Saagar Enjeti explains how returning to normal is taking “the same poison that got us where we are today.”
Last week, the Fed added new programs and upsized many of the loan and bond buying programs it had already announced over the past several weeks. It is now traveling on a road without an exit in sight. It’s almost certain that withdrawal of this new support will be slow. In the near-term, it has already significantly dislocated (tightened) both investment grade and (to a lesser extent) high yield (HY) prices relative to their fundamental cash flow profiles.
Let’s call out these new “liquidity programs” for what they really are. The PMCCF and SMCCF (Primary and Secondary Corporate Credit Facilities) are targeted to help large, low-investment grade companies like Ford, whose bonds popped from 70 to 83 on the news of an upsize to the facility. The program extends support without the political fallout a new TARP (Troubled Asset relief Program) might cause.
PMCCF and SMCCF are TARP in disguise.
While extensive, I believe these varied programs will not prevent the default cycle that is coming in the BB+ and below universe. Default rates will be lower than without these programs, but not low enough to support current risk-asset values. The “exigent circumstances” to which the Fed is responding are unlikely to be short-lived, especially because corporate leverage was already so high before the pandemic began and earnings were already so weak. After today’s tightening in high yield spreads (CDX to ~500bps and HYG YAS ~600bps), we continue to believe there is little upside to ownership of U.S. high yield – even after the announcement of these expanded programs (likely to expand even more).
We believe risk-reward to U.S. equities in particular is still skewed massively to the downside, and for the Fed to take the action it took today, it must see circumstances as being dire indeed.
We wrote on March 29th that a rally to 2700 to 2,800 could occur and that it would be a fade. We expected short squeezes in credit and equities on program announcements – those program announcements came faster than expected. We maintain that view. For the S&P to trade at 2,800, it requires a 19.5x forward earnings-per-share multiple on $145 in EPS (down a mere 10% YoY). That EPS estimate is probably far too conservative and earnings could easily fall 20% (with average recession EPS down between 20% to 30%). At S&P EPS down 20% ($130), 2,800 on the S&P requires a 21.5x forward multiple. Can large cap equities really sustain that multiple given the risks to cash flows? Can small cap stocks (Russell 2000) sustain a forward multiple of almost 40x given the inevitable defaults that will occur in BB+ credits and below? We don’t think so. Recall that equity is the residual in every capital structure and is first loss.
While the buying is currently occurring across the universe of high yield bonds, we believe worsening fundamentals will drive dispersion amongst high yield credits over time. The sub-BB+ universe will become an orphan… at least until the Fed buys it, too. Moreover, the speculative grade loan market was already strained before the pandemic began; loan volumes are likely to continue to fall – albeit even faster now. Fed programs will prevent disaster, but they won’t continue to support current equity and credit valuations as fundamentals deteriorate. HY spreads have fallen from just under 900 (CDX HY) to 530bps (as low as 475bps) on Fed euphoria. So, lets query something. Even with Fed support, do HY spreads at 500bps make sense on the cusp of the most severe recession since 1929? We think not.
Since 2008, in order to justify extraordinary policy actions (including company bailouts), the Fed has been using the Section 13(3)’s exigent circumstances exception to the specific direction provided for open market operations under Section 14 of the Federal Reserve Act (FRA). The Fed began again on March 15th by establishing numerous Treasury-funded SPVs (Special Purpose Vehicles) that it will lever to provide financing under TALF, two investment grade buying programs, and CPFF amongst others, which we summarize below. Today, it upsized many of those programs. These corporate bond buying programs will be extended through September of 2020. There are nine programs in total.
For years, the conversation around the prospect for “Japanification” of U.S. monetary policy was almost universally met with extreme skepticism. The use of Section 13(3) now places the U.S. almost side-by-side with Japanese policymakers, and it is incumbent upon us to understand the implications of this progression. Where will it eventually lead U.S. monetary policy? Certainly, there is no policy space left. Monetary policy has been come completely palliative rather than stimulative. Will continued intervention destroy the very free market system it is attempting to save? We would argue that now is precisely the right time to ask this question. Japan serves as a vision of one possible future self for the US.
We investigate both the Fed’s authority to implement BoJ-style policy as well as the practical near and long-term implications. We’ll review each of the policies the Fed has undertaken or is likely to undertake (alongside and in coordination with fiscal policy). On March 20th and just prior its re-implementation, we had already suggested that the 2008 playbook would reemerge. Next, we’ll touch on the next stop on the slippery slope – the Fed buying equities and a broader swath of high yield corporate bonds. It can presumably continue to justify such actions as the next extension of its Section 13(3) powers.
We conclude that, while monetization of deficits serves a legitimate purpose of helps prevent unintended consequences in rates markets, buying equities would do little but further distort asset prices. This already extant distortion (due largely to quantitative easing) helped to create the fragility and lack of policy space that makes the current Covid-19 Tsunami so hard to combat. At this point, monetary policy alone can’t combat the 100-year disaster. It must work as the mechanism to monetize the debt required to fund the fiscal policy response. Importantly, this means Fed action should receive additional checks and balances from the legislature. In our view, Treasury-only supervision just doesn’t cut it. Our system is one of checks and balances… yet, there are none in this instance. Should there not be?
Throughout history, liberty is almost always denied when governments assert that exigent circumstances require it. Let’s look at a constitutional analogue. The Fourth Amendment to the U.S. Constitution prohibits ‘unreasonable’ searches and seizures. Said differently, the Fourth Amendment prevents the government from unreasonably taking or infringing upon an individual’s property or privacy rights. To that end, it sets requirements for issuing warrants: warrants must be issued by a judge or magistrate, justified by probable cause, supported by oath or affirmation, and must specify the place to be searched and the persons or things to be seized.
Exigent circumstances may provide an exception to the Fourth Amendment’s protections when circumstances are dangerous or obviously indicate probable cause. The application of exigent circumstances has been highly adjudicated – meaning, the courts found it necessary to rule often on its application to assure the government’s propensity to overreach was checked. One such permissible example of justifiable exigent circumstance is the Terry stop, which allows police to frisk suspects for weapons. The Court also allowed a search of arrested persons in Weeks v. United States (1914) to preserve evidence that might otherwise be destroyed and to ensure suspects were disarmed.
