7 ms·

Mark Cuban says bailed out companies should never be allowed to buy back stocks

135 points by electrum 7y ago

jka 7y ago
It feels like there could be perverse incentives developing here. There's a lot of discussion about providing cash bonuses to employees and perhaps citizens across the U.S. Encouraging people to put that money back into the stock market could be sold on the notion that "we're reaching a bottom; join the economy on the way back up, and you'll help the recovery while profiting". If that works as intended, then in the short term that would seem good. However there could be a significant number of stocks which don't recover. And the whole process would then essentially signal that "crisis is good for these types of business", leading to continued ascent of crisis-oriented businesses, and, as a side-effect, more incentive for crises. This may be a cynical or slanted perspective, and perhaps a correctly-functioning market avoids this trend somehow. Any opinions and discussion would be appreciated.
- umanwizard 7y ago
  Why would you expect them to encourage people to put the money into the stock market? If the government wanted to print money to make the stock market go up, it could do so directly. That's not the point of giving money to all citizens.
  - jka 7y ago
    The concern is that an artifically-created economic recovery could be a political goal, and might not align with the interests of humanitarian response; nor indeed with longer-term genuine economic recovery. You're no doubt correct that the same result could likely be achieved in other ways too.
tedunangst 7y ago
I suppose they'll be prohibited from ever distributing dividends too, but then I wonder why anybody would buy the stock.
- teruakohatu 7y ago
  Would anyone buy the stock if they knew that when the next Black Swan or recession happens there would be no possibility of a bail out? Or are bailouts just welfare for investors (with a happy coincidence of keeping voters employed in bad companies)? The last time Air New Zealand was bailed out the government in fact bought them out (over 50%). I think governments should have buy outs not bail out. This way any future dividends or buybacks will benefit the tax payer at the expense of existing investors.
  - adrr 7y ago
    Buyouts make more sense and allows the government to recoup the money. Example being the Great Recession an the AIG take over by the US government.
jon_dahl 7y ago
I'll go on the record asking a question that might be dense: why would this apply to stock buybacks and not dividends? Stock buybacks accomplish a similar goal to dividends. You're transferring profits to shareholders. By paying dividends, you distribute profits via cash. With a buyback, you distribute profits by increasing the value of equity. There are tradeoffs between these two approaches (tax treatment and otherwise), but they do the same thing. And aren't dividends (or future dividends) the ultimate point of equity?
- teruakohatu 7y ago
  The big issue is, as I understand it, companies borrowing money to buyback stock.
  - tedunangst 7y ago
    Companies borrow money to pay dividends too.
    - teruakohatu 7y ago
      I am out of my depth here but isn't that because of a shortfall verses expected profits, or restrictions on moving money around the world (apple) verses borrowing huge amounts of money at low interest rates to give investors a tax advantage and giving management large bonuses?
    - rumanator 7y ago
      >>Companies borrow money to pay dividends too. The very definition of "dividends" is precisely distributing profits to it's shareholders.
      - umanwizard 7y ago
        Well, all I can say is get a new dictionary, because companies really can and do borrow money to pay dividends. Of course, any bailout would have to have terms preventing this, and it should prevent immediately spending it on stock buybacks too.
sirsar 7y ago
One way to accomplish this would be to nationalize companies instead of bailing them out, right? If the taxpaying public bears the risks of your business, why shouldn't it get to share in any of the rewards? I suspect the answer is something having to do with the overlap between the politically powerful and those with a great exposure to those risks and rewards.
- malandrew 7y ago
  Instead of nationalizing them, create an index fund run by the government. Capitalize the fund using taxpayer dollars and use the fund to buy out the companies at rock bottom. Then distribute the entirety of shares in the fund to all US tax payers. Taxpayers then win on the upside when things recover.
  - jaggederest 7y ago
    That's just nationalizing them with extra steps, if I may deploy a cliché. I definitely agree with the idea, but it's effectively the same as taking them private with government money and re-IPOing them later.
