptcy theory. Real world bankruptcy may well have a lot more friction.
Feel free to educate me on how the real world works here!
Not to mention that maybe letting them get so big was a mistake in the first place? Based on petty power games of "leaders" (in politics, finance and business) and not on technical necessities.
"Management" is a group of ordinary people who are doing their jobs - trying to maximize profits for their employers. I'm not going to sit here and say my job is any different. I'm writing code so my employer will make money, not anyone else.
What specifically are you going to punish management for?
It wouldn't be that long for new companies to pop up if the only two players collapsed. People can just buy the existing facilities for making parts and assembly.
Maybe we ought to rethink the extent of our wants versus our needs.
Conversely, Trump, if he knows nothing else, knows how to focus doggedly on what's going to excite his base. If he can sell his base on the idea of loan-sharking Boeing (which is a legitimate strategy), then he'll come out looking like a winner, despite the fact that he'll have done the exact same thing as Obama.
Remember, never let your accomplishments go unrecognized by those you serve. https://www.joelonsoftware.com/2002/02/13/the-iceberg-secret...
Taxpayers lost $10.2 billion. Are those the bailouts you're talking about.
There was a brief period where loans were paid back profitably but everyone crowing about profits was ignoring that the rest of the loans were booked against stock which was heavily underwater and later liquidated at substantial losses.
I don't know who The Balance is but these numbers seem consistent from other sources I just looked at.
Please correct me if I have this wrong (not being snarky) -- what I think I know is comprised of varied articles spread across years.
And there are no possible circumstances where he'll be remembered as the best president ever. He's fighting for 44th place.
A more generous reading of this strategy is that Trump will do what the people want. I fail to see how that's any worse than someone in Washington saying they know what's best, or tat we need to "tighten our belts".
>He's fighting for 44th place.
In a survey of Californians maybe. You're sorely mistaken if you don't think Trump is popular, and might be surprised (again) in November. Will the Democrats blame the Russians again?
In the old language of my ancestors, rotfl.
https://www.wsj.com/articles/ge-powered-the-american-century...
That of course is if the American Taxpayer wants to save that business.
Yes buybacks were dumb. It's done now. Just change the regs and make sure it never happens again.
https://projects.propublica.org/bailout/
>The main sources of that revenue are $23.1 billion through dividend or interest payments, $19.7 billion from sales of equity or other assets that Treasury acquired (mostly stock in Citigroup); and $9.63 billion through stock warrants which Treasury received as part of most of the investments. When companies pay back the TARP investment, the warrants are either sold back to the company or auctioned off.
Because screw your employees!
That's very well put.
There are legitimate reasons for stock buybacks, but when they're being used for nothing more than short-term increases (in share prices), then that says something about the system.
Futures contracts have existed for a very long time for exactly this reason. [0] It's up to management to use them responsibly. For an example from the last crisis, Ford managed to avoid needing a bailout while GM and Chrysler took part in one. Management makes a difference. I'd want to steer out of a situation where management uses government to finance its carelessness.
[0] https://en.wikipedia.org/wiki/Futures_contract
Black Swans cannot be prepared for, that's what makes them Black Swans.
One of the principles is:
The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
How do you establish an emergency fund for something with a non-computible probability? How much money should you put aside for it?
In terms of a company having a healthy balance sheet, there are many well known metrics that can signal that a company is at higher risk of bankruptcy.
E.g. acid test, interest coverage ratio, Altman z score: https://en.m.wikipedia.org/wiki/Altman_Z-score
The Altman Z score was defined over 50 years ago and can be approximately competed using the standard accounting data that public corporations are required to report to investors.
I'll push back a bit: there are ways of measuring/ estimating some of these. If you read an old school book on value investment, some of these ideas may be covered. Why not use them when considering how to invest wealth?