“Only when the tide goes out do you discover who’s been swimming naked.” - Warren Bu

[USGrant1962]

Not trying to blame the Clinton administration for anything. They were just trying to rein in what was then considered excessive executive salaries in cash. A noble effort. It just led to the unintended consequence of executive pay moving heavily to stock.

I'm sure I'm in the minority on this forum, but I feel unregulated capitalism is somewhat dangerous. It's a tough problem, especially with global competition. Even if I had all the answers, nobody would listen to me anyway.

Paraphrasing Churchill, like democracy, the problem with unregulated capitalism is that is the worst form of economics except all the others.

Regulations, promulgated by politicians, are rarely an improvement.

 

[Lakewood90712]

Meanwhile over at the Chicago Merc. Exchange , trading firm Ronan capitol went thru the meat grinder. Forced liquidation. The way it is supopsed to happen . Bailouts ? not here .

https://www.cnbc.com/2020/03/20/cle...meet-capital-requirements-at-cme-sources.html

 

[pj.mask]

You don't think a 10x fudge factor is enough ?

Here we are and at that 10x number 6-7 days later. I wouldn’t blame the increase entirely on spread - but also on lack testing. Paid for testing in my city run out daily in the morning. Drove by the city test site and followed the line of cars for 5 miles before I went home. The line continued. We have seen about a 10% positive test rate.

Many rural areas don’t show cases because they haven’t tested.

 

[Closet_Gamer]

(Pardon a very long post...I have time on my hands!)

I don’t have a problem with stock buy backs any more than I have a problem with dividends or paying interest on debt or retiring debt early. Cash is cash and how its returned to shareholders/debt holders vs. internal organic growth vs. M&A is not broadly relevant.

What is relevant are the eternal debates:

1) Balancing the 3 interests of a company: Shareholders, Employees, Society

2) The near term vs. long term conundrum (including balance sheet strength)

3) Executive Compensation and the incentives it creates

Some would argue that #3 has morphed #1 into four competing interests — executives emerging as a distinct interest group — and while there are certainly examples to support that view, I tend to not think of it as a central problem.

I’m what one would call upper management. I was one of the people who started and grew a multi-billion dollar business for our company. My company has recently dispatched me to try and do it again. Over the course of 20 years, I’ve develop a scarce set of skills and earned a lot of confidence...ergo, I can command a rich premium in the skills market. By any yard stick, I have a high income.

The people above me earn 10x what I do. In some cases 25x. Nearly to a person, I think quite highly of these people. They have breathtaking responsibilities which they take quite seriously with sincere concern for balancing the three interests noted above and for finding the right mix of short term vs. long term.

There is an old saying that NFL quarterbacks make their money on 3rd and long. Not everyone is Tom Brady and there is a reason that at age 42 he can sign a $50M deal with the Bucs.

We’re about to discover who the great corporate quarterbacks are. For the most part, you won’t hear about them because a big company that doesn’t need to ask the government for money isn’t news. Securing a credit line that keeps employees on the payroll isn’t as flashy as a throw to the back corner of the end zone but, right at this moment, there are people sitting in board rooms sweating how to keep their companies healthy, their employees safe, and society moving. They are running their two minute drills in the form of business continuity plans. They switching back and forth from working financial problems to trying to figure out social distancing rules in call centres and what to if 25% of the work force is suddenly absent. In many cases they are also engaged with government trying to keep essential services online. And they are balancing issues of generosity, brand management, and real cash flow issues associated with providing services for free.

Right now, in this crisis, the people at the top of my company are exactly the people I want at the helm and worrying about the money and career equity I have in the corporation.


What is very relevant is what we do with large, too big to fail, companies when we hit exigent circumstances as we seem to do about every 10 years.

Capitalism is clearly the best model, but it is prone to panics. The modern, interconnected nature of everything and the emergence of the mega, too big to fail, company have brought new challenges. Scale is not intrinsically the enemy. Having 24 sub-scale airlines would be irrelevant in the face of this kind of problem. If anything, the relative economic efficiency of massive companies right now is a strength, not a weakness.

The problem isn’t the structure, its not stock buy backs, and its not that society makes smart moves to keep millions of people employed during an economic discontinuity.

The problem is moral hazard and the emergence of the government “put”.
That’s what needs to end.