  - colechristensen 7y ago
    If you buy a troubled company, the company is still troubled, you just own it, no resources have been transferred into it. Give away the shares to the population then you don't have any influence on it any more.
    - hedora 7y ago
      If you buy it by purchasing newly issued shares, then the money does go directly to the company and the existing shareholders stakes are diluted. The effectively takes the bailout money away from the stockholders, which seems appropriate, since their shares would be worth even less if the company were allowed to fail.
      - colechristensen 7y ago
deleted 7y ago
[deleted]
anm89 7y ago
From a seperate thread a few days ago: As someone who leans heavily free markets, even I buy the argument that it's not wise to let every airline in the country fail simultaneously, regardless of fault. Here's the thing, there is nothing unfree market about demanding terms for those bailouts, it should be a negotiation, not an ultimatum from the airline industry. So for example, if you enforced all bonuses to be canceled for the next three years and retroactively fined for the last three years, set executive pay at a max of $50k for the next three years (and banned any new stock incentives during that time), fined the executives equal to 125% of capital gains they made on stock incentives, during the stock buyback period, and made all bailouts loans not grants at above market rates, you could ostensibly let them decide how much bailout they wanted without continuing this endless cycle of letting them run at losses knowing the public will foot the bill. And if they don't take it, then let them die. Basically the end result of the bailout has to be drastically net negative over the last 3-5 years for every airline executive for this not to create moral hazard. I think that is achievable. Unfortunately well probably just hand them $50 billion and make poor people pay for it. note: I get the issue that a lot of execs would just walk away. You'd have to think how to structure it to hold them on the hook. It's just an example.
- arcticbull 7y ago
  I'm very much a Canadian left-wing type, so what y'all largely call "communists" in America, and I couldn't disagree more. Failing of businesses is a critical part of capitalism. If we let the big ones fail a number of smaller ones would spring up and compete as they had before the last couple of decades of mergers and acquisitions. Just look at this list of airline M&A in the last couple of decades [1]. Looks like over 50 airlines were folded into 5. That's a 10:1 reduction. I guarantee that in this economic climate, we wouldn't see 50 fall down, but I could see us losing all the big ones without help. The more we rescue them the more they fold together to the point they have to be bailed out. We should allow them to fold, create short-term pain but in the long-term foster a large competitive ecosystem. I made the same exact case for letting all the major automakers fail in 2008. Ford would have made it out and Tesla would have probably been miles ahead. Capitalism isn't supposed to be pretty. As a side-note America has far fewer major international airlines per capita than most major geographies. There's 3 international airlines (American, United, Delta) for ~350M people, or 1 per 116MM people. Canada has 2 for 35MM. Europe has 15-ish for 741MM people, or 1 per 50MM. China has 29 for 1.386BB people or 1 per 47MM people. [1] https://www.airlines.org/dataset/u-s-airline-mergers-and-acquisitions/ https://www.airlines.org/dataset/u-s-airline-mergers-and-acq...
gz5 7y ago
and buying back shares is exactly what the airlines have been doing - $15B from AA in past 6 years for example - from Matt Levine: https://www.bloomberg.com/opinion/articles/2020-03-17/the-good-times-for-airlines-are-over https://www.bloomberg.com/opinion/articles/2020-03-17/the-go...
JohnJamesRambo 7y ago
How about no companies are allowed to buy their own stocks? It makes no sense and just sets up a company to focus on one thing- raising the stock price. When all the companies do it, it seems like an elaborate multi-sector price fixing scheme. If they all have so much extra money, they could be lowering the prices on their products for consumers.
- umanwizard 7y ago
  It absolutely has to be legal and normal to distribute profits to business owners, in order for capitalism to function. If you want to entirely abolish capitalism, so be it, that's a position many smart people do indeed hold, but I'm not sure if you realized that that's what your position is basically tantamount to.
cletus 7y ago
