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 Bailouts 
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Post Bailouts
https://www.bloomberg.com/news/articles ... acks-chart

Airlines spent 96% of their free cash flow re-purchasing their own shares so that execs enjoy tax free wealth growth (something seen as stock manipulation up until the SEC changed rules in 1982). Now they're getting $50B from the government because of covid-19. The crazy part is these genius CEOs could now be buying their airline stock at half price.

Capitalist profits, socialist losses.

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Wed Mar 18, 2020 6:35 pm
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Post Re: Bailouts
No matter the facts, you will still have a lot of misguided people who think that socialism works, even though it has failed in every country that has tried it out. Hopefully examples and information like you have here will help guide the misled in the future elections.

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Wed Mar 18, 2020 7:34 pm
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Post Re: Bailouts
So I want to preface, I am not at all in favor of bailouts, but I do want to clarify that buy backs in and of themselves are not a bad thing, it’s just a question of when and where.

Imagine opening a lemonade stand, and having a friend give you $100 for 25% ownership to help you get going. The stand grows and you open more and decide to buy the 25% ownership back from your friend for $200. He decides to sell so he came out on top and you came out on top. A buy back is a great way to reward equity investors at a lower tax rate than a dividend and is valuable in a market to encourage capital investments. It is ALSO a very important step to restructure capital within a company. As a young company, equity investments may be crucial so that loan interest doesn’t suck cash flow out of the company and prevent growth. Later, short and long term debt may be cheaper than equity, so a company needs to buy back equity and do a capital restructure to grow and remain profitable. Anyone with a 401k that plans to retire has benefited from this system immensely and is very important for companies to operate. It’s not a buy back issue, it’s a bailout issue. It’s also a FED issue.

When companies believe they are too big to fail, they take over leveraged positions because they believe they will be bailed out if it goes poorly. As a result, companies will assume a highly leveraged position to buy back equity because it does create profit for both equity shareholders and also executives (who a big portion of their compensation comes from preferred stock).

Additionally, the government has encouraged this behavior through ridiculously low treasury rates. Debt is incredibly cheap for large companies so they can assume more debt at a lower risk which means they don’t feel the need to carry as much cash and short term highly liquid assets. The problem is IF it goes wrong, they implode FAST-see Boeing.

If companies don’t believe a bailout is possible, they wouldn’t take over leveraged positions. They will maintain a liquid reserve and be prepared for market cycles and black swans. Airlines and Boeing all know they will get bailed out. The airlines all have many times in the past, and Boeing has a HUGE lobbying force in DC. It’s a shame but it’s true.

They should all be allowed to fail. It will hurt, but it will teach a lesson. Crony capitalism is the problem.


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Wed Mar 18, 2020 7:47 pm
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Post Re: Bailouts
bluesky2012 wrote:
So I want to preface, I am not at all in favor of bailouts, but I do want to clarify that buy backs in and of themselves are not a bad thing, it’s just a question of when and where.

Imagine opening a lemonade stand, and having a friend give you $100 for 25% ownership to help you get going. The stand grows and you open more and decide to buy the 25% ownership back from your friend for $200. He decides to sell so he came out on top and you came out on top. A buy back is a great way to reward equity investors at a lower tax rate than a dividend and is valuable in a market to encourage capital investments. It is ALSO a very important step to restructure capital within a company. As a young company, equity investments may be crucial so that loan interest doesn’t suck cash flow out of the company and prevent growth. Later, short and long term debt may be cheaper than equity, so a company needs to buy back equity and do a capital restructure to grow and remain profitable. Anyone with a 401k that plans to retire has benefited from this system immensely and is very important for companies to operate. It’s not a buy back issue, it’s a bailout issue. It’s also a FED issue.

When companies believe they are too big to fail, they take over leveraged positions because they believe they will be bailed out if it goes poorly. As a result, companies will assume a highly leveraged position to buy back equity because it does create profit for both equity shareholders and also executives (who a big portion of their compensation comes from preferred stock).

Additionally, the government has encouraged this behavior through ridiculously low treasury rates. Debt is incredibly cheap for large companies so they can assume more debt at a lower risk which means they don’t feel the need to carry as much cash and short term highly liquid assets. The problem is IF it goes wrong, they implode FAST-see Boeing.

