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French companies benefiting from state aid can't buy back shares

uk.reuters.com

171–180 of 220 posts

Re: French companies benefiting from state aid can't buy back shares

#171

Earlier quoted context omitted.

> but dividends that go to every owner aren't unfair per se If these companies are in such dire straits they need the infusion of cash provided by a government bailout, where did the money to pay dividends come from? Shouldn't they use that money to pay employees and fund their operations?

I've heard arguments for dividends/buybacks in the scenario where the government does a terrible job of picking companies that actually need a bailout and ends up throwing money at a healthy company, in which case the only way for that money to reach decent investment opportunities is for the company to pass on the money to its own investors in the form of buybacks and what not. I don't really agree with the concept…

This is just making a stronger argument for not bailing out corporations at all and giving out more of the money by sending checks to individuals.

If companies need money they can sell shares, and then people have more money to buy the shares with. If that's what they want. If everybody has the money and nobody thinks a particular company is worth saving, why are we saving it?

Re: French companies benefiting from state aid can't buy back shares

#172

Earlier quoted context omitted.

Informing hundreds of thousands of people that a government enforced quarantine took away their job permanently isn't a good way to keep a government. If the government instead helps them stay on pay roll, life goes on

What if the government just pays them instead and lets the company fail?

It's probably much more expensive. The difference is between a loan which will likely be paid back versus paying the salaries of thousands of people for who knows how long.

Also, good luck taking a plane in the few months following the crisis. Creating back airlines from the ground up is far from instant, even if you have the planes and crews just laying around.

Re: French companies benefiting from state aid can't buy back shares

#173

Earlier quoted context omitted.

As others have said, make it convertible debt. It converts to voting shares. I actually like these conditions. If you need the money, you shouldn't be paying dividends or doing buybacks anyway. This real issue is that we need to ban C-suite and BOD compensation from using anything stock related. Then this perverse incentive for buybacks and quarterly numbers fades and people start focusing on building healthy compani…

Companies (and their directors) care about the share price because their owners care about the share price, since they are the shareholders. If the directors and bosses stopped caring about the share price, the shareholders would be more likely to kick them out and recruit some more co-operative people. If you want companies to care less about share prices, you'll have to structure companies differently.

Of course, companies will always care about the stock price. And that's a good thing. There should be strong limits on the way to increase that price.

Increasing the value of the company? Awesome, go ahead. That's what the bailout is supposed to be for.

Buying back stock? No. No value is created.

Re: French companies benefiting from state aid can't buy back shares

#174

Earlier quoted context omitted.

It's basically rent seeking behavior if you taking public money and then using it to enrich yourself with no benefit to the public. That money could be 1) saved for a rainy day (like now) so they won't have to ask the public for money or 2) reinvested in the company to generate more value. As it is it just sucks value from the economy while also artificially increasing the stock price.

It does the opposite. Buybacks send that money directly back into the economy to the shareholders that sold.

Anything that increases share values or enriches shareholders is going straight into the hands of the 1%, or the funds that hold huge percentages of the market. It's not going out to be respent.

Re: French companies benefiting from state aid can't buy back shares

#175
Most of the commenters here focus on the finances of individual firms. The only reasons for a government to bail out a company are 1) to protect the supply chain of a necessary good or service, 2) as a way of providing a safety net for people that doesn't involve direct payment, 3) a way of maintaining the structure of the economy so it can resume normal operation more quickly after the shock, or 4) a way of giving a handout to a set of wealthy and connected members of society. I think most of us can agree that 1-3 are necessary response to a major disruption and 4 is corruption.

For a small business like a dog groomer or a restaurant, we expect the fraction that aren't viable to go out of business with some probability during small economic shocks, and we expect that this will be a small fraction. So we let them go. But in a crisis where an entire sector will be mostly wiped out, such as restaurants in the current pandemic, some attempt at preserving the sector makes sense because otherwise you send shocks through everything connected with it. For example, if a restaurant occupies the bottom floor of an apartment building, and the building's cashflow depends on that space not being unoccupied for more than two months, then you can have a sequence of events that result in mass evictions unless you control those side effects as well. It's probably easier to try to maintain the web of cashflow.

Now, you may be able to get side effects that you like in some sectors, such as restaurants turning into food kitchens for the duration as part of the direct injection of cash. On the other hand, a bar or a salon probably just shuts down. But even there, most stylists rent a chair in a salon, so you need to make sure that web of cashflow isn't broken by an owner pocketing it. It still gets very complicated. For some areas like farms we already have large measures in place, since bad seasons tend to affect large swathes of farms. Thus reserve boards, farm subsidies and the like.