The health of the public and of the police officers justified the infringement on privacy. Other circumstances might justify police to enter private property without a warrant if they have plain sight evidence that a violent crime is taking place. Importantly, there are many examples of situations in which exigent circumstances were ruled insufficient to justify the infringement on personal or property rights. For example, even if a suspect was carrying a gun (an exigent circumstance), while reasonable to ‘stop and frisk,’ it would not necessarily justify the extreme action of locking him/her up indefinitely until a search of his home could be conducted.
We think this 4th Amendment construct is an incredibly useful analogy for understanding the danger in the Fed’s actions now; there’s a reason the very same phase – exigent circumstances – is used in 4th Amendment cases as well as in the Federal Reserve Act. We are not arguing that the present economic circumstances are not exigent, but we are arguing that there must be due process to assure that a valid justification does not lead to overreach. That overreach arguably started today as the Fed expanded its program into HY. Unlike legal challenge under the Fourth Amendment, Section 13(3) is not subject to a well-defined process by which it may be challenged and by which ‘lines may be drawn.’ Lack of due process almost invariably leads to government overreach.
The current Japanification of policy – if gone unchecked by Congress – is the beginning of the socialization and consequent destruction of free capital markets.
In our piece Monetize It – Monetize All of It, we suggested it would be necessary for the Fed to monetize all the upcoming deficits that would be needed to fund coronavirus relief programs. We were clear to suggest that the coordination should be explicit and with the appropriating authority – i.e. – Congress. Dodd Frank amendments to the Federal Reserve Act did not have the foresight to modify 13(3) checks and balances beyond Treasury approval. The Fed is now using this loophole to skirt the explicit mandate provided for in Section 14 – without due process to ascertain where the line ought to be drawn.
In the case of Japan, we can see what we’d consider an undesirable monetary policy outcome orchestrated by a stealthy government takeover of large swaths of private industry. Last year, the Bank of Japan (BoJ) bought just over ¥6 trillion ($55 billion) of ETFs and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the Topix’s total market capitalization. According to the latest Nikkei calculations, not only has the BOJ also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings, it was among the top 10 holders for 49.7% of all Tokyo-listed enterprises. In other words, the BOJ has gone from being a top-10 holder in 40% of Japanese stocks last March to 50% just one year later.
The BoJ is not an independent central bank, so it receives explicit legislative authority to act when it buys non-governmental assets. We doubt Congress would allow that here – as Congress might actually recognize the Constitutional implications. Surely, the courts would.
Monetary policy in its Japanified form has mutated into an incredibly stealthy ‘taking’ of Japanese citizens’ private property under the auspices of the public good.
Arguably, if unchecked, the BoJ could end up owning all private assets under the auspices of supporting the economy. Is this something we should tolerate here in the US, the greatest capitalist democracy the world has ever seen? We say no.
The Fed Facilities
So, thus far, what has the Fed done? We predicted much of it. On March 20th in Monetize It – Monetize All of It, we wrote:
“To state the obvious, today’s crisis differs from 2008. Thus, the policy response should also differ. As we know, many of the Fed-provided credit facilities from 2008-era were designed to bail out banks, but the powers of section 13(3) of the Federal Reserve Act were also extended to companies. Banks remain key as that’s how all policy is transmitted (at least in part), so we’ve suggested clients expect facilities like CPFF (Commercial Paper Funding Facility – already done), TLGP (Temporary Liquidity Guarantee Program) and others. We might also expect an expansion of the PDCF (Primary Dealer Funding Facility) collateral or a modification to haircuts. Under 13(3) we might also expect a TALF-like facility (Term Asset-Backed Securities Loan Facility) and a TARP (Troubled Asset Relief Program).”
If the Fed extends it logic under Section 13(3), all high yield bonds (not just fallen angels and the HYG ETF) and equities will be next. This would be pure folly with the drastic unintended consequences that Japan has already begun to face.
Let’s get granular around what facilities the Fed has established, how much liquidity they provide, and what authority allows the. We will include a discussion of the collaboration between the Fed and Treasury through the Exchange Stabilization Fund (ESF) and how the Treasury funds the ESF through special purpose vehicles (SPVs) which it may then leverage based on collateral provided.
Commercial Paper Funding Facility (CPFF) – March 17th.
The CPFF facility is structured as a credit facility to a SPV authorized under section 13(3) of the Federal Reserve act. The SPV serves as a funding backstop to facilitate issuance of commercial paper. The Fed will commit to lending to the SPV on a recourse basis. The US Treasury Dept., using the ESF (Exchange Stabilization Fund) will provide $10 billion of credit protection to the Federal Reserve Bank of New York in connection to the CPFF. The SPV will purchase 3-month commercial paper through the New York Fed’s primary dealers. The SPV will cease purchases on March 17th, 2021 unless the facility is extended.
Primary Dealer Credit Facility (PDCF) – March 17th.
The PDCF offers overnight and term funding for maturities up to 90 days. Credit extended to primary dealers can be collateralized by a range of commercial paper and muni bonds, and a range of equity securities. The PDCF will remain available to primary dealers for at least six months, and longer if conditions warrant an extension.
Money Market Mutual Fund Liquidity Facility (MMLF) – March 18th.
The MMLF program was established to provide support and liquidity of crucial money markets. Through the program, the Federal Reserve Bank of Boston will lend to eligible financial institutions secured by high-quality assets purchased by financial institutions from money market mutual funds. Eligible borrowers include all U.S. depository institutions, U.S. bank holding companies, and U.S. branches and agencies of foreign banks.No new credit extensions will be made after September 30th, 2020 unless the program is extended by the Fed.
Primary Market Corporate Credit Facility (PMCCF) – March 23rd as amended April 9th.
