By Joe Nocera / Bloomberg Opinion
“Trump Says U.S. Bailouts May Require Equity Stakes, Buyback Bans,” a Bloomberg headline screamed early Thursday afternoon.
The president had just finished a news conference in which he was asked point blank whether he supported the government getting equity stakes — and a ban on share buybacks — in return for giving taxpayers’ money to companies struggling with the economic downturn caused by the coronavirus.
“I do, I really do,” he replied to a question about equity stakes. “Conditions like that would be OK with me,” he said when asked whether he supported a buyback ban as well as a freeze on executive bonuses.
It’s impossible to know whether this will be government policy going forward or whether the president will change his mind tomorrow; especially once he discovers that the biggest champion of these ideas is Sen. Elizabeth Warren, D-Mass. The fact that Larry Kudlow, the administration’s chief economic adviser, had earlier broached the possibility of equity stakes gives me hope that the ideas might stick. They should. In fact, they’re the only sensible way to proceed.
Most Americans may not have heard the phrase “privatize the profits and socialize the losses,” but they certainly understand the underlying meaning. During good times, companies can reap billions of dollars in profits; and top executives can make millions. With income inequality widening and far too many service jobs paying minimum wage, the increasing wealth of the corporate elite can be galling. But when you add in the idea that these same companies run to the government for a taxpayer bailout when a crisis hits, well, that’s just infuriating.
Yet the government simply can’t allow the airlines, for instance, to collapse; they are too important. So it needs to rescue the industry, even if it means using taxpayers’ funds. From a purely financial point of view, the taxpayers should get a return on their investment, assuming airlines get back on their feet, which they surely will. But it is even more important psychologically. Without it, a bailout becomes a giveaway. In the current climate, that is unacceptable.
As for the buyback ban, well, you reap what you sow. Two years ago, Trump and the Republicans pushed through tax cuts that saved companies billions of dollars. The idea was supposed to be that the cuts would lead U.S. companies to invest, expand, hand out raises and so on. Instead, most companies bought back stock. Very smart people (I’m talking about you, Cliff Asness) have raised stout defenses of this practice. But it’s another one of those practices that infuriates the populace; and the political class. Democrats have filed bills to curb the practice.
Consider airlines again: Earlier this week, Bloomberg News reported that “the biggest airlines spent 96 percent of free cash flow last decade on buying back their own shares.” American Airlines Group Inc., the article went on to say, had to borrow money to reach its buyback goal, repurchasing $12.5 billion of its stock.
When people see the airlines coming to the federal government, hat in hand, to request a $50 billion bailout — half of that in the form of grants — they think: Why weren’t these companies putting money away for a rainy day? Why were they so intent on rewarding shareholders instead of preparing for the day when the party ended? Why should they get aid when they were so reckless?
No doubt, corporate lobbyists will try to push back, but it’s a losing battle. Banning buybacks is a populist issue that appeals to both the left and the right. If the Democrats win the White House and the Senate — and hold on to the House — there is a decent chance that they’ll pass a law banning buybacks.
There is a famous story about a meeting that took place between President Obama and the heads of the nation’s biggest banks in the aftermath of the financial crisis. They had all participated in the government’s bailout package, but the public was angry because their compensation was still in the millions.
They were trying to explain to the president why they needed to pay such high salaries. Obama stopped them cold. “Be careful how you make those statements, gentlemen,” he said. “The public isn’t buying it.”
Then he added, “My administration is the only thing between you and the pitchforks.” As we proceed with badly needed corporate bailouts, let’s hope executives are wise enough to realize that measures like buyback bans and equity stakes are the only things standing between them and the pitchforks.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast “The Shrink Next Door.”