Others have pointed out that such structural maintenance can be gamed by having a barely-viable company that is too big to fail. Then even small shocks can be turned into structural crises. Someone else suggested requiring capital reserves the way we do for banks, and for large companies that makes sense. If you're that big and structurally risky, you should be required to derisk yourself.

One discussion I hope we will be having as a society during and after this is what disaster preparedness looks like. We should have the regulations for what putting the economy on such a footing looks like, run simulations every few years for a week, and have adversarial gaming on an ongoing basis to try to find loopholes and close them.

Re: French companies benefiting from state aid can't buy back shares

#176

Earlier quoted context omitted.

Absolutely agree but a middle ground is to regulate this kind of behavior out.

I don’t know that we can or should regulate how much cash every single business in the country keeps on hand. Financial institutions that pose systemic risks, sure, but if a cruise company goes out of business because it was mismanaged (i.e. didn’t keep enough cash on hand) is that really something regulation should have prevented?

The argument made elsewhere on this thread was that if the cruise liner employs thousands of people then yes it makes sense to have some sort of rules in place to stop them over-leveraging (or similar) to the point where their failure has knock on effects to the greater community/society.

Another argument is that we cannot guarantee letting them fail will happen due to political influence etc so it is better to put in place rules to stop bad behavior in the first place as there is always a risk of corruption when it comes to bailouts.

Re: French companies benefiting from state aid can't buy back shares

#177
post #159

Earlier quoted context omitted.

It's not "stealing" from the market. All it does is increase the value of each share in proportion.

One aspect of this that the GP noted but has not been addressed, is the following. If you are an executive of the company you very likely have stock options which allow you to buy stock at a preferred (already set) price. Then you support a stock buyback, which inflates the price of the stock, making your options even more attractive. When you exercise the options, you purchase stock directly from the company and the…

Well, and then you get even more preferential shares, because your compensation as executive is often bound directly to the stock performance.

Re: French companies benefiting from state aid can't buy back shares

#178

Earlier quoted context omitted.

It's basically rent seeking behavior if you taking public money and then using it to enrich yourself with no benefit to the public. That money could be 1) saved for a rainy day (like now) so they won't have to ask the public for money or 2) reinvested in the company to generate more value. As it is it just sucks value from the economy while also artificially increasing the stock price.

You didn’t explain how this is different from dividends.

Dividends don't increase wealth concentration.

Re: French companies benefiting from state aid can't buy back shares

#179
post #165

Earlier quoted context omitted.

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 pla…

> 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.

Re: French companies benefiting from state aid can't buy back shares

#180
Here's a counter point from a couple economists who say that the most important thing should be preserving jobs and not worrying about preconditions for now:

This dramatic spike in jobless claims is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why? Because throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers. Wages are, in effect, socialized for the duration of the crisis.

Instead of safeguarding employment, America is relying on beefed-up unemployment benefits to shield laid-off workers from economic hardship. To give just one example, in both the United States and Britain, the government is asking restaurant workers to stay home. But in Britain, workers are receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are guaranteed to get their job back once the shutdown is over. In America, the workers are laid off; they must then file for unemployment insurance and wait for the economy to start up again before they can apply for a new job, and if all goes well, sign a new contract and resume working.

And: There is nothing efficient in the destruction of businesses that were viable before the virus outbreak. The crisis cannot be blamed on poorly managed corporations. Government support, in the case of a pandemic, does not create perverse incentives. Bankruptcies redistribute income, but in a chaotic and opaque way. And while bankruptcy might be a way to deal with the economic fallout of the pandemic for large corporations, it is not well adapted to small businesses. Without strong enough government support, many small businesses will have to liquidate. The death of a business has long-term costs: The links between entrepreneurs, workers and customers are destroyed and often need to be rebuilt from scratch.

Instead, tax corporations for excess profits later:

Windfall profits have a fair, comprehensive and transparent solution: The government should impose excess profits taxes, as it has done several times in the past during periods of crisis. In 1918, all profits made by corporations above and beyond an 8 percent rate of return on their capital were deemed abnormal, and abnormal profits were taxed at progressive rates of up to 80 percent. Similar taxes on excessive profits were applied during World War II and the Korean War. These taxes all had one goal — making sure that no one could benefit outrageously from a situation in which the masses suffered.

https://www.nytimes.com/2020/03/30/opinion/coronavirus-econo...

However, I'm not sure what would prevent the Hollywood accounting trick in that scenario.

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