The PMCCF will serve as a funding backstop for corporate debt issued by eligible parties. The Federal Reserve Bank will lend to a SPV on a recourse basis. The SPV will purchase the qualifying bonds as the sole investor in a bond issuance. The Reserve Bank will be secured by all the assets of the SPV. The Treasury will make a $75 (up from $10) billion equity investment in the SPV to fund the facility and the SMCCF (below), allocated as $50 billion to the facility and $25 billion to the SMCCF. The combined size of the facility and the SMCCF will be up to $750 billion (the facility leverages the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans that are IG at the time of purchase. The facility leverages its equity at 7 to 1 when acquiring any other type of asset).Eligible issuers must be rated at least BBB-/Baa3 as of March 22nd by a major NRSRO (nationally recognized statistical rating org). If it is rated by multiple organizations, the issuer must be rated BBB-/Baa3 by two or more as of March 22nd.The program will end on September 30th, 2020 unless there is an extension by the Fed and the Treasury.
Secondary Market Corporate Credit Facility (SMCCF) – April 9th.
Under SMCCF, the Fed will lend to a SPV that will purchase corporate debt in the secondary market from eligible issuers. The SPV will purchase eligible corporate bonds (must be rated BBB-/Baa3, see above for full criteria) as well as ETF’s that provide exposure to the market for U.S. investment grade corporate bonds. Today, the Fed also indicated that purchases will also be made in ETF’s whose primary investment objective is exposure to U.S. high-yield corporate bonds. The Treasury will make a $75 (up from $10) billion equity investment in the SPV to fund the facility and the PMCCF (above), initially allocated as $50 billion to the PMCCF and $25 billion to the SMCCF. The combined size of the facility will be up to $750 billion (the facility leverages the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans that are IG at the time of purchase. The facility leverages its equity at 7 to 1 when acquiring corporate bonds that are below IG, and in a range between 3 to 1 and 7 to 1 depending on the risk in any other type of eligible asset).The program will end on September 30th, 2020 unless there is an extension by the Fed and the Treasury.
Municipal Liquidity Facility (MLF) – April 9th.
The MLF, authorized under Section 13(3) of the Federal Reserve Act will support lending to U.S. states and cities (with population over 1 million residents) and counties (with population over 2 million residents). The Federal Reserve Bank will commit to lend to a SPV on a recourse basis, and the SPV will purchase eligible notes from issuers at time of issuance. The Treasury, using funds appropriated to the ESF, will make an initial equity investment of $35 billion in the SPV in connection with the facility. The SPV will have the ability to purchase up to $500 billion of eligible notes (which include TANs, TRANs, and BANs). The SPV will stop making these purchases on September 30th, 2020 unless the program is extended by the Federal Reserve and the Treasury.
Paycheck Protection Program Lending Facility (PPP) – April 6th.
The PPP facility is intended to facilitate lending by all eligible borrowers to small businesses. Under the facility, Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis, and take PPP loans as collateral. Eligible borrowers include all depository institutions that originate PPP Loans. The new credit extensions will be made under the facility after September 30th, 2020.
Term Asset-Backed Securities Loan Facility (TALF) – March 23rd.
The TALF is a credit facility that intends to help facilitate the issuance of asset-backed securities and improve asset-backed market conditions generally. TALF will serve as a funding backstop to facilitate the issuance of eligible ABS on or after March 23rd. Under TALF, the Federal Reserve Bank of NY will commit to lend to a SPV on a recourse basis. The Treasury will make an equity investment of $10 billion in the SPV. The SPV initially will make up to $100 billion of loans available. Eligible collateral includes ABS that have credit rating in the long-term, or in case of non-mortgage backed ABS, short-term investment grade rating category by two NRSROs.No new credit extensions will be made after September 30th, 2020, unless there is an extension.
The Main Street New Loan Facility (MSNLF) and Expanded Loan Facility (MSELF) – April 9th.
The MSNLF and MSELF are intended to facilitate lending to small and medium-sized businesses by eligible lenders. Under the facilities, a Federal Reserve Bank will commit to lend to a single common SPV on a recourse basis. The SPV will buy 95% participations in the upsized tranche of eligible loans from eligible lenders. The Treasury will make a $75 billion equity investment in the single common SPV that is connected to the facilities. The combined size of the facilities will be up to $600 billion. Eligible borrowers are businesses up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. The SPV will cease purchasing participations in eligible loans on September 30th, 2020 unless there is an extension by the Fed and Treasury.
The $2.3 trillion in loans announced this morning is made up of the Fed’s nine programs, including leverage on the Treasury’s equity contribution to SPVs under the ESF. Specifically, the Commercial Paper Funding Facility accounts for $100 billion of loans, while the Primary and Secondary Market Corporate Credit Facilities account for $500 billion and $250 billion respectively. The Municipal Liquidity Facility (MLF) adds another $500 billion, while TALF makes up another $100 billion. Finally, the Main Street New Loan Facility (MSNLF) amounts to approximately $600 billion. Together, these specified facilities account for ~$2.05 trillion of the announced $2.3 trillion. As we understand it, the remainder of the contribution flows to the Paycheck Protection Program (PPP), the Money Market Mutual Fund Facility (MMLF), and the Primary Dealer Credit Facility (PDCF).
Trump’s son-in-law has no business running the coronavirus response.
Reporting on the White House’s herky-jerky coronavirus response, Vanity Fair’s Gabriel Sherman has a quotation from Jared Kushner that should make all Americans, and particularly all New Yorkers, dizzy with terror.
According to Sherman, when New York’s governor, Andrew Cuomo, said that the state would need 30,000 ventilators at the apex of the coronavirus outbreak, Kushner decided that Cuomo was being alarmist. “I have all this data about I.C.U. capacity,” Kushner reportedly said. “I’m doing my own projections, and I’ve gotten a lot smarter about this. New York doesn’t need all the ventilators.” (Dr. Anthony Fauci, the country’s top expert on infectious diseases, has said he trusts Cuomo’s estimate.)
Even now, it’s hard to believe that someone with as little expertise as Kushner could be so arrogant, but he said something similar on Thursday, when he made his debut at the White House’s daily coronavirus briefing: “People who have requests for different products and supplies, a lot of them are doing it based on projections which are not the realistic projections.”
Kushner has succeeded at exactly three things in his life. He was
- born to the right parents,
- married well and
- learned how to influence his father-in-law.