I'm not sure I understand the hate on stock buybacks. Consider how this evolved. The traditional model was that companies would make a profit and would return some or all of that to shareholders in the form of dividends. Retaining profits, generally, doesn't help anyone. Some investors like dividends but some don't. Some use stocks as an income-generating stream. Some don't need or want the income as it generates tax events. So the share buyback was born. This allows a company to return profits to shareholders who want to sell while generally helping the share price as the supply of stock is decreasing. This is kind of a win-win for shareholders. What's different in that post-GFC we had zero or near-zero interest rates on corporate bonds such that what companies would do is borrow money for buybacks. Now this is a little different but I'm not sure I have a problem with it either. If the interest rate is fixed, this is essentially free money and it's really the government's fault that exists. What I do have a problem with is retaining profits overseas (to avoid US taxes) and then borrowing money to pay for buybacks and general operations. If your interest rate is near zero this is essentially deferring taxes indefinitely. Combine this with moving IP overseas and paying "royalties" to further reduce US profits (and thus taxes) and your tax bill essentially goes to zero. What I think should happen is that every dollar borrowed counts as a dollar of foreign profits repatriated to the US (and is thus taxed). If the company has no foreign profits retained offshore then no problem, it's not a taxable event. Executive pay is another matter. It's clearly out of control. I'm honestly not sure what you do about it however. Another thing that should change is that when a company goes through bankruptcy, there is a pecking order for creditors. Secured creditors are first, then bondholders, then preferential shareholders and then ordinary shareholders. There may be other classes too. Top of that pecking order should be non-executive worker pay and benefits. Additionally, pension funds should be held in trust such that they can never be spent by the company or claimed by creditors.
megaman821 7y ago
Can they not just sell their stock to get the operating cash they need for the next 90 days or so? Maybe next time airlines will figure out a better balance of reserve cash vs stock buybacks.
thrill 7y ago
Telling companies how to operate, other than health directed concerns such as during a pandemic, when their operations are not the reason they are in a bind is a great way to destroy process and effectiveness of companies. Due to the health concerns, make loans sufficient to carry them through at minimal staffing levels so that they can recover quickly, and otherwise stay out of their way. Their executive-to-employee compensation level is not the concern of government.
haecceity 7y ago
What do stock buy backs do that makes it unethical?
lubujackson 7y ago
I have an idea - if companies are legally persons and also too big to fail, maybe they should be required to put a portion of their profits into a rainy day fund that will be used for bailouts when the "once a decade unforseen cataclysm" comes. Yes, some companies would benefit more than others and lots of them would grumble about lost profits but it would save everyone a whole lot of headaches. We can call it Corporate Social Security.
jb775 7y ago
I think the market tanking as a result of coronavirus is actually a very good thing in the long term. It corrected the fake value added as a result of absurd stock buybacks, and will most likely halt that behavior. If these buybacks continued for years, could you imagine the outcome? Talk about a house of cards.
ykevinator 7y ago
Mark Cuban has no surviving companies. Celebrity is not expertise.
MR4D 7y ago
I disagree with Mark, as I think it’s important to let people make bad decisions. However, and this is important, I believe that we should let those companies fail (i.e bankruptcy), and let their creditors manage them through an expedited process, whereby the government can choose to be a party. I’ve found that creditors are much more ruthless than governments quite frequently. Further, I look at a company like Boeing, and think that bankruptcy might break up the company (which looks like a good thing, as their engineering issues appear to be systemic). I can’t see the government bailing Boeing out and then breaking it up. Which would mean they may never buy back shares, but still have a broken engineering process.
untangle 7y ago
I agree with Mark Cuban on this. Easy decision and implementation. 1. Taking this money is optional but if you take it you accept the following terms. 2. You will not buy back stock for a period of 12 (?) months after the transaction. 3. For the four quarters following this transaction, you will not reduce your workforce by greater than 5%. 4. Etc. There has to be a quid pro quo. It's not free.