Which brings us back to: what do we do?

My suggestion...receivership instead of bailouts and a requirement that execs maintain a certain level of at-risk investment in the company with a multi-year tail after their exit. Perhaps as much as 50% of their gross income. This can come in the form of equity or debt.

If the government has to back you with tens of billions of dollars to prop you up, you are officially a ward of the state. Equity goes to zero. Existing debt holders are subordinated and perhaps wiped out. Non-qualified deferred compensation is zeroed. I would actually flip the debt hierarchy...pension funds and vendors get paid before debt owners in the company. Senior management & the board are terminated. The company is re-capitalised and re-IPO’d. Alternatively it is sold to a stronger, existing firm. Government gets in, gets the job done, and gets out. (Who you hire to run the company and the process is always an issue...you can’t fire EVERYONE who has a clue how the business works...but you can take a big bite.)

And if everyone knew those were the rules?

Boeing and every other company would be spending a lot more time talking with their debt holders right now than pining away for bailouts. The debt guys would suddenly have a real love of interest forbearance.

And equity holders without the benefit of government put? Dow would be at 10K. And as investors we’d all have a new respect for risk.

(I hope that was at least interesting to read!)

 

[GravitySucks]

But it is nice to be able to breath the air and I can't remember a river catching fire in a while.

Paraphrasing Churchill, like democracy, the problem with unregulated capitalism is that is the worst form of economics except all the others.

Regulations, promulgated by politicians, are rarely an improvement.

 

[Markola]

Closet Gamer, Thank you for that very thoughtful insider analysis. Society is in a tough moment and fairness and equity are required by everyone if we’re going to pull together to do what is necessary to beat this bug. If some senators are using their knowledge for personal advantage and some companies with powerful K Street representation are jockeying ahead of everyone else to avoid the consequences of their short term business choices, because of the government put, as you call it (I’d call it a cheap tin cup), cohesion and acquiescence to government authority break down. Can you be available if CNBC calls you?

 

[OldShooter]

@ClosetGamer, good post. I think there are a couple of other factors that make huge top management pay questionable. First, I think you will admit that luck plays a huge part in getting those jobs. No matter how smart she is, no matter how hard she works, the daughter of a garbage-picker in Mumbai will never head a Fortune 500 company. She picked the wrong parents, she's the wrong sex, she's the wrong color, she's the wrong religion, and she's not tall enough. If she went to school at all, it was the wrong one. All of these factors are proven to be negatives for climbing the corporate ladder.

More importantly, much of CEOs' success is due to luck. By the time decisions get to the C-suite level, the easy ones based on data have already been made, leaving mostly coin tosses. Further, the victors write the history, aided and abetted by HBS. For example, Jack Welch. You and I are both old enough to remember when he was feted as a demigod manager. Now, in the rear view mirror, not so much.

So while I have worked the higher levels of Fortune 500 and I will agree that most of the top guys are smart, I also believe that most of what got them there is luck and that much of their success is also due to luck. The ex-president of Medtronic, Bill George, is probably one of those. His initial fame was as president of the Litton microwave oven division just at the time that microwave ovens took off. It didn't take a genius to ride that wave.

What do you do with that? I don't know. The inmates control the asylum as far as pay is concerned, the shareholders having abdicated. And the victors write the history.

Paraphrasing Churchill, like democracy, the problem with unregulated capitalism is that is the worst form of economics except all the others.

Regulations, promulgated by politicians, are rarely an improvement.

Not to pick on @USGrant1962 specifically, but IMO people who pop off with this kind of simplistic sentiment are simply not paying attention. How do you know that you got the 20 gallons of gas you just paid for? Answer: Regulated capitalism/Weights & Measures Division. Why do you have high confidence that your flight will not end in a mid-air collision? Answer: Regulated capitalism/Air Traffic Control Division. Why is it that you aren't constantly being gouged by monopolists? Answer: Regulated capitalism/Antitrust Division. ... and on and on -- food safety, drug efficacy, ... All of the regulation is not perfect, of course, but we live our lives unconsciously bathed in it.