Most of his other endeavors — his
- biggest real estate deal, his
- foray into newspaper ownership, his
- attempt to broker a peace deal between the Israelis and the Palestinians
— have been failures.
Undeterred, he has now arrogated to himself a major role in fighting the epochal health crisis that’s brought America to its knees. “Behind the scenes, Kushner takes charge of coronavirus response,” said a Politico headline on Wednesday. This is dilettantism raised to the level of sociopathy.
The journalist Andrea Bernstein looked closely at Kushner’s business record for her recent book “American Oligarchs: The Kushners, the Trumps, and the Marriage of Money and Power,” speaking to people on all sides of his real estate deals as well as those who worked with him at The New York Observer, the weekly newspaper he bought in 2006.
Kushner, Bernstein told me, “really sees himself as a disrupter.” Again and again, she said, people who’d dealt with Kushner told her that whatever he did, he “believed he could do it better than anybody else, and he had supreme confidence in his own abilities and his own judgment even when he didn’t know what he was talking about.”
It’s hard to overstate the extent to which this confidence is unearned. Kushner was a reportedly mediocre student whose billionaire father appears to have bought him a place at Harvard. Taking over the family real estate company after his father was sent to prison, Kushner paid $1.8 billion — a record, at the time — for a Manhattan skyscraper at the very top of the real estate market in 2007. The debt from that project became a crushing burden for the family business. (Kushner was able to restructure the debt in 2011, and in 2018 the project was bailed out by a Canadian asset management company with links to the government of Qatar.) He gutted the once-great New York Observer, then made a failed attempt to create a national network of local politics websites.
His forays into the Israeli-Palestinian conflict — for which he boasted of reading a whole 25 books — have left the dream of a two-state solution on life support. Michael Koplow of the centrist Israel Policy Forum described Kushner’s plan for the Palestinian economy as “the Monty Python version of Israeli-Palestinian peace.”
Now, in our hour of existential horror, Kushner is making life-or-death decisions for all Americans, showing all the wisdom we’ve come to expect from him.
“Mr. Kushner’s early involvement with dealing with the virus was in advising the president that the media’s coverage exaggerated the threat,” reported The Times. It was apparently at Kushner’s urging that Trump announced, falsely, that Google was about to launch a website that would link Americans with coronavirus testing. (As The Atlantic reported, a health insurance company co-founded by Kushner’s brother — which Kushner once owned a stake in — tried to build such a site, before the project was “suddenly and mysteriously scrapped.”)
The president was reportedly furious over the website debacle, but Kushner’s authority hasn’t been curbed. Politico reported that Kushner, “alongside a kitchen cabinet of outside experts including his former roommate and a suite of McKinsey consultants, has taken charge of the most important challenges facing the federal government,” including the production and distribution of medical supplies and the expansion of testing. Kushner has embedded his own people in the Federal Emergency Management Agency; a senior official described them to The Times as “a ‘frat party’ that descended from a U.F.O. and invaded the federal government.”
Disaster response requires discipline and adherence to a clear chain of command, not the move-fast-and-break-things approach of start-up culture. Even if Kushner “were the most competent person in the world, which he clearly isn’t, introducing these kind of competing power centers into a crisis response structure is a guaranteed problem,” Jeremy Konyndyk, a former U.S.A.I.D. official who helped manage the response to the Ebola crisis during Barack Obama’s administration, told me. “So you could have Trump and Kushner and Pence and the governors all be the smartest people in the room, but if there are multiple competing power centers trying to drive this response, it’s still going to be chaos.”
Competing power centers are a motif of this administration, and its approach to the pandemic is no exception. As The Washington Post reported, Kushner’s team added “another layer of confusion and conflicting signals within the White House’s disjointed response to the crisis.” Nor does his operation appear to be internally coherent. “Projects are so decentralized that one team often has little idea what others are doing — outside of that they all report up to Kushner,” reported Politico.
On Thursday, Governor Cuomo said that New York would run out of ventilators in six days. Perhaps Kushner’s projections were incorrect. “I don’t think the federal government is in a position to provide ventilators to the extent the nation may need them,” Cuomo said. “Assume you are on your own in life.” If not in life, certainly in this administration.
The Trump administration is putting together a rumored trillion-dollar-plus stimulus package that will include taxpayer funded bailouts of Corporate America, according to leaks cited widely by the media. Trump in the press conference today singled out $50 billion in bailout funds for US airlines alone. A bailout of this type is designed to bail out shareholders and unsecured creditors. That’s all it is. The alternative would be a US chapter 11 bankruptcy procedure which would allow the company to operate, while it is being handed to the creditors, with shareholders getting wiped out.
So get this: The big four US airlines – Delta, United, American, and Southwest – whose stocks are now getting crushed because they may run out of cash in a few months, would be the primary recipients of that $50 billion bailout, well, after they wasted, blew, and incinerated willfully and recklessly together $43.7 billion in cash on share buybacks since 2012 for the sole purpose of enriching the very shareholders that will now be bailed out by the taxpayer (buyback data via YCHARTS):
Share buybacks were considered a form of market manipulation and were illegal under SEC rules until 1982, when the SEC issued Rule 10b-18 which provided corporations a “safe harbor” to buy back their own shares under certain conditions. Once corporations figured out that no one cared about those conditions, and that no one was auditing anything, share buybacks exploded. And they’ve have been hyped endlessly by Wall Street.
The S&P 500 companies, including those that are now asking for huge bailouts from taxpayers and from the Fed, have blown, wasted and incinerated together $4.5 trillion with a T in cash to buy back their own shares just since 2012:
And those $4.5 trillion in cash that was wasted, blown, and incinerated on share buybacks since 2012 for the sole purpose of enriching shareholders is now sorely missing from corporate balance sheets, where these share buybacks were often funded with debt.
And the record amount of corporate debt – “record” by any measure – that has piled up since 2012 has become the Fed’s number one concern as trigger of the next financial crisis. So here we are.
In 2018, even the SEC got briefly nervous about the ravenous share buybacks and what they did to corporate financial and operational health. “On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs,” SEC Commissioner Jackson pointed out. And he fretted whether the existing rules “can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.”
Obviously, they couldn’t, as we now see.
