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The Story of Hertz Going Bust

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Re: The Story of Hertz Going Bust

#21

Post by im3w1l-alt »

082349872349872 wrote: post #4
wolco wrote: post #2

In the end Kathryn Marinello failed. She was at the helm for years where she could have positioned the company better. Blaming it on a 2014 misfilling and the wasted years cleaning it up only gives false cover. She didn't pay back debit when times were better because it would have affected her compension.

US companies aren't supposed to pay back debt (in Hertz's case, how did 2005 affect the balance sheet?) because that would be an inefficient use of capital. US consumers are supposed to spend, not save, to stimulate the economy. US government is supposed to run a deficit, not a surplus. And yet the aggregate US net worth is positive: about 5x its GDP. What sector have I missed?

Debt is how much (negative) money you have. Net worth also takes non-monetary assets into account. If you take out a loan to buy a house your debt increases but your net worth is constant.

Re: The Story of Hertz Going Bust

#22

Post by smt88 »

082349872349872 wrote: post #13
eru wrote: post #7

Earlier quoted context omitted.

Why do you say Kathryn Marinello failed? Compensation incentives are there for a reason. Acting according to them just means fulfilling the shareholders wishes. (Unless the shareholders are idiots or impotent and the board set the wrong incentives.) Running a riskier strategy that fails under a pandemic is a perfectly cromulent business decision to make. Shareholders and creditors knew what they were in for. Not all…

Shareholders also diversify over several firms — so the individual parts of a portfolio should run at riskier positions on the efficient frontier than shareholders (already the investors with the highest risk appetite) wish to have for themselves.

Good comment that I was going to make myself. I hope you won't mind if I translate for people (perhaps non-native English speakers) unfamiliar with the jargon:

Large investors have stock in many companies. Some are low-risk, some are high-risk. Ideally, these will balance each other out. In theory, this allows large, publicly-traded companies to do risky things. Amazon was a great example of this for years.

The problem is that some companies are perceived as risky or not-risky by different investors.

If 30% of their shareholders want a conservative strategy and 30% of them want a risky strategy, the conservative shareholders will always win because it's easier to build a coalition around "don't do anything" than it is around "do something". "Do something" can mean any one of a billion different strategies, and it's very hard to get a large group to agree on one.

Re: The Story of Hertz Going Bust

#23

Post by teambayleaf »

eru wrote: post #6
082349872349872 wrote: post #4

Earlier quoted context omitted.

US companies aren't supposed to pay back debt (in Hertz's case, how did 2005 affect the balance sheet?) because that would be an inefficient use of capital. US consumers are supposed to spend, not save, to stimulate the economy. US government is supposed to run a deficit, not a surplus. And yet the aggregate US net worth is positive: about 5x its GDP. What sector have I missed?

Despite the snark, you are partially right. Having debt in your capital structure indefinitely is a perfectly fine decision to make. If there's a political will to favour equity over debt, the lawmakers should first remove the tax benefits of debt over equity. See https://en.wikipedia.org/wiki/Tax_benefits_of_debt

> Having debt in your capital structure indefinitely is a perfectly fine decision to make.

We're hearing this argument a lot recently, but aren't we past that already in 1980s?

As I recall, it was somewhat popular among companies to pile up leverages by buying a large potion of their own stocks. The reasoning was the same as today: it was supposed to benefit shareholders because a levereged BS has tax benefits.

... which subsequently resulted in those highly-levereged ("recap'ed") companies filing for bunkruptcy. So that hack was shunned by the time of 1990s. What does make this time different?

Re: The Story of Hertz Going Bust

#24

Post by eru »

virgilp wrote: post #20
eru wrote: post #7

Earlier quoted context omitted.

Why do you say Kathryn Marinello failed? Compensation incentives are there for a reason. Acting according to them just means fulfilling the shareholders wishes. (Unless the shareholders are idiots or impotent and the board set the wrong incentives.) Running a riskier strategy that fails under a pandemic is a perfectly cromulent business decision to make. Shareholders and creditors knew what they were in for. Not all…

> Unless the shareholders are idiots or impotent and the board set the wrong incentives. That's quite a big leap. Humans are exceptionally good at gaming objective metrics if that's all that matters... setting the right incentives is by no means something any non-idiot can do; it's in fact exceptionally rare to find people able to set right incentives for an entire organization (or for it's leadership; if the leaders…

Yes, that is indeed a problem.

However, CEO and shareholders are playing a repeated game here. So they can retro-actively reward last years performance by giving more (or less) money for next year.

