Bailout People, Not Profits

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I never expected it, but somehow it happened again. Corporate America requires another bailout. The cause? Coronavirus. This virus has brought our economy to a literal halt. Businesses, small and large, shuttered their doors under government order. With no income and no cash on hand, these companies have asked the American people to borrow and bail out their industrial future. Again.

In an almost unprecedented bipartisan fashion, both Houses of Congress acted swiftly to pass H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act”. President Donald Trump immediately signed it into law, and just like that, with limited political debate, and with a few lofty strokes of the presidential pen, over $2.2 trillion of loans, financial guarantees, and direct payments to both corporations and individuals appeared. That was March 27, 2020. Less than two months have passed since then, and the House just passed another $3 trillion bailout package on top of the $3 trillion that the Federal Reserve has pumped into the economy (with a implicit commitment to print however much more). I don’t know about you, but that is a lot of bailout money. 

It was not long ago, just a decade in fact, when Congress did something very similar. The result? Inflated stock and home prices, soaring student and personal debts, deep political unrest, and rampant income inequality. There is one key difference between then and now, however. This time, the bailout is more than three times as big.

I expect triple the damage.

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We’ve seen this playbook before. I witnessed my first bailout just a few months after graduating college. I started working for PricewaterhouseCoopers on September 15, 2008, the day Lehman Brothers, one of the oldest financial institutions in the country filed for bankruptcy. The signs of disaster had already begun appearing on the walls over the past several months. The Dow Jones Industrial Average retreated 19% from its October 2007 highs. Homeowners across America began defaulting on their mortgages. Fixed income juggernaut, Bear Stearns, absorbed early losses and narrowly avoided bankruptcy in March when JPMorgan purchased the company for $2 per share, a bargain compared to the $159 it traded just one year prior.

Lehman Brothers was getting desperate and hoping for a similar deal. But in that moment, the US Government decided that they would not receive a bailout. It sent shock waves through the global financial system. Panic set in. Hysteria consumed even the most measured fiduciaries. “If they will let Lehman fall, they will let any one of us fall,” bankers frightened. The Dow went on to lose another 42% of its value over the next six months. It turned out, in that moment, that the American economy did not run on productivity and profits. It ran on hope and future expectations. The moment hope faded and future expectations changed, all hell broke loose.

The Lehman bankruptcy remains the largest ever bankruptcy in US history.

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Photo by Obi Onyeador on Unsplash

What did Uncle Sam do then? At first, it seemed that the crisis was mortgage related. So our elected leaders in Washington sold us on a “buy troubled mortgages” program. Congress acted and passed the Troubled Asset Relief Program or TARP for short. This $750 billion bailout fund would purchase distressed assets such as home mortgages and small business loans. “This will directly help Americans,” our politicians collectively told us.

I happened to be working at PricewaterhouseCoopers at the time. One of my first assignments was to read the legislation and understand how it worked and more importantly, how the United States was going to enact this program. Was the government going to buy mortgages and provide direct financial support to the American people? Who would select which mortgages? How would the portfolio be managed? And who would manage it? These were the questions, both philosophical and technical, that I researched. This was going to be complicated.

But then the Treasury pulled a fast one. Instead of buying depressed assets, the US Treasury would simply buy equity in the largest financial institutions in the country. Problem solved! No complicated portfolio management or selection bias.

What? You mean the money went from “save American homeowners” to “save Americas banks”? You got it. Forget the homes on Main Street; Wall Street comes first.

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“Forget the homes on Main Street; Wall Street comes first.”

We learned a very important lesson then. America will do anything to save its corporate institutions. America will do anything to protect profits. It’s as if we have socialism in this country. It’s just a different kind of socialism. It is not the traditional socialism whereby governments provide for the basic human needs of healthcare, education, and basic income, but rather corporate socialism whereby companies are provided maximum life support, capital, guarantees, and reduced regulatory oversight in order to maintain profits. Airlines, airplane manufacturers, hotels, energy producers, retailers, restaurants, banks, construction companies, travel groups, car manufacturers, car suppliers, car dealerships, and so many other billion dollar corporations have requested government assistance. The government once again proves to be the lender of first resort in times of crisis. Given the both the nature of the crisis and the magnitude of the over $8 trillion in relief, we are doubling down on American socialism.

Listen. I get it. America needed help in 2008 just as Americans need help today. Then Federal Reserve Chairman, Ben Bernancke is one of the foremost experts on depression economics. He would be the first to tell you that you can not have a flourishing economy without a sound and stable financial system. He was right. America saved itself by repairing the “Wall” in Wall Street.

But at the same time, it was insulting. It was insulting because the bank CEO’s who were asking America for a handout, had just the prior year, received over $400MM in personal compensation. Does this story sound familiar some ten years later? Are we not bailing out companies that have paid CEOs billions of dollars in executive compensation?