Enriching shareholders is the number one goal no matter what the risks.These shareholders are also the very corporate executives and board members that make the buyback decisions. And when it hits the fan, there is always the taxpayer or the Fed to bail out those shareholders, the thinking goes. But this type of thinking is heinous.
Boeing is also on the bailout docket. Today it called for “at least” a $60-billion bailout of the aerospace industry, where it is the biggest player. It alone wasted, blew, and incinerated $43 billion in cash since 2012 to manipulate up its own shares until its liquidity crisis forced it to stop the practice last year, and its shares have since collapsed (buyback data via YCHARTS):
If Boeing’s current liquidity crisis causes the company to run out of funds to pay its creditors, it needs to file for chapter 11 bankruptcy protection. Under the supervision of the Court, the company would be restructured, with creditors getting the company, and with shareholders likely getting wiped out.
Boeing would continue to operate throughout, and afterwards emerge as a stronger company with less debt, and hopefully an entirely new executive suite and board that are hostile to share buybacks and won’t give in to the heinous clamoring by Wall Street for them.
No one could foresee the arrival of the coronavirus and what it would do to US industry. I get that. But there is always some crisis in the future, and companies need to prepare for them to have the resources to deal with them.
A company that systematically and recklessly hollows out its balance sheet by converting cash and capital into share buybacks, often with borrowed money, to “distribute value to shareholders” or “unlock shareholder value” or whatever Wall Street BS is being hyped, has set itself up for failure at the next crisis. And that’s fine. But shareholders should pay for it since they benefited from those share buybacks – and not taxpayers or workers with dollar-paychecks. Shareholders should know that they won’t be bailed out by the government or the Fed, but zeroed out in bankruptcy court.
The eventual costs of enriching shareholders recklessly in a way that used to be illegal must not be inflicted on taxpayers via a government bailout; or on everyone earning income in dollars via a bailout from the Fed.
The solution has already been finely tuned in the US: Delta, United, American, and other airlines already went through chapter 11 bankruptcies. They work. The airlines continued to operate in a manner where passengers couldn’t tell the difference. The airlines were essentially turned over to creditors and restructured. When they emerged from bankruptcy, they issued new shares to new shareholders, and in most cases, the old shares became worthless. The new airlines emerged as stronger companies – until they started blowing it with their share buybacks.
Companies like Boeing, GE, any of the airlines, or any company that blew this now sorely needed cash on share buybacks must put the ultimate cost of those share buybacks on shareholders and unsecured creditors. Any bailouts, whether from the Fed or the government, should only be offered as Debtor in Possession (DIP) loans during a chapter 11 bankruptcy filing where shareholders get wiped out.
In other words, companies that buy back their owns shares must be permanently disqualified for bailouts, though they may qualify for a government-backed DIP loan in bankruptcy court if shareholders get wiped out. Because those proposed taxpayer and Fed bailouts of these share-buyback queens are just heinous.
The outrageous story of a group of financiers from a poor and damp island on the outer rim of Europe, who created a private company that became the biggest military and political power in all of India
20:28So how justified is the pessimistic China story of doom and gloom?I agree with their analysis.And I disagree pretty strongly with the conclusions they draw.And here’s what I mean by that, everything that the China pessimists talk about withregards to overcapacity, excess debt, all of that is true.And, in fact, it’s probably, in reality, worse than even what they say.They’re entirely right about what that typically leads to.Here’s where I differ significantly, I see a potential financial crisis as the last outcome in the China story.And there’s a very simple reason for that.And it has nothing to do with finance or economics.And it’s this, if there is a China crisis, of what you and I would mutually agree uponis a true financial crisis, 2008, you know something like that, that is what would becomethe once a century event.That would be D-day, that would be the communists rolling into Moscow, that would be 1989, allrolled into one event.Beijing knows this, OK?Beijing will do everything possible to prevent a financial crisis from taking place.Now, I need to be perfectly clear, that doesn’t mean that they’re going to make good policydecisions.It most definitely does not mean that they’re going to make good policy decisions.But it does mean that their objective is to prevent a financial crisis, at all costs.When the US government was looking at some of the decisions it made in 2008, it madea very clear, conscious decision, we are not going to rescue some of these firms, we arenot going to rescue specific asset holders in the decisions they’ve made.Now we can debate whether or not that was the right decision, but there was a very cleardecision, we’re not going to do this, we’re not going to allow specific pain or eventsto unfold.Beijing does not have that option.Someone I trust quite seriously on these issues said, it is Beijing’s objective to becomeTokyo, not Thailand.And what they mean by that is, they are very willing to turn it into a long, grinding mess,but they are absolutely, under no uncertain circumstances, willing to let it become afinancial crisis.Because if it is a financial crisis, that changes everything we know about China, overnight.That is the once a century event, and Beijing is going to do everything they can to preventthat from happening.
He’s long-boasted of how his business acumen makes him fit for president. But, Kurt Eichenwald delves into the history of his deals and finds a catalogue of calamitous ventures
The year was 1993, and his target was Native Americans, particularly those running casinos who, Trump was telling a congressional hearing, were sucking up to criminals.
Trump, who at the time was a major casino operator, appeared before a panel on Native American gaming with a prepared statement that was level-headed and raised regulatory concerns in a mature way. But, in his opening words, Trump announced that his written speech was boring, so he went off-script, even questioning the heritage of some Native American casino operators, saying they “don’t look like Indians” and launching into a tirade about “rampant” criminal activities on reservations.
.. His words were, as is so often the case, incendiary. Lawmakers, latching onto his claim to know more than law enforcement about ongoing criminal activity at Native American casinos, challenged Trump to bring his information to the FBI. One attacked Trump’s argument as the most “irresponsible testimony” he had ever heard.
.. For opponents of Trump’s presidential run, this contretemps about Native Americans might seem like a distant but familiar echo of the racism charges that have dogged his campaign, including his repeated taunting of Senator Elizabeth Warren as “Pocahontas” because she claims native ancestry.
.. Trump, through his offensive tantrum, was throwing away financial opportunities, yet another reminder that, for all his boasting of his acumen and flaunting of his wealth, the self-proclaimed billionaire has often been a lousy businessman.