Mostly, shareholders do want CEOs to take some amount of risk. And giving your CEO eg stock options means you want to encourage risk taking.

If you want your CEO to be careful, you pay them in eg long term company debt instead.

Exactly how you align the precise risk appetites is a harder problem. And there might be some loopholes clever management can exploit. But the broad strokes are clear.

Re: The Story of Hertz Going Bust

#25

Post by eru »

eganist wrote: post #19
xapata wrote: post #9

Earlier quoted context omitted.

Making a bet and losing doesn't imply idiocy. What were the odds? What was the potential payoff?

The odds, according to more than a few scientists (but citing just one here: https://cmr.asm.org/content/20/4/660 ), were 100% in not too much time. I don't know if that makes shareholders and board members "idiots," just that it's something the firm probably should've worked to mitigate a bit more effectively. Example: EHI is still holding on, and they (from my understanding based on employees I've spoken with) had…

That's good on EHI. Though perhaps that planning would have cost some extra time and money that would have been 'wasted', if the pandemic hadn't happened.

Re: The Story of Hertz Going Bust

#26

Post by eru »

oarsinsync wrote: post #14
eru wrote: post #11

Earlier quoted context omitted.

Yes, exactly. Though it's not just odds and payoff, but also risk appetite. There's something like risk-aversion, and a corresponding risk-return-tradeoff. But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds, who don't need to care whether a any single company they hold goes ba…

> But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds Except there are low and high risk index funds as well. Just because you're invested through a passive index fund, doesn't mean you're risk-neutral.

Yes. Hence the 'broadly'.

As an investor, you can also always just add leverage to your index fund holding, if you want more risk. If your jurisdiction allows you, that is.

Re: The Story of Hertz Going Bust

#27

Post by eru »

teambayleaf wrote: post #23
eru wrote: post #6

Earlier quoted context omitted.

Despite the snark, you are partially right. Having debt in your capital structure indefinitely is a perfectly fine decision to make. If there's a political will to favour equity over debt, the lawmakers should first remove the tax benefits of debt over equity. See https://en.wikipedia.org/wiki/Tax_benefits_of_debt

> Having debt in your capital structure indefinitely is a perfectly fine decision to make. We're hearing this argument a lot recently, but aren't we past that already in 1980s? As I recall, it was somewhat popular among companies to pile up leverages by buying a large potion of their own stocks. The reasoning was the same as today: it was supposed to benefit shareholders because a levereged BS has tax benefits. ... w…

If you have shares in enough companies, you don't particularly care if a few of them go bankrupt every once in a while, _if_ that trade-off makes you enough money on average.

Mostly things haven't changed that much since the 1980s. The biggest difference is probably that individual investors are les likely to own specific shares, and more likely to own via an (index) fund.

(That doesn't mean that any particular balance between equity and debt is the right one. Just that the occasional bankruptcy is not a nail in the coffin.)

Re: The Story of Hertz Going Bust

#28

Post by eru »

ninkendo wrote: post #17
082349872349872 wrote: post #16

Earlier quoted context omitted.

That wasn't snark. As an undergrad, I was taught that households should be positive, corporations negative, and public sector balanced on average, which would balance out. Either I'm missing a sector in the original analysis above (please tell me what it is), or the "common wisdoms" expressed there are false (and I should be more cynical), or...?

Your tone is snarky despite your words being more or less correct. Correcting someone by saying you’re not using snark is just digging yourself a bit deeper I’m afraid.

Mostly agreed.

Re: The Story of Hertz Going Bust

#29

Post by eru »

im3w1l-alt wrote: post #21
082349872349872 wrote: post #4

Earlier quoted context omitted.

US companies aren't supposed to pay back debt (in Hertz's case, how did 2005 affect the balance sheet?) because that would be an inefficient use of capital. US consumers are supposed to spend, not save, to stimulate the economy. US government is supposed to run a deficit, not a surplus. And yet the aggregate US net worth is positive: about 5x its GDP. What sector have I missed?

Debt is how much (negative) money you have. Net worth also takes non-monetary assets into account. If you take out a loan to buy a house your debt increases but your net worth is constant.

And, of course, every debt is also an asset on someone else's balance sheet.

Re: The Story of Hertz Going Bust

#30

Post by tonetheman »

wolco wrote: post #2

In the end Kathryn Marinello failed. She was at the helm for years where she could have positioned the company better. Blaming it on a 2014 misfilling and the wasted years cleaning it up only gives false cover. She didn't pay back debit when times were better because it would have affected her compension.

Yeah nope. Did you read the article at all? The string of bad choices before that is what did it...
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