For those seriously interested in this complex question, I recommend Tim Taylor's "The Instant Economist." He works hard to be nonpolitical (and pretty much succeeds) in discussing the need for regulated capitalism. Actually, it should be required reading for any serious investor. It's only 250 pages and well priced for us cheapskates: https://www.amazon.com/gp/offer-listing/0452297524

 

[Markola]

So one person who will be left on the beach is...me, since I don’t have contacts for the insider corporate trading that’s about to happen based on advanced notice of the details of executives’ companies’ coming government cash tsunami. A good Reuters article about a pending white collar crime wave: https://www.reuters.com/article/us-health-coronavirus-white-collar-idUSKBN21D1AS

 

[Lakewood90712]

On the company list , Cheasecake Factory has informed it's landlords , it will not be able to make April Rent payments for the time being.

 

[razztazz]

Paraphrasing Churchill, like democracy, the problem with unregulated capitalism is that is the worst form of economics except all the others.

Regulations, promulgated by politicians, are rarely an improvement.

Which of course is not an endorsement of No Regulations. Nothing works well without regulations, period. What are regulations and who are they designed to increase or protect? Unregulated capitalism is feudalism or worse. History proves that. Those who want no regulations want themselves to be the regulators and want the the regulations to work for them. That's their idea of "unregulated."


Besides anybody who is affected by capitalism has right to exert influence on the things that affect them. That is part and parcel of freedom. Freedom is not being forced by others to be victimized by them and not being permitted to do anything about it. And that means things can be regulated in the public interest using the instruments of available. ie The Government.

 

[Markola]

+1. Your freedom to swing your fist ends at my jaw. That’s why we need government.

 

[Toocold]

My suggestion...receivership instead of bailouts and a requirement that execs maintain a certain level of at-risk investment in the company with a multi-year tail after their exit. Perhaps as much as 50% of their gross income.

Having been a corporate insider as well, I agree with most of the things you said. On the issue of bailouts (in the form of grants or emergency loans), I think we have the distinguish between normal situations and times of unforeseen crisis, which I include the current situation. No matter how much we plan, I don't think any reasonable corporate leader could have foreseen a complete shutdown of society.

For man-made crisis, I agree with all your general points. Unfortunately, that's the role of the Board and the shareholders, and as the majority of the shareholders invest in index, the situation will get worse.

 

[OldShooter]

... For man-made crisis, I agree with all your general points. Unfortunately, that's the role of the Board and the shareholders, and as the majority of the shareholders invest in index, the situation will get worse.

I see this argument all the time but I am skeptical. I don't think that small investors, if they voted at all, were anywhere near enough an influential block to matter. Pension funds and other large shareholders can easily, even if they have delegated their stock-picking to an index, identify and direct voting where there are specific issues. An index fund manager will listen very carefully to direction from a customer for whom he is running a few hundred million or a few billion $$.

For example, DFA has announced that they will vote against every director of companies that enact poison pills AND that they will follow those directors to any board they serve on or are nominated to and will vote against them there too. I think that's pretty neat.

 

[Markola]

The zombies are back. I wondered when they’d show up to the federal trough. In the last recession, we bailed out the unregulated Collateralized Loan Obligations (CLOs) stuffed with faulty mortgages. This time, the taxpayers’ gift from the unregulated free market Wall Street capitalists is emerging to be $3 trillion in CLOs stuffed with corporate junk bonds issued by companies who cannot pay their obligations to bond holders. Who knows what level of Hell lies this way?


https://qz.com/1833565/some-are-calling-for-a-junk-bond-leveraged-loan-bailout/

 

[RenoJay]

The zombies are back. I wondered when they’d show up to the federal trough. In the last recession, we bailed out the unregulated Collateralized Loan Obligations (CLOs) stuffed with faulty mortgages. This time, the taxpayers’ gift from the unregulated free market Wall Street capitalists is emerging to be $3 trillion in CLOs stuffed with corporate junk bonds issued by companies who cannot pay their obligations to bond holders. Who knows what level of Hell lies this way?


https://qz.com/1833565/some-are-calling-for-a-junk-bond-leveraged-loan-bailout/

Remember the good old days when politicians would at least pay lip service to concepts like long term debt and moral hazard before increasing the national debt by 40% (projected over this crisis) to bail out dubious businesses who chose not to save for a rainy day?

 

[USGrant1962]

Remember the good old days when politicians would at least pay lip service to concepts like long term debt and moral hazard before increasing the national debt by 40% (projected over this crisis) to bail out dubious businesses who chose not to save for a rainy day?