.. As Trump was denigrating Native Americans before Congress, other casino magnates were striking management agreements with them.
.. in his purposeless, false and inflammatory statements before Congress, Trump alienated politicians from around the country, including some who had the power to influence construction contracts –problems that could have been avoided if he had simply read his prepared speech rather than ad-libbing.
.. Lost contracts, bankruptcies, defaults, deceptions and indifference to investors – Trump’s business career is a long, long list of such troubles
.. arrogance and recklessness of a businessman whose main talent is self-promotion... He is also pretty good at self-deception, and plain old deception... “I’m just telling you, you wouldn’t say that you’re failing,” he said in a 2007 deposition when asked to explain why he would give an upbeat assessment of his business even if it was in trouble. “If somebody said, ‘How you doing?’ You’re going to say you’re doing good.” Perhaps such dissembling is fine in polite cocktail party conversation, but in the business world it’s called lying... And while Trump is quick to boast that his purported billions prove his business acumen, his net worth is almost unknowable given the loose standards and numerous outright misrepresentations he has made over the years. In that 2007 deposition, Trump said he based estimates of his net worth at times on “psychology” and “my own feelings”. But those feelings are often wrong – in 2004, he presented unaudited financials to Deutsche Bank while seeking a loan, claiming he was worth $3.5bn. The bank concluded Trump was, to say the least, puffing; it put his net worth at $788m, records show.
.. He personally guaranteed $40m of the loan to his company, so Deutsche coughed up. He later defaulted on that commitment.
.. Trump’s many misrepresentations of his successes and his failures matter – a lot.
.. He has no voting record and presents few details about specific policies. Instead, he sells himself as qualified to run the country because he is a businessman who knows how to get things done, and his financial dealings are the only part of his background available to assess his competence to lead the country. And while Trump has had a few successes in business, most of his ventures have been disasters.
.. When he was ready for college, Trump wanted to be a movie producer, perhaps the first sign that he was far more interested in the glitz of business than the nuts and bolts.
.. He applied to the University of Southern California to pursue a film career, but when that didn’t work out, he attended Fordham University; two years later, he transferred to the Wharton School of Business at the University of Pennsylvania and got a degree in economics.
.. Almost all of his best-known successes are attributable to family ties or money given to him by his father.
.. The son of wealthy developer Fred Trump, he went to work for his father’s real estate business immediately after graduating from Wharton and found some success by taking advantage of his father’s riches and close ties to the power brokers in the New York Democratic Party, particularly his decades-long friend Abe Beame, the former mayor of the city.
Even with those advantages, a few of Trump’s initial deals for his father were busts, based on the profits.
His first project was revitalising the Swifton Village apartment complex in Cleveland, which his father had purchased for $5.7m in 1962. After Trump finished his work, they sold the complex for $6.75m, which, while appearing to be a small return, was a loss; in constant dollars, the apartment buildings would have had to sell for $7.9m to have earned an actual profit. Still, Trump happily boasted about his supposed success with Swifton Village and about his surging personal wealth.
.. in 1970, he took another shot at joining the entertainment business by investing $70,000, to snag a co-producer’s credit for a Broadway comedy called Paris Is Out! Once again, Trump failed; the play bombed, closing after just 96 performances.
.. The next year, he moved to Manhattan from the outer boroughs, still largely dependent on Daddy. In 1972, Trump’s father brought him into a limited partnership that developed and owned a senior citizen apartment complex in East Orange, New Jersey.
Fred Trump owned 75 per cent, but two years later shrunk his ownership to 27 per cent by turning over the rest of his stake to two entities controlled by his son. Another two years passed, and then Fred Trump named him the beneficiary of a $1m trust that provided him with $1.3m in income (2015 dollars) over the next five years.
.. In 1978, he boosted his son’s fortunes again, hiring him as a consultant to help sell his ownership interest in a real estate partnership to the Grandcor Company and Port Electric Supply Corp. The deal was enormously lucrative for Donald Trump, particularly since it just fell into his lap thanks to his family. Under the deal, Grandcor agreed to pay him an additional $190,000, while Port Electric kicked in $228,500. The payments were made over several years, but the value in present-day dollars on the final sum he received is $10.4m.
.. Despite having no real success of his own, by the late 1970s, Trump was swaggering through Manhattan, gaining a reputation as a crass self-promoter. He hung out in the fancy nightspot Le Club, where he was chums with prominent New Yorkers like Roy Cohn, the one-time aide to Senator Joe McCarthy who was one of the city’s most feared and politically connected attorneys. Cohn became one of the developer’s lifelong mentors, encouraging the pugilistic personality that showed itself all the way back in second grade, when Trump punched his music teacher.
.. Soon Trump gained the public recognition he craved. Through a wholly owned corporation called Wembley Realty, Trump struck a partnership with a subsidiary of Hyatt Hotels. That partnership, Regency Lexington, purchased the struggling Commodore Hotel for redevelopment into the Grand Hyatt New York, a deal Trump crowed about when he announced he was running for president.He failed to mention that this deal was once again largely attributable to Daddy, who co-guaranteed with Hyatt a construction loan for $70m and arranged a credit line for his boy with Chase Manhattan Bank.
.. The credit line was a favour to the Trump family, which had brought huge profits to the bank; according to regulatory records, the revolving loan was set up without even requiring a written agreement. Topping off the freebies and special deals that flowed Trump’s way, the city tossed in a 40-year tax abatement. Trump’s “success” with the Hyatt was simply the result of money from his dad, his dad’s bank, Hyatt and the taxpayers of New York City.
.. Despite the outward signs of success, Trump’s personal finances were a disaster. In 1978, the year his father set up that sweet credit line at Chase, Donald’s tax returns showed personal losses of $406,386 – $1.5m in present-day dollars. Things grew worse in 1979, when he reported an income of negative $3.4m, $11.2m in constant dollars. All of this traced back to big losses in three real estate partnerships and interest he owed Chase. With Trump sucking wind and rapidly drawing down his line of credit, he turned again to Daddy, who in 1980 agreed to lend him $7.5m.