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We survived that crisis. A “Great Recession” as they called it. America got saved from financial ruin.

Sources: Lloyd Blankfein $53.97 million, John Mack $40.2 million, Jamie Dimon $30 million, Vikram Pandit $216 million, Ken Lewis $20.4 million, Stan O’Neal $46 million, James Cayne $38.3 million, Dick Fuld $22 million

What else did we get? Well, for the majority of Americans, a decade of stagnant career and wage growth, soaring debts, political chaos, and ultimately, another crisis followed by a corporate bailout! College loans have soared with Millennial and Generation Z students holding over $1.5 trillion in debt. Personal debts including auto loan and credit cards creeped up as a way to fund this past decade’s economic boom. In major cities, home prices skyrocketed. All in, the combination of bailout plus loose monetary policy increased the wealth of the top 10% exponentially while leaving the remaining 90% of Americans saddled with debt and low wages.

Let me tell you who it did help. Rich People. They made out like bandits. Their fortunes were not just protected; they were enriched fourfold. Their assets increased nearly 400%. Did your net worth increase 400%?

“The real winners were rich people. Their assets increased nearly 400%. Did your net worth increase 400%?”

Just look at instagram. Here we are in a pandemic crisis, adjusting our lifestyles, our careers, our families, our dreams, our ambitions, so that we can fight this plague. “We’re all in this together” I’ve heard some of the talking heads on TV say. Meanwhile, the rich are off quarantining on yachts in tropical destinations, playing tennis on private courts in the Hamptons, and enjoying private luxury services at remote destinations. If the times were so good leading up to COVID19, then ask yourself, “Am I quarantined on a yacht?”

Photo by Viktor Ritsvall on Unsplash

Well, how did their wealth go up so much? Pretty simple: tax cuts, corporate cost reduction, benefit cutting, and a decade of stock buyback bonanza. Just look at the data.

In 2018 alone, S&P and Dow Jones index companies repurchased a record $806 billion in stocks. In 2017, $520 billion. The previous record high was in 2007, right before the last time corporate America needed a bailout. There seems to be a pattern here. Bailouts come shortly after companies directly enrich their shareholders with maximum returns. Had companies kept the cash, they would not need a bailout.

Compare the $806 billion in share buybacks to the amount of the 2019 Federal Deficit, $984 billion. This is obvious. The government is borrowing money on behalf of all Americans to keep corporate taxes low. Companies then pay shareholders with that saved money. Let me simplify, the government is borrowing money on your behalf, to subsidize corporate profits and share buyback programs. Ninety percent of that benefit goes to the top 10% of Americans. A bailout is no different. The cost of a bailout is shared equally. The benefit is not.

“The government is borrowing money on your behalf, to subsidize corporate profits and share buyback programs”

For the companies that survive, we face their Moral Hazard. There is no incentive, nor free market check, to force companies to conserve and preserve profits for moments like this. Companies do not care. Top executives will receive multi-million dollar compensation packages, 271 times more than their average worker. Everyone will praise these executives as corporate gods for having weathered the storm. Employee wages will eventually be cut, benefits slashed, and regulations rolled back. Profits will be maximized and returned swiftly to wealthy shareholders. The majority of America will end up no better off in ten years than they are today. Rinse and Repeat.

We have to start asking ourselves why we think that providing the same bailouts is going to somehow result in a different outcome. The only thing that we are doing differently is increasing the size and magnitude of our mistakes.

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The bailout of these companies destroys competition. Weak companies provide opportunity for new entrepreneurs and new ideas to compete. But who can compete with a monolithic airline such as Delta or JetBlue or United when they are bankrolled by Uncle Sam to the tune of hundreds of billions of dollars? Who can compete to offer a new mortgage, credit card, or lending product when the Federal Reserve is providing endless liquidity to large banks, insurance companies, and mortgage brokers? Who can start a new boutique hotel when Hilton, Marriott, Hyatt employees are being paid to stay home? Who can afford to compete with Amazon or Walmart or Target when they have become our only lifeline to basic goods and services?

“This isn’t capitalism. This is negligent corporate welfare.”

This isn’t capitalism. This is negligent corporate welfare. Our Capitalism thrives when ideas flow freely amongst our people and we let those ideas compete for longevity and impact. A bailout, by definition, is the opposite of competition. Instead of letting the fittest survive, we are doing precisely the opposite. We are letting the weakest ideas survive. The strong do not need a bailout.

The weak idea that needs to die in quarantine is not the company or industries themselves. We need airlines, and cruise ships, and restaurants, and movie theaters, and sporting events, and concerts. The weak idea that needs to die is the belief and practice of companies distributing, with subsidy from the government, all profits quickly and swiftly to shareholders. These companies can not survive this crisis, not because they don’t have something of incredible value to sell, but rather because they have imprudently destroyed their balance sheets. Short term and persistent shareholder returns cannibalized the need for safe and prudent financial management.

