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

From a seperate thread a few days ago:<p>As someone who leans heavily free markets, even I buy the argument that it&#x27;s not wise to let every airline in the country fail simultaneously, regardless of fault.<p>Here&#x27;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&#x27;t take it, then let them die.<p>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.<p>Unfortunately well probably just hand them $50 billion and make poor people pay for it.<p>note: I get the issue that a lot of execs would just walk away. You&#x27;d have to think how to structure it to hold them on the hook. It&#x27;s just an example.

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&#x27;t it get to share in any of the rewards?<p>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.

I&#x27;ll go on the record asking a question that might be dense: why would this apply to stock buybacks and not dividends?<p>Stock buybacks accomplish a similar goal to dividends. You&#x27;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.<p>And aren&#x27;t dividends (or future dividends) the ultimate point of equity?

I suppose they&#x27;ll be prohibited from ever distributing dividends too, but then I wonder why anybody would buy the stock.

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 &quot;once a decade unforseen cataclysm&quot; 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.<p>We can call it Corporate Social Security.

It feels like there could be perverse incentives developing here.<p>There&#x27;s a lot of discussion about providing cash bonuses to employees and perhaps citizens across the U.S.<p>Encouraging people to put that money back into the stock market could be sold on the notion that &quot;we&#x27;re reaching a bottom; join the economy on the way back up, and you&#x27;ll help the recovery while profiting&quot;.<p>If that works as intended, then in the short term that would seem good.<p>However there could be a significant number of stocks which don&#x27;t recover. And the whole process would then essentially signal that &quot;crisis is good for these types of business&quot;, leading to continued ascent of crisis-oriented businesses, and, as a side-effect, more incentive for crises.<p>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.

I disagree with Mark, as I think it’s important to let people make bad decisions.<p>However, and this is important, I believe that we should let those companies fail (i.e bankruptcy), and let their creditors manage them <i>through an expedited process, whereby the government can choose to be a party</i>.<p>I’ve found that creditors are much more ruthless than governments quite frequently.<p>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).<p>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.

I&#x27;m not sure I understand the hate on stock buybacks. Consider how this evolved.<p>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&#x27;t help anyone.<p>Some investors like dividends but some don&#x27;t. Some use stocks as an income-generating stream. Some don&#x27;t need or want the income as it generates tax events.<p>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.<p>What&#x27;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&#x27;m not sure I have a problem with it either. If the interest rate is fixed, this is essentially free money and it&#x27;s really the government&#x27;s fault that exists.<p>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 &quot;royalties&quot; to further reduce US profits (and thus taxes) and your tax bill essentially goes to zero.<p>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&#x27;s not a taxable event.<p>Executive pay is another matter. It&#x27;s clearly out of control. I&#x27;m honestly not sure what you do about it however.<p>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.<p>Top of that pecking order should be non-executive worker pay and benefits.<p>Additionally, pension funds should be held in trust such that they can never be spent by the company or claimed by creditors.

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.

and buying back shares is exactly what the airlines have been doing - $15B from AA in past 6 years for example - from Matt Levine: <a href="https:&#x2F;&#x2F;www.bloomberg.com&#x2F;opinion&#x2F;articles&#x2F;2020-03-17&#x2F;the-good-times-for-airlines-are-over" rel="nofollow">https:&#x2F;&#x2F;www.bloomberg.com&#x2F;opinion&#x2F;articles&#x2F;2020-03-17&#x2F;the-go...</a>

I agree with Mark Cuban on this. Easy decision and implementation.<p>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.<p>There has to be a quid pro quo. It&#x27;s not free.

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.

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.

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

What do stock buy backs do that makes it unethical?

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.