Corporate Bailouts Support Future Failure

Bailouts aren’t just a failed policy carried out by governments. We see friends and family carry out the same behavior on a daily basis. Nobody wants to see failure. Your friend can’t make their car payment so you loan them $50. You got your first credit card, charge it to the limit, and your parents pay it off when you realize you can’t. These are all life experiences to learn from but only a small portion of people learn anything when someone covers for their mistake. People don’t feel the pain of their failures because they weren’t actually allowed to fail. 

The federal government signed into law the CARES Act on March 27, 2020. The bill provides roughly $500 billion in loans and grants to major corporations. These aren’t your small family owned businesses, we’re talking hotel chains, airlines, and a plethora of other industries with multibillion dollar balance sheets. One of the biggest groups claiming imminent bankruptcy is airlines. These companies had less than 2 months of reduced business before they were having major money problems.  Why? Airlines have spent over $45 billion dollars on stock buy backs over the past few years.  These buybacks boosted stock prices for investors but left their cash level dangerously low.

American airlines in 2015 had over $2 billion in cash and by the start of 2020 had less than $700 million. The company had been posting annual profits in excess of one billion  from 2015-2020 but still choose to utilize cash to fuel stock buybacks. American Airlines needed over $40 billion in revenue to pay their bills in 2019. These expenses largely vary based on the amount of flights and staff being utilized. However, we see over a billion dollars in interest payment alone being made by them on loans annually. There are endless expenses they can’t just cancel because they’re from contracts. Yet, we see American Airlines drain their cash to only a few weeks worth of operating expenses. These buybacks increased stock prices for shareholders but put the company in a dangerous financial situation. 

You now get to bail them out with your hard earned money through taxes. We’re handing out so many bailouts to companies, we have to take out trillions in debt to fund the federal government’s operations this year. Yes, these bailouts are mostly loans, which means American Airlines has to pay them back with interest. What’s the big deal then? Well, these companies couldn’t get loans with the low or no interest rates from banks like they will the federal government. A bank knows the risks associated with mismanaged companies and won’t seek to bail them out at a potential loss to the bank. We see many companies currently accessing lines of credit they had them long before COVID-19 came around. There are companies that set themselves up to make it through financial mishaps. We saw over $124 billion in credit line usage in the month of March alone. Most of these companies have never taken government bailouts and instead set themselves up with the option for private loans or credit. 

 

Let’s step back to 2009 when General Motors was producing almost 8 million cars. Their company lacked long term financial success or innovative engineering. We saw the federal government step in to “help” December of 2008 and give them $13.4 billion. What happened? General motors burned through the cash and filed for bankruptcy on June 1st, 2009. We saw a chain of event which led to the federal government becoming owner of General Motors until the end of 2013 where they sold their remaining shares at a $11+ billion dollar loss to you.  General motors sold 7.7 million cars in 2019 down from 10 million in 2016 or near the levels of 2008. The company doesn’t have long term business plans past it’s continuous sale of foreign assets. Do you notice a repeating trend? General Motors once again is at the front of the line with money struggles. The company tapped over 16 billion in credit lines and has begun to eat through its 20+ billion in cash. Although the company does have ample cash, they’ve shown to be at significant risk of financial disaster. The first quarter results show a near 87% drop in profits and that’s before COVID-19 shutdowns were in full swing. How many billion will they be set to lose next quarter? Years of decline and COVID-19 will be sure to take a chunk out of General Motors in 2020. 

What do corporate bailouts do for society? Nothing. Bailouts put off inevitable bankruptcies for multibillion dollar corporations that employ thousands. These jobs are no safer after a bailout than they were before. The same bad policies, leadership, and behaviors remain when companies aren’t allowed to go bankrupt and be torn to the bone by creditors or sold to a successful company. Any company worth keeping around will be bought out by a competitor or holding company. Yet we continue to allow horribly managed companies to remain in existence when we bail them out. Nobody at the company learns a lesson when they get a fat check from the federal government to fix their mismanagement. These federal level bailouts destroy the effective cycle of life that capitalism can create with businesses. Failure is allowed to succeed when bailouts are brought into the picture. Nature doesn’t saved dying species and we shouldn’t save dying businesses.

Chase Renwick

Author: Chase Renwick