If companies don’t believe a bailout is possible, they wouldn’t take over leveraged positions. They will maintain a liquid reserve and be prepared for market cycles and black swans. Airlines and Boeing all know they will get bailed out. The airlines all have many times in the past, and Boeing has a HUGE lobbying force in DC. It’s a shame but it’s true.

They should all be allowed to fail. It will hurt, but it will teach a lesson. Crony capitalism is the problem.


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The problem is (because execs compensation is overwhelmingly made up in stock, NOT salary), is that there is a perverse short term incentive for them to burn company cash on stock buybacks (again illegal before 1982). They boost the value of their own portfolios without incurring a cent of taxes. They are not investing that money in expansion, job creation, aquisitions, research, or emergency spending (like now). Typical CEOs move on before the poor decisions they make have any effect on them. My wife and I have worked at 7 different Fortune 500 companies in several different industries and have seen this pattern all too often. It also distorts the value of stocks which are no longer priced according to underlying fundamentals:

https://hbr.org/2020/01/why-stock-buyba ... he-economy

But my main reason for this post is a comment on what economists call "moral hazard"--i.e. there is a lack of downside risk because that's taken care of by us, the US tax payer. It's by like going to Vegas and you keep all your winnings while your brother-in-law pays all your losses. You'd double down on any and every blackjack hand you're dealt.

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Thu Mar 19, 2020 8:50 am
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Post Re: Bailouts
I don’t disagree with the moral hazard aspect. A big reason for this being such an issue is quarterly SEC reporting requirements and vesting periods for executives.

The SEC requiring quarterly reporting drives a much shorter term thought process which drives away from strategic investments. Vesting periods should also be 5+ years so that executives and boards have to plan strategically for future growth rather than short term decisions.


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Thu Mar 19, 2020 10:47 am
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Post Re: Bailouts
bluesky2012 wrote:
I don’t disagree with the moral hazard aspect. A big reason for this being such an issue is quarterly SEC reporting requirements and vesting periods for executives.

The SEC requiring quarterly reporting drives a much shorter term thought process which drives away from strategic investments. Vesting periods should also be 5+ years so that executives and boards have to plan strategically for future growth rather than short term decisions.


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Amen!! I couldn't agree more. I've been saying that for years--5 year vesting would encourage decisions that benefit the company over the long term which would benefit the shareholders, employees, tax payers and the US economy.

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Thu Mar 19, 2020 11:05 am
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Post Re: Bailouts
MNGunner wrote:
bluesky2012 wrote:
I don’t disagree with the moral hazard aspect. A big reason for this being such an issue is quarterly SEC reporting requirements and vesting periods for executives.

The SEC requiring quarterly reporting drives a much shorter term thought process which drives away from strategic investments. Vesting periods should also be 5+ years so that executives and boards have to plan strategically for future growth rather than short term decisions.


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Amen!! I couldn't agree more. I've been saying that for years--5 year vesting would encourage decisions that benefit the company over the long term which would benefit the shareholders, employees, tax payers and the US economy.


I’m fine with that unless I’m a CEO, then it’s pump and dump baby!

Kidding- seriously vesting & short reporting periods is a serious issue. This isn’t the first time and won’t be the last time this happens.


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Thu Mar 19, 2020 11:40 am
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Post Re: Bailouts
bluesky2012 wrote:
MNGunner wrote:
bluesky2012 wrote:
I don’t disagree with the moral hazard aspect. A big reason for this being such an issue is quarterly SEC reporting requirements and vesting periods for executives.

The SEC requiring quarterly reporting drives a much shorter term thought process which drives away from strategic investments. Vesting periods should also be 5+ years so that executives and boards have to plan strategically for future growth rather than short term decisions.


Sent from my iPhone using Tapatalk Pro

Amen!! I couldn't agree more. I've been saying that for years--5 year vesting would encourage decisions that benefit the company over the long term which would benefit the shareholders, employees, tax payers and the US economy.


I’m fine with that unless I’m a CEO, then it’s pump and dump baby!


Sent from my iPhone using Tapatalk Pro


You've got Upper Management written all over you! :D

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