Many of the companies that received bailout funds were mismanaged before the crisis even started. The crisis merely exposed them for the fraudsters, manipulators, and profiteers that they are. Their system of false rewards, cliche mantras, and profits over people needed to die. The virus proved what a sham it really was. If 21st century capitalism worked, then you shouldn’t need a bailout within just days of a crisis after a whopping ten years of an economic boom. We shouldn’t be giving loans to failing businesses.

Here is what the government needed to do this time. Take ALL of the money, not just some of it, and devote ALL of it to bailing out the American People. Not companies. Not executives. And certainly not profits.

“The U.S. Government should be paying Americans to fire their employer”

The American People are in a tough situation. For those unemployed, they aren’t sure how long this is going to last or where their income is even going to come from if Uncle Sam turns off the spigot. For those with jobs, they’ve suddenly lost all leverage against their employers and find themselves working tirelessly to support their company in work-from-home arrangements. Now is the time for all of us to start asking the tough questions. Are these the jobs we really want? Do I really want to go back to work for that company? Or that boss? Are you really going to be better off or are you simply getting back to work so that you can live paycheck to paycheck?

I sure hope not. Keeping these jobs means perpetuating a relationship with employers who have prioritized shareholder gains over wage increases, tax cuts over basic healthcare, and flexible corporate cost structures over job security. The U.S. Government should be paying Americans to fire their employer, to incentivize them to form their own businesses and end this perpetual path of working poverty. Bail out Americans, not companies. Bail them out of working for the companies that put us into this rapid economic despair in the first place. Shouldn’t you have an opportunity to be an owner rather than an employee? You might have shied away from the entrepreneurial pursuits thinking “well I have a lot of security working for a large company. It’s just easier. I have less work and I have good family balance”. My response to that is simple: what about now? As of May 2020, for over 30 million of you, that security vanished.

Think about the logic. Why would we bail out leaders and owners who have demonstrated, some of them repeatedly, that they are not financially prudent? The ruling class loves to criticize the working class as irresponsible. They shout mantras in the halls of Congress “don’t support welfare moms” and “you need to save during the good years and stop living paycheck to paycheck.” It turns out, it was Corporate America that was living paycheck to paycheck.

“Why would we bail out leaders and owners who have demonstrated, some of them repeatedly, that they are not financially prudent?”

In a dynamic economic situation such as this, American Entrepreneurialism should be barrelling to full speed as new constraints, new customer demands, changing lifestyles and habits, and altered home economics begin to ignite ingenuity, creativity, and competition. The incentive to invent, create, and compete far exceeds the cost of being wrong. New ideas and new products thrive when customers and business think differently. Bailouts diminish that possibility.

Instead, our government has us convinced that the only path forward is for the American people to borrow as many trillions as possible, and hand over those trillions to the corporate lords of the Fortune 500. These bailouts are not security. These jobs do not bring us hope or happiness. They are handcuffs. A bailout does not make our future life better; it merely supports us to get back to where we were. Where we were was not good. It was maximum employment towards enriching the lives of the few rather than the many.

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What if instead, that corporate bailout money went to funding new businesses? Businesses started while employees were unemployed. Businesses started with creative solutions and inventive products. Business started and owned by the people who actually work there? Is this not what capitalism is supposed to be? We should be giving grants loans to workers to start new businesses.

What if instead, our policy was geared towards helping people, and if people were doing well, then profits would do well. People with money create demand. Demand generates profits. People help profits. Profits don’t always help people.

What if instead, the government gave the bailout money directly to Americans and they decided who receives financial help by directly investing and owning a piece of those companies. Then, when we have another decade of profits, all Americans receive upside, not just rich people. Then profits do help people. 

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In just my three decade lifetime, we have had five economic recessions, extremist terrorism followed by 20 years of internaional war, Category 5 hurricanes resulting in mass destruction of entire metropolitan regions, wildfires, civil disruption, mass shootings, sovereign wealth defaults in Europe, the collapse of oil prices, nuclear disasters in Japan, and now a global pandemic. I no longer consider anything to be “once in a lifetime.” We need to plan for more, not less disruption and we need a playbook that comes from the future, not the past. We need a playbook that lets companies and employees compete.

Photo by Artem Beliaikin from Pexels

The solution to our problems are not corporate bailouts. Bailouts are perpetuating the fundamental change that needs to occur in our political and social process. Our bailouts create moral hazard. Companies will continue to act knowing that the government will fund their ineptitude in the name of preserving employment. Income inequality will continue to rise and life for the majority of the country will remain stagnant. Our bailouts prevent new ideas, new policies, new innovations, economic and social, to rise to light. Companies who act prudently and with explicit risk of failure will preserve capital. Employees, who are rewarded in the good years will have ample savings to weather the down years. Employees with capital will start new businesses. When people start businesses, they change their title from employee to owner. That is Capitalism.