135 points by electrum 7y ago

jka 7y ago

It feels like there could be perverse incentives developing here. There's a lot of discussion about providing cash bonuses to employees and perhaps citizens across the U.S. Encouraging people to put that money back into the stock market could be sold on the notion that "we're reaching a bottom; join the economy on the way back up, and you'll help the recovery while profiting". If that works as intended, then in the short term that would seem good. However there could be a significant number of stocks which don't recover. And the whole process would then essentially signal that "crisis is good for these types of business", leading to continued ascent of crisis-oriented businesses, and, as a side-effect, more incentive for crises. This may be a cynical or slanted perspective, and perhaps a correctly-functioning market avoids this trend somehow. Any opinions and discussion would be appreciated.

umanwizard 7y ago
Why would you expect them to encourage people to put the money into the stock market? If the government wanted to print money to make the stock market go up, it could do so directly. That's not the point of giving money to all citizens.
- jka 7y ago
  The concern is that an artifically-created economic recovery could be a political goal, and might not align with the interests of humanitarian response; nor indeed with longer-term genuine economic recovery. You're no doubt correct that the same result could likely be achieved in other ways too.

tedunangst 7y ago

I suppose they'll be prohibited from ever distributing dividends too, but then I wonder why anybody would buy the stock.

teruakohatu 7y ago
Would anyone buy the stock if they knew that when the next Black Swan or recession happens there would be no possibility of a bail out? Or are bailouts just welfare for investors (with a happy coincidence of keeping voters employed in bad companies)? The last time Air New Zealand was bailed out the government in fact bought them out (over 50%). I think governments should have buy outs not bail out. This way any future dividends or buybacks will benefit the tax payer at the expense of existing investors.
- adrr 7y ago
  Buyouts make more sense and allows the government to recoup the money. Example being the Great Recession an the AIG take over by the US government.

jon_dahl 7y ago

I'll go on the record asking a question that might be dense: why would this apply to stock buybacks and not dividends? Stock buybacks accomplish a similar goal to dividends. You're transferring profits to shareholders. By paying dividends, you distribute profits via cash. With a buyback, you distribute profits by increasing the value of equity. There are tradeoffs between these two approaches (tax treatment and otherwise), but they do the same thing. And aren't dividends (or future dividends) the ultimate point of equity?

teruakohatu 7y ago
The big issue is, as I understand it, companies borrowing money to buyback stock.
- tedunangst 7y ago
  Companies borrow money to pay dividends too.
  - teruakohatu 7y ago
    I am out of my depth here but isn't that because of a shortfall verses expected profits, or restrictions on moving money around the world (apple) verses borrowing huge amounts of money at low interest rates to give investors a tax advantage and giving management large bonuses?
  - rumanator 7y ago
    >>Companies borrow money to pay dividends too. The very definition of "dividends" is precisely distributing profits to it's shareholders.
    - umanwizard 7y ago
      Well, all I can say is get a new dictionary, because companies really can and do borrow money to pay dividends. Of course, any bailout would have to have terms preventing this, and it should prevent immediately spending it on stock buybacks too.

sirsar 7y ago

One way to accomplish this would be to nationalize companies instead of bailing them out, right? If the taxpaying public bears the risks of your business, why shouldn't it get to share in any of the rewards? I suspect the answer is something having to do with the overlap between the politically powerful and those with a great exposure to those risks and rewards.