.. All of these names and numbers can grow confusing for voters with little exposure to the business world. So to sum it all up, Trump is rich because he was born rich – and without his father repeatedly bailing him out, he would have likely filed for personal bankruptcy before he was 35. As his personal finances were falling apart, Trump got a big idea for how to make money: casinos... At the time, Trump was deep into plans to turn Bonwit Teller’s flagship department store into Trump Tower – a transformation achieved with the help of Roy Cohn, who fought in the courts to win Trump a huge tax abatement. Still, Trump jumped on the casino idea and had a lawyer reach out to the owners to negotiate a lease deal... Trump wanted to build a 39-story, 612-room hotel and casino, but the banks refused to finance his adventure. So, instead, he struck a partnership with Harrah’s Entertainment in which the global gaming company and subsidiary of Holiday Inn Inc put up all the money in exchange for Trump developing the property. In 1984, Harrah’s at Trump Plaza opened, and Trump seethed. He had wanted his name to be the marquee brand, even though Harrah’s had an international reputation in casinos and he had none. He even delayed building a garage because his name was not being used prominently enough in the marketing.
..According to court papers, Harrah’s spent $9.3m promoting the Trump name, giving the New York developer a reputation in the casino business he’d never had before. And Harrah’s quickly learned the price – now, with Trump able to argue he knew casinos, financing opportunities that did not exist before opened up, and he was able to use Harrah’s promotion of him as a lever against the entertainment company. Soon after that first casino opened, Trump took advantage of his new credibility with financial backers interested in the gaming business to purchase the nearly completed Hilton Atlantic City Hotel for just $320m; he renamed it Trump Castle. The business plan was ludicrous: Trump had not only doubled down his bet on Atlantic City casinos but was now operating two businesses in direct competition with each other. When Trump Castle opened in 1985, Harrah’s decided to ditch Trump and sold its interest in their joint venture to him for $220m... Still, he wanted more in Atlantic City – specifically, the Taj Mahal, the largest casino complex ever, which Resorts International was building. This made the Casino Control Commission nervous because it could have meant that the financial security of Atlantic City would be riding on the back of one man.
.. his argument went, he was Donald Trump. He would contain costs, he said, because banks would be practically throwing money at him, and at prime rates. He would be on a solid financial foundation because the banks loved him so much, unlike lots of other companies and casinos that used below-investment-grade, high-interest junk bonds for their financing. “I’m talking about banking institutions, not these junk bonds, which are ridiculous,” he testified... But Trump’s braggadocio proved empty. No financial institution gave him anything. Instead, he financed the deal with $675m in junk bonds, agreeing to pay an astonishing 14 percent interest, about 50 percent more than he had projected.
That pushed Trump’s total debt for his three casinos to $1.2bn. For the renamed Trump Taj Mahal to break even, it would have to pull in as much as $1.3m a day in revenue, more than any casino ever.
Disaster hit fast. As had been predicted by some Wall Street analysts, Trump’s voracious appetite cannibalised his other casinos – it was as if Trump had tipped the Atlantic City boardwalk and slid all his customers at the Trump Castle and Trump Plaza down to the Taj. Revenues for the two smaller casinos plummeted a combined $58m that first year... Trump introduced the airline with his usual style – by insulting the competition. At an elegant event at Logan Airport in Boston, Trump took the stage and suggested that the other airline with a northeastern shuttle, Pan Am, flew unsafe planes. Pan Am didn’t have enough cash, he said, and so it couldn’t spend as much as the Trump Shuttle on maintenance. “I’m not criticising Pan Am,” Trump told the assembled crowd. “I’m just speaking facts.” But Trump offered no proof, and others in the airline industry seethed; talking about possible crashes was bad for everyone’s business.
.. He was spending $1m to update each of the planes, which were individually worth only $4m. With those changes, he boasted, he would increase the shuttle’s market share from 55 to 75 percent. But just like with casinos, Trump was in a business he knew nothing about.
.. Customers on a one-hour flight from Washington to New York didn’t want luxury; they wanted reliability and competitive prices. Trump Shuttle never turned a profit. But it didn’t have much of a chance; even as he was preening about his successes, Trump’s businesses were falling apart and would soon bring the shuttle crashing down... At 1:40pm on 10 October, 1989, the four-blade rotor and tail rotor broke off of a helicopter flying above the pine woodlands near Forked River, New Jersey. The craft plunged 2,800 feet to the ground, killing all five passengers. Among them were three of Trump’s top casino executives... With the best managers of his casinos dead, Trump for the first time took responsibility for running the day-to-day operations in Atlantic City. His mercurial and belligerent style made a quick impact – some top executives walked, unwilling to put up with his eccentricities, while Trump booted others. The casinos were struggling so badly that Trump was sweating whether a few big winners might pull him under... executives at the casino were humiliated, since Trump was signalling that he was frightened customers might win... By early 1990, as financial prospects at the casinos worsened, Trump began badmouthing the executives who had died, laying blame on them, although the cause of his problems was the precarious, debt-laden business structure he had built... By June 1990, Trump was on the verge of missing a $43m interest payment to the investors in the Taj’s junk bonds. Facing ruin, he met with his bankers, who had almost no recourse – they had been as reckless as Trump. By lending him billions – with loans for his real estate, his casinos, his airline and other businesses – they could fail if Trump went down. So the banks agreed to lend him tens of millions more in exchange for Trump temporarily ceding control over his multi billion-dollar empire and accepting a budget of $450,000 a month for personal expenditures. In August, New Jersey regulators prepared a report totaling Trump’s debt at $3.4bn, writing that “a complete financial collapse of the Trump Organisation was not out of the question.”