This is exactly the situation that calls for increasing the national debt, as opposed to the massive transfer payments that have driven it for the last half century. And exactly what kind of "rainy day" fund do you think businesses should have to cover a government ordered, multi-month complete shutdown?

 

[OldShooter]

... dubious businesses who chose not to save for a rainy day?

I think you have never run a business.

 

[RenoJay]

I think you have never run a business.

Actually I’ve started and run seven companies, but nice attempt at an insult.

 

[RenoJay]

This is exactly the situation that calls for increasing the national debt, as opposed to the massive transfer payments that have driven it for the last half century. And exactly what kind of "rainy day" fund do you think businesses should have to cover a government ordered, multi-month complete shutdown?

Good luck explaining that to future generations who will be saddled with incredible debt (leading to some combination of higher taxes, lower services and and slower growth.) oh I forgot...the only people who matter are current voters, at least if you ask current voters.

 

[pb4uski]

This is exactly the situation that calls for increasing the national debt, as opposed to the massive transfer payments that have driven it for the last half century. And exactly what kind of "rainy day" fund do you think businesses should have to cover a government ordered, multi-month complete shutdown?

Good luck explaining that to future generations who will be saddled with incredible debt (leading to some combination of higher taxes, lower services and and slower growth.) oh I forgot...the only people who matter are current voters, at least if you ask current voters.

It doesn't have to be either/or. I agree with Grant that few small businesses would be prepared for a few months of no revenue and this is a very unusual situation justifying fiscal stimulus... more for the employees of the business but also for the business.

At the same time, in past "bailouts" the money has been attached to borrowing that has been later paid off, which could help alleviate the impact of this fiscal stimulus on the deficit and debt.

It is very concerning all the money that is being thrown around with nary a thought about the impact on the deficit.

 

[DrRoy]

I am certain that there are a number of folks among us - equity AAs at 80+ who have been posting for years, condescending to anyone with lower and with no fear.

That's where I was going into the Great Recession. This time I was at 58%. Rather better.

 

[Markola]

It doesn't have to be either/or. I agree with Grant that few small businesses would be prepared for a few months of no revenue and this is a very unusual situation justifying fiscal stimulus... more for the employees of the business but also for the business.



At the same time, in past "bailouts" the money has been attached to borrowing that has been later paid off, which could help alleviate the impact of this fiscal stimulus on the deficit and debt.



It is very concerning all the money that is being thrown around with nary a thought about the impact on the deficit.

What happens to the Wall Street artisans who assembled and sold CLOs apparently stuffed with corporate junk whose zombie debt issuers can’t keep up their interest payments? If it turns out these wizards of creative finance have again been allowed to walk the country to the edge of disaster, should they be bailed out? Their investors? Should they go to prison this time? Should ratings agencies like Moody’s et al be shut down and this kind garbage all outlawed? Perhaps we aren’t there yet but the article I posted seems a credible worry.

 

[OldShooter]

Actually I’ve started and run seven companies, but nice attempt at an insult.

It was an observation, not an insult. But if you indeed have business experience it is even more surprising to me that you would label all companies without months of revenue available in cash as "dubious." Unless, I guess, you consider the majority of US companies to be "dubious."

In fact, for companies self-funding their own growth, tying up that much cash would be poor management and very limiting.

 

[pb4uski]

I wasn't responding to those issues or your post at all.. your response is so far out of left field that I won't respond other than to say I don't see the outcome being any different from last time.

What happens to the Wall Street artisans who assembled and sold CLOs apparently stuffed with corporate junk whose zombie debt issuers can’t keep up their interest payments? If it turns out these wizards of creative finance have again been allowed to walk the country to the edge of disaster, should they be bailed out? Their investors? Should they go to prison this time? Should ratings agencies like Moody’s et al be shut down and this kind garbage all outlawed? Perhaps we aren’t there yet but the article I posted seems a credible worry.

 

[Markola]

The whole post is my post but you’re welcomed to comment however you like on it, including that you think it’s from left field. I will push back on the comment, having experienced the mortgage crisis with all the junk in CLOs that was sold as higher quality, which was then insured through credit default swaps for billions more, all of which nearly crashed the economy. I am not as complacent.