malandrew 7y ago
Instead of nationalizing them, create an index fund run by the government. Capitalize the fund using taxpayer dollars and use the fund to buy out the companies at rock bottom. Then distribute the entirety of shares in the fund to all US tax payers. Taxpayers then win on the upside when things recover.
- jaggederest 7y ago
  That's just nationalizing them with extra steps, if I may deploy a cliché. I definitely agree with the idea, but it's effectively the same as taking them private with government money and re-IPOing them later.
- colechristensen 7y ago
  If you buy a troubled company, the company is still troubled, you just own it, no resources have been transferred into it. Give away the shares to the population then you don't have any influence on it any more.
  - hedora 7y ago
    If you buy it by purchasing newly issued shares, then the money does go directly to the company and the existing shareholders stakes are diluted. The effectively takes the bailout money away from the stockholders, which seems appropriate, since their shares would be worth even less if the company were allowed to fail.
    - colechristensen 7y ago

deleted 7y ago

[deleted]

anm89 7y ago

From a seperate thread a few days ago: As someone who leans heavily free markets, even I buy the argument that it's not wise to let every airline in the country fail simultaneously, regardless of fault. Here's the thing, there is nothing unfree market about demanding terms for those bailouts, it should be a negotiation, not an ultimatum from the airline industry. So for example, if you enforced all bonuses to be canceled for the next three years and retroactively fined for the last three years, set executive pay at a max of $50k for the next three years (and banned any new stock incentives during that time), fined the executives equal to 125% of capital gains they made on stock incentives, during the stock buyback period, and made all bailouts loans not grants at above market rates, you could ostensibly let them decide how much bailout they wanted without continuing this endless cycle of letting them run at losses knowing the public will foot the bill. And if they don't take it, then let them die. Basically the end result of the bailout has to be drastically net negative over the last 3-5 years for every airline executive for this not to create moral hazard. I think that is achievable. Unfortunately well probably just hand them $50 billion and make poor people pay for it. note: I get the issue that a lot of execs would just walk away. You'd have to think how to structure it to hold them on the hook. It's just an example.

arcticbull 7y ago
I'm very much a Canadian left-wing type, so what y'all largely call "communists" in America, and I couldn't disagree more. Failing of businesses is a critical part of capitalism. If we let the big ones fail a number of smaller ones would spring up and compete as they had before the last couple of decades of mergers and acquisitions. Just look at this list of airline M&A in the last couple of decades [1]. Looks like over 50 airlines were folded into 5. That's a 10:1 reduction. I guarantee that in this economic climate, we wouldn't see 50 fall down, but I could see us losing all the big ones without help. The more we rescue them the more they fold together to the point they have to be bailed out. We should allow them to fold, create short-term pain but in the long-term foster a large competitive ecosystem. I made the same exact case for letting all the major automakers fail in 2008. Ford would have made it out and Tesla would have probably been miles ahead. Capitalism isn't supposed to be pretty. As a side-note America has far fewer major international airlines per capita than most major geographies. There's 3 international airlines (American, United, Delta) for ~350M people, or 1 per 116MM people. Canada has 2 for 35MM. Europe has 15-ish for 741MM people, or 1 per 50MM. China has 29 for 1.386BB people or 1 per 47MM people. [1] https://www.airlines.org/dataset/u-s-airline-mergers-and-acquisitions/ https://www.airlines.org/dataset/u-s-airline-mergers-and-acq...

gz5 7y ago

and buying back shares is exactly what the airlines have been doing - $15B from AA in past 6 years for example - from Matt Levine: https://www.bloomberg.com/opinion/articles/2020-03-17/the-good-times-for-airlines-are-over https://www.bloomberg.com/opinion/articles/2020-03-17/the-go...

JohnJamesRambo 7y ago

How about no companies are allowed to buy their own stocks? It makes no sense and just sets up a company to focus on one thing- raising the stock price. When all the companies do it, it seems like an elaborate multi-sector price fixing scheme. If they all have so much extra money, they could be lowering the prices on their products for consumers.

umanwizard 7y ago
It absolutely has to be legal and normal to distribute profits to business owners, in order for capitalism to function. If you want to entirely abolish capitalism, so be it, that's a position many smart people do indeed hold, but I'm not sure if you realized that that's what your position is basically tantamount to.