.. By December, Trump was on the verge of missing an interest payment on the debt of Trump Castle, and there was no room left to manoeuvre with the banks this time. So, just as he had in the past, Trump turned to Dad for help, according to New Jersey state regulatory records. On December 17, 1990, Fred Trump handed a certified cheque for $3.35m payable to the Trump Castle to his attorney, Howard Snyder. Snyder travelled to the Castle and opened an account in the name of Fred Trump. The cheque was deposited into that account and a blackjack dealer paid out $3.35m to Snyder in gray $5,000 chips. Snyder put the chips in a small case and left; no gambling took place. The next day, a similar “loan” was made – except by wire transfer rather than by cheque – for an additional $150,000. This surreptitious, and unreported, loan allowed Donald Trump to make that interest payment... Trump’s casino empire was doomed. A little more than a year after the opening of the Taj, that casino was in bankruptcy court, and was soon followed there by the Plaza and the Castle. Under the reorganisation, Trump turned over half his interest in the businesses in exchange for lower rates of interest, as well as a deferral of payments and an agreement to wait at least five years before pursuing Trump for the personal guarantees he had made on some of the debt... In 2004, Trump Hotels & Casino Resorts – the new name for Trump’s casino holdings – filed for bankruptcy, and Trump was forced to relinquish his post as chief executive. The name of the company was then changed to Trump Entertainment Resorts; it filed for bankruptcy in 2009, four days after Trump resigned from the board... In his books and public statements, Trump holds up this bankruptcy as yet more proof of his business genius; after all, his logic goes, he climbed out of a hole so deep few others could have done it. He even brags now about how deep that hole was. Trump falsely claimed in two of his books that he owed $9.2bn, rather than the actual number, $3.4bn, making his recovery seem far more impressive... When challenged on the misrepresentation during a 2007 deposition, Trump blamed the error on Meredith McIver, a longtime employee who helped write that book. Trump testified that he recognised the mistake shortly after the first book mentioning it was published; he never explained why he allowed it to appear again in the paperback edition and even in his next book. McIver went on to garner some national recognition as a Trump scapegoat – nine years later, when Trump’s wife, Melania, delivered a speech at the Republican National Convention that was partially plagiarised from Michelle Obama, the campaign blamed McIver. But despite all this supposed sloppiness, Trump has never directed his trademark phrase “You’re fired!” at this loyal employee... In 2008, he defaulted on a $640m construction loan for Trump International Hotel & Tower in Chicago, and the primary lender, Deutsche Bank, sued him. Trump counter-sued, howling that the bank had damaged his reputation... Trump has also based huge projects on temporary business trends. For example, for a few years during the George W Bush administration, wealthy expatriates from around the Middle East flocked to Dubai. In response, Trump launched work on a 62-story luxury hotel and apartment complex on an artificial island shaped like a palm tree. But, as was predictable from the start, there were only so many rich people willing to travel to the United Arab Emirates, so the flood of wealthy foreigners into the country slowed. The Trump Organisation was forced to walk away from the project, flushing its investments in it.Beginning in 2006, Trump decided to take a new direction and basically cut back on building in favour of selling his name. This led to what might be called his nonsense deals, with Trump slapping his name on everything but the sidewalk, hoping people would buy products just because of his brand... Trump hosted a glitzy event in 2006 touting Trump Mortgage, then proclaimed he had nothing to do with managing the firm when it collapsed 18 months later. He tried again, rechristening the failed entity as Trump Financial. It also failed.That same year, he opened GoTrump.com, an online travel service that never amounted to more than a vanity site; the URL now sends searchers straight to the Trump campaign website... Also in 2006, Trump unveiled Trump Vodka, predicting that the T&T (Trump and Tonic) would become the most requested drink in America (he also marketed it to his friends in Russia, land of some of the world’s greatest vodkas); within a few years, the company closed because of poor sales... In 2007, Trump Steaks arrived. After two months of being primarily available for sale at Sharper Image, that endeavour ended; the head of Sharper Image said barely any steaks sold... Amusing as those fiascoes are for those of us who didn’t lose money on them, the most painful debacles to witness were many involving licensing agreements Trump sold to people in fields related to real estate. There is the now-infamous Trump University, where students who paid hefty fees were supposed to learn how to make fortunes in that industry by being trained by experts handpicked by Trump; many students have sued, saying the enterprise was a scam in which Trump allowed his name to be used but had nothing else to do with it, despite his claims to the contrary in the marketing for the “school”... Particularly damning was the testimony of former employee Ronald Schnackenberg, who recalled being chastised by Trump University officials for failing to push a near-destitute couple into paying $35,000 for classes by using their disability income and a home equity loan.Around the country, buyers were led to believe they were purchasing apartments in buildings overseen by Trump, although his only involvement in many cases was getting paid for the use of his brand... In 2010, lenders foreclosed on the $355m project. Even though Trump’s name was listed on the condominium’s website as the developer, he immediately distanced himself, saying he had only licensed his name... A similarly sordid tale unfolded for Trump Ocean Resort Baja Mexico, a 525-unit luxury vacation home complex that Trump proclaimed was going to be “very, very special”. His name and image were all over the property, and he even personally appeared in the marketing video discussing how investors would be “following” him if they bought into the building. Scores of buyers ponied up deposits in 2006, but by 2009 the project was still just a hole in the ground. That year, the developers notified condo buyers their $32m in deposits had been spent, no bank financing could be obtained, and they were walking away from the project. Scores of lawsuits claimed the buyers were deceived into believing Trump was the developer. Trump walked away from the deal, saying that if the condo buyers had any questions, they needed to contact the developer – and that wasn’t him, contrary to what the marketing material implied... The same story has played out again and again. In Fort Lauderdale, Florida, people who thought they were buying into a Trump property lost their deposits of at least $100,000, with Trump saying it was not his responsibility because he had only licensed his name.. Investors in another failed Floridian property, Trump Tower Tampa, put up millions in the project in 2005 believing the building was being constructed by him. Instead, they discovered it was all a sham in 2007, inadvertently from Trump, when he sued the builder for failing to pay his license fees. The investors lost their money, and finally got to hear Trump respond to allegations that he had defrauded them when they sued him. In a deposition, lawyers for the Tampa buyers asked him if he would be responsible for any shoddy construction; Trump responded that he had “no liability” because it was only a name-licensing deal. As for the investors, some of whom surrendered their life savings for what they thought was a chance to live in a Trump property, Trump said they at least dodged the collapse of the real estate market by not buying the apartments earlier.
“They were better off losing their deposit,” he said.
So said the man who now proclaims that Americans can trust him, that he cares only about their needs and their country, that he is on the side of the little guy.