Government must take equity stakes for bailouts

Via Roday Lay at Livewire:

The only government measure that is likely to stave off deep recession / depression risk is extending a government (tax payer funded) first loss debt program to the banks and, in turn, on to the SME sector. Similarly, the only thing that will save Qantas and Virgin is a tax payer funded bailout.

But if the tax payer is being asked to, in effect, act as a distressed debt investor then it incumbent on the Government to do so with the stipulation of a component of equity upside – equity warrants, in effect. Just as any distressed debt investor would do so.

This would dilute existing shareholders. But so it should. Such investors enjoyed the full upside return, knowing the risk of the highly leveraged airlines sector. It is not the job of tax payers (mainly the younger and uninvested) to bail out the investors (mainly the older and, in many cases, non tax payers). If you invest in the markets then, by extension, you are an advocate of capitalism. And in capitalism, as Milton Freidman said, there is no such thing as a free lunch.

Just as the GFC led to a decade long binge on cheap money, in turn leading ultimately to the greatest marginal call of all time when the music stopped, a massive fiscal bailout will lead to significant future and inter-generational wealth issues (add that to an already significant list regarding the latter). And that’d be just another case of kicking the can down the road, and which will raise its head at another, unexpected point in time.

Yep. Beyond market integrity and social licence to operate there is another very good reason for driving a hard bargain, inadvertently summed up by a gormless Kouk:

If governments do not take equity, convertible notes or other forms of ownership that can be cashed out later at huge profits then it will be you and me that is bailing out corporations via higher taxes and charges.

David Llewellyn-Smith
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Comments

  1. boomengineeringMEMBER

    .It simply does not make any sense to say you use central bank liabilities in the form of notes and coins but not use them in the form of an account at the central bank.

    boomengineeringMEMBER
    March 20, 2020 at 2:13 pm
    007, OK A nationalized bank terminology would appeal to my tastes though.

  2. robert2013MEMBER

    How strange it would be to watch the lnp nationalise businesses while the alp says and does nothing.

    • There’s silence because Albo’s in awe of it all — he’s thinking: that ScoMo’s a right commie! 😉

      • Insiders had David Speers going for his usual “gotcha” question, asking if Labor would object to anything before it was officially announced. Labor MP said they never got advance warning and found out at the same time as the public.

        Which means they are either being deliberately side lined, irrelevant, or both.

    • BobTurkeyMEMBER

      Labour is a toothlesss tiger which has lost its way (sadly a bit like the Greens). Its up to the Libs to lose power. No one is going to take it from them.

      • seanraceMEMBER

        If you want to lead. You need to do that from in front. Otherwise you will be irrelevant. Sadly they have all been following from behind.

    • Was thinking about this whilst out for 8 hrs today morning slashing and whipper snippering for first inspection tomorrow

      Could it be be labor knows this is it for lnp and are being bi partisan by saying nothing whilst holding the knife as the lnp twist onto it

      Btw how does michaelia cash become (un)employment minister – the only thing she’s qualified to minister is a stern talking to in the 50s* as a headmistress

      *the 1750s

      God she is horrid

      • The LNP always put a woman in as the human sacrifice i.e sportsrorts. For the next 2 years unemployment is going to be the crappiest portfolio of all.

  3. Equity warrants? So if the share price fails to get up off the deck we get nothing? Mmmm … sounds like an excellent deal for the taxpayer. Just give the taxpayer 35% and be done with it – take it or leave it.

    “income tax for those earning over $100k (among other things) to reduce debt”

    Lol. Who’s this clown kidding? Whatever debt is run up in the ensuing months will NEVER be repaid – not one dollar. More fantastical nonsense. The economy will not become healthy again until a very large chunk of existing debt has been erased altogether. Too bad too few understand this.

    There’ll be a reset before any healthy economy emerges.

    • turncoatMEMBER

      Equity warrants? So if the share price fails to get up off the deck we get nothing?

      The warrant is only one part. There’s debt as well and also make the warrant strike price zero

    • kannigetMEMBER

      If you just give them the money with no recourse and they recover you have nothing, if they dont you have nothing……. they way I see it an equity position allows for a government upside and no difference on the downside

    • The economy was in unofficial recession before this hot mess started.

      It was like a punch drunk fighter wobbling around the ring, to stupid to know when it’s beaten. COVID19 is the final head shot that’s going to get the economy stretchered off.

      The worst part is that so many people had bet everything they had on that fight.

      • +1000s. If you make dreadful bets, you’ll get carried out. This is why this crisis could lead to big psychological changes society-wide. Those betting on a recovery to the ‘good old days’ will likely lose that too.

  4. ApproachingZero

    Shouldn’t individual taxpayers get the equity? It’s our money, not the government’s.

