Watch Round 2 of Chamath P. put CNBC on blast ( He called the airlines zombie companies last week )

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  Joseph N. April 24, 2020

  Chamath Palihapitiya is obviously right, but since most people haven’t worked in economics, finance or accounting, give me a paragraph to explain. These airlines did not simply use surplus cash to buy their own stock. They had billions, actually tens of billions in debt. So in reality the airlines were using cheap debt to prop up their stock prices. Not that unusual. Now they own huge piles of their own stock but the stock isn’t worth as much as they paid. If any of us bought something on credit that then fell in value, we would be on the hook for that, but the airlines want the taxpayer to cover their bad bets.

  Something very similar happened to my hometown. The city had borrowed money cheap and bought parking structures instead of paying off the loans. When the economy turned, the city was holding parking structures that didn’t earn enough money to pay the debt. The city ended up in bankruptcy court over it.
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    Rob April 24, 2020

    So are you saying they should have bought 5% debt with their earnings instead of stock in a company returning 25% on equity?

    Or are you saying they should have realized the stock they were buying was not actually 25% ROE, but more like 0% because something that never happened before was about to happen?
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  Rob April 23, 2020

  He’s getting so much attention because nobody has ever said this and the reason why is because it’s wrong. I will give him credit for saying wrong things with great confidence. But buybacks are just a return of capital to shareholders. That’s what you want management to do when they don’t have a good use of capital. You don’t want them chasing dumb acquisitions or foolish side projects. Not having good projects to invest in doesn’t mean you are a bad CEO, You may be in a mature industry with little growth or an industry that is service based that doesn’t require huge financial capital. And if it is bad management to not have seen a hundred year pandemic coming, then every management in every industry is bad. Letting them fail just to replace them with new management that also won’t see the next shock coming hasn’t achieved anything. Sure, the buybacks were poorly timed looking at it now with the benefit of hindsight. But it’s just silly to imply they did it with some malice to enrich themselves. They are shareholders. You want them to make decisions that enrich shareholders. That is who they work for.
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    Miles April 23, 2020

    Rob – I would certainly agree that with you that on your point about fool-hardly allocation of capital, and I’m not arguing all buybacks are terrible, but when you analyze 10 years worth of buybacks and realize that a considerable portion of the market run-up has been attributed to buybacks with little to minimal structural growth, and large amounts of debt have amassed on balance sheets to finance those buybacks, it’s not hard to see that economic growth by and large has only benefitted those who are market participants. Of those market participants, the execs steering corporate buybacks receive millions per year in options and stock awards – a pretty big incentive to continue to do so – and that behavior should be held accountable. The pandemic is certainly a black swan event, but companies whose business is heavily cyclical and chose to allocate large swaths of cash flow and investment towards buybacks have positioned their companies with little to no balance sheet resilience to a cut off in cheap money or downturn in demand. Buying equity in said companies is caveat emptor – and should bear those inherent risks. Again, I’m not saying all buybacks are terrible, but it’s hard for me to wrap my head around corporate governance being competent let alone worthy of 8 figure salaries when the overwhelming majority of free cash flow buys back stock at increasing prices, and the vast majority of executive compensation being tied to stock appreciation, begs the question of those execs acting in their short terms best interest over long term interest of shareholders
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      Rob April 23, 2020

      I think there are a few things Chamath and you are overlooking that is making you see a conspiracy where there isn’t one.

      First, it was our idea as shareholders to compensate executives with stock and options because we wanted their interests to be aligned with ours. Getting the stock price higher is their primary fiduciary duty. I’m sure they would much prefer being paid in cash and then NOT returning capital to shareholders so they have more capital on the balance sheet to use to swing for home runs that will juice their bonuses. The era of stock based exec comp was ushered in to stop exactly this very behavior. It’s ironic that we now as a society view these handcuffs as somehow facilitating the opposite. It’s kinda like we’ve already identified who we want to be the villain and are just in search of a crime.

      Second, shareholders are shareholders. Making the stock go up is pretty much their only job. You can’t breakout shareholders into market participants and other. It’s just wrong to imply making the stock go up is somehow favoring hedge funds over other shareholders. Every shareholder has the opportunity to trade actively or to turn the management of their investments over to someone who will trade more actively, if it is believed active trading is generating better returns. This entire idea of their being some elite class of stock appreciation beneficiaries is a figment of Chamath’s imagination.

      Third, it doesn’t make any sense to say management is somehow benefiting itself with a short term focus. Management’s equity grants are almost always locked up for periods that automatically put them in the longest-term shareholder category.

      Last thing is that it isn’t fair to go back now and deem all debt as dumb. Debt is a capital structure decision. Any debt looks dumb when there is a serious crisis, as do any uses of cash. There are many thousands of business school case studies demonstrating the various reasons why debt in the capital structure makes a lot of sense, from tax efficiency reasons to building out a term structure of your liabilities that matches the term structure of your assets,

      I get that the airlines look like a bunch of dummies now for doing anything but hoarding cash in preparation of a coming apocalypse. And there is some merit to the question of whether certain high risk, capital intensive, strategic industries like airlines should be nationalized since it seems the government needs to always be the lender of last resort. But from my vantage point, it isn’t fair to imply they brought this on themselves. A government ordered shut down of this magnitude and duration has never happened before and was not on anyone’s radar as a possibility.