cletus 7y ago

I'm not sure I understand the hate on stock buybacks. Consider how this evolved. The traditional model was that companies would make a profit and would return some or all of that to shareholders in the form of dividends. Retaining profits, generally, doesn't help anyone. Some investors like dividends but some don't. Some use stocks as an income-generating stream. Some don't need or want the income as it generates tax events. So the share buyback was born. This allows a company to return profits to shareholders who want to sell while generally helping the share price as the supply of stock is decreasing. This is kind of a win-win for shareholders. What's different in that post-GFC we had zero or near-zero interest rates on corporate bonds such that what companies would do is borrow money for buybacks. Now this is a little different but I'm not sure I have a problem with it either. If the interest rate is fixed, this is essentially free money and it's really the government's fault that exists. What I do have a problem with is retaining profits overseas (to avoid US taxes) and then borrowing money to pay for buybacks and general operations. If your interest rate is near zero this is essentially deferring taxes indefinitely. Combine this with moving IP overseas and paying "royalties" to further reduce US profits (and thus taxes) and your tax bill essentially goes to zero. What I think should happen is that every dollar borrowed counts as a dollar of foreign profits repatriated to the US (and is thus taxed). If the company has no foreign profits retained offshore then no problem, it's not a taxable event. Executive pay is another matter. It's clearly out of control. I'm honestly not sure what you do about it however. Another thing that should change is that when a company goes through bankruptcy, there is a pecking order for creditors. Secured creditors are first, then bondholders, then preferential shareholders and then ordinary shareholders. There may be other classes too. Top of that pecking order should be non-executive worker pay and benefits. Additionally, pension funds should be held in trust such that they can never be spent by the company or claimed by creditors.

megaman821 7y ago

Can they not just sell their stock to get the operating cash they need for the next 90 days or so? Maybe next time airlines will figure out a better balance of reserve cash vs stock buybacks.

thrill 7y ago

Telling companies how to operate, other than health directed concerns such as during a pandemic, when their operations are not the reason they are in a bind is a great way to destroy process and effectiveness of companies. Due to the health concerns, make loans sufficient to carry them through at minimal staffing levels so that they can recover quickly, and otherwise stay out of their way. Their executive-to-employee compensation level is not the concern of government.

haecceity 7y ago

What do stock buy backs do that makes it unethical?

lubujackson 7y ago

I have an idea - if companies are legally persons and also too big to fail, maybe they should be required to put a portion of their profits into a rainy day fund that will be used for bailouts when the "once a decade unforseen cataclysm" comes. Yes, some companies would benefit more than others and lots of them would grumble about lost profits but it would save everyone a whole lot of headaches. We can call it Corporate Social Security.

jb775 7y ago

I think the market tanking as a result of coronavirus is actually a very good thing in the long term. It corrected the fake value added as a result of absurd stock buybacks, and will most likely halt that behavior. If these buybacks continued for years, could you imagine the outcome? Talk about a house of cards.

ykevinator 7y ago

Mark Cuban has no surviving companies. Celebrity is not expertise.

MR4D 7y ago

I disagree with Mark, as I think it’s important to let people make bad decisions. However, and this is important, I believe that we should let those companies fail (i.e bankruptcy), and let their creditors manage them through an expedited process, whereby the government can choose to be a party. I’ve found that creditors are much more ruthless than governments quite frequently. Further, I look at a company like Boeing, and think that bankruptcy might break up the company (which looks like a good thing, as their engineering issues appear to be systemic). I can’t see the government bailing Boeing out and then breaking it up. Which would mean they may never buy back shares, but still have a broken engineering process.

untangle 7y ago

I agree with Mark Cuban on this. Easy decision and implementation. 1. Taking this money is optional but if you take it you accept the following terms. 2. You will not buy back stock for a period of 12 (?) months after the transaction. 3. For the four quarters following this transaction, you will not reduce your workforce by greater than 5%. 4. Etc. There has to be a quid pro quo. It's not free.