    • you must be new to Australia – here we socialize the losses, but privatise the gains.

      Politicians are rewarded with lucrative directorships after retiring from politics.

      Qantas got a big bailout on Monday. On Tuesday it announced it is putting 2/3 of its workforce on ice.
      When things get better CEO Alan Joyce will get 10 million dollar a year bonuses again.

      • Yep. GFC1 was the banks behaving badly and then making out like bandits.
        GFC2 will see companies, that bought back their own shares with debt to juice share prices and executive bonuses, make out like bandits.

        • SoMPLSBoyMEMBER

          No way should any recipient company be allowed to buy back their shares ever again!
          The potential for C- suite shenanigans would just be too tempting and we know they would jump at the first opportunity.
          We need to be ‘telling’ them how its going to be; not ‘asking’ them. If they don’t like the rescue package, they can go to the receivers!

    • Instead of helicopter money, helicopter shares?

      Que “ride of the valcaries” and Lowe hanging out of a huey…. nah nah na na naa na…

      • Nah, it’s more of a disorderly retreat with Arnie yelling “Get to da chopper!”

  5. innocent bystanderMEMBER

    Labor didn’t do it during the bank bail outs during the GFC, hard to see LNP doing it?

  6. +1 David.

    NZ Govt already doing this with Air NZ. We must take equity stakes in any bailout.

  7. How nice of the Kouk to support the idea of me paying an extra 2% on goods and me paying an extra 2% income tax.
    – I did not vote for this government.
    – I did not vote for the reduction of interest rates to below safety buffer level
    – I not vote for the poor handling of this crisis
    – I did not vote for the shitty lending standards of the banks
    – I did not vote for the bad business practises of the businesses that are now crying poor
    – I did not vote for the massive immigration program that has led to an over supply of labour

    He can get fecked. I don’t care how many businesses fall over. If they are deemed to be required then I expect the public to own an sizeable equity share in them if they get saved.

  8. How nice of the Kouk to support the idea of me paying an extra 2% on goods and me paying an extra 2% income tax.
    – I did not vote for this government.
    – I did not vote for the reduction of interest rates to below safety buffer level
    – I not vote for the poor handling of this crisis
    – I did not vote for the sh*tty lending standards of the banks
    – I did not vote for the bad business practises of the businesses that are now crying poor
    – I did not vote for the massive immigration program that has led to an over supply of labour

    He can get fecked. I don’t care how many businesses fall over. If they are deemed to be required then I expect the public to own an sizeable equity share in them if they get saved.

    • You make the mistake of thinking your vote matters. We don’t live in a democracy. We live in a murdochracy.

      • I hate that you are right.

        Murdoch’s been so powerful for so long and no one has the moral strength to tell him he’s become a tyrant. The only hope is that he will go to sleep one night and never wake up.

        Rupert will never retire and will never give up his stranglehold on public opinion and influence over governments. He will not go gently into that good night.

  9. turncoatMEMBER

    Actually the Libs may be of a mind to royally roger the big end of town given their treacherous recent attachment to identity politics over their historic leanings. They haven’t been of much use to the conservative cause for some time so why help the bastards now.

    Chief among those not getting a handout should be Qantas for its role in Isaac Folau’s exclusion from Rugby.

    Rugby itself should also receive nothing.

    Nixon like, Scomo should have a list of enemies he can now destroy. Let’s hope he does it to the wankers who left him to die before the miracle election.

  10. Maybe we should have a “work for your bailout” program where CEOs clean street verges or work at the Salvos for 10 hours per week to get their bailouts.

  11. The rich get bailed while the plebs work their butt off all day in a supermarket putting up with all the angry customers and worst of all I am expecting many supermarket staff to contract Covid 19.
    The rich get bailed out while the Nurses and DR’s expose them self to the disease, working long hours in complete stress. DR’s are one profession who deserve to be rich unlike many others who lean on others cash to get rich.

    Equity stake or go bankrupt take your pick Alan Joyce.

  12. Interesting conversation with a customer of mine on Friday.

    She’s Virgin cabin crew and would walk over hot coals for the new CEO, despite having her hours cut by 50%. Says he’s not taking any pay this month nor are the middle management. Says the international crew are utterly stuffed and the CEO has spoken to the Prime Minister about deploying them in other areas as they all have first aid, safety and anti terrorism training. This is actually a very good idea. They would make excellent medic assistants.

    This is an intelligent person with excellent communication skills who has seen a lot in life and is slightly cynical as a result. I was gobsmacked at her level of loyalty to the new CEO, it’s very rare for any manager to inspire that in this era.

    She was also very disparaging of the previous boss, saying he gutted the company to get a bigger golden parachute.

    Interesting times.