If the public is to be called upon for the second time in twelve years to bail out businesses, it should get something back for its money. Bailed out firms should be compelled to issue convertible bonds to the government.
We have all heard a thousand and one times that history proceeds not in straight lines, but in spirals. But what is happening now in Washington is ridiculous. Barely a decade after INET was founded in the wake of the greatest bank bailout in world history, not just banks, but almost every American industry is back: Asking for programs of a size that would make Bernie Sanders cringe, corporate lobbyists and top execs are laying siege to the President and Congress to secure even more expansive bailouts.
As this relentless, determined, and laser-focused horde descends on the District of Columbia, much of the press and nearly all politicians seem clueless. It is obvious that bailouts for people, not companies, should be the primary focus of policy. Some excellent ideas about how to aid people have been proposed, but a sweeping bailout program for companies is now also coming up like the morning sun.
Discussions of the company bailouts leave a lot to be desired. Many analyses focus on sideshows. Asking corporations to foreswear stock buybacks in the current environment is not asking for much: prices are low and the outlook, absent vast government bailouts, is dismal. Proposals that corporate boards approve all political contributions also ask far too little: These are the same corporate boards that have been rubber stamping executive pay, and INET researchers have shown how contributions from individual executives bulk up total corporate contributions beyond those coming directly from companies.
INET researchers, alas, have also shown how money-driven the entire political system now is. This research could not be more timely: Because bailouts lead to a Saturnalia of lobbying and campaign contributions, rules on political spending by bailed-out firms need to be far-reaching. If we had our way, we would replace the whole merry-go-round of campaign finance racketeering with public funding. But if that is not politically possible in a Congress whose members either can’t refrain from swapping out the holdings of their portfolios after closed briefings or bring themselves to sanction colleagues who do, then, yes, corporate boards should have to approve political contributions.
If we, the people, are not to finance our own bamboozlement, any company receiving bailout money must be required at the end of each month to file full reports on political contributions and lobbying expenditures to candidates and parties. The waves of so-called “Dark Money” funneled through fake charities is a scandal. Big givers should not be exempted from those reporting requirements nor should “527” funds. Firm and top executives’ contributions to trade associations and other groups that lobby or make political expenditures must also be disclosed. Donations to think tanks and “gifts” from corporate foundations, which we now know are often politically motivated, also need disclosure each month. Not only money from the companies, but contributions of their executives and PACs need to be included in these reports.
But there is more. We are very sympathetic to many of the other conditions suggested by Senator Warren and the handful of other thoughtful observers, including banning stock buybacks. But a crucial condition for any rational bailout has yet to surface.
Put simply, if the public is to be called upon for the second time in twelve years to bail out businesses, it should get something back for its money. It can’t simply be asked to shoulder losses; it needs to share in any upside.
The model for any bailout by the government should be a variant of Warren Buffett’s famous bailout of Goldman Sachs during the last blowout. Buffett guaranteed himself against a loss by structuring the deal as a sort of convertible bond by combining preferred shares and warrants. [1] The bond part of the deal – the preferred shares — guaranteed that he got paid ahead of any other shareholders. But the bond part also came with warrants that were convertible into stock: if the firm prospered, then the stock component ensured that he shared in the upside.
This time, unlike last time, when Hank Paulson, Tim Geithner, and Ben Bernanke failed to give the public a serious share of the upside, the bailed out firms should be compelled to issue convertible bonds to the government. Those bonds should make the government the senior creditor to the firm for the value of the principal as long as the debt is unpaid. At low interest rates like those prevailing today, there is no reason to burden the firm with additional coupon payments that impair the working capital of firms.
But the pandemic is, we trust, terrible, but temporary. Most firms bailed out will likely return to profitability as the economy rises from the ashes. This is where the convertible part of the bond should kick in, so the public gets some of the upside. As firms’ stock prices rise, the Treasury or, better, a special master (not a private investment house), should be charged with converting the bonds when the transaction terms are favorable to the people of the United States. This will require clear benchmarks that measure the value of the original loan against the rising market values of the firm. We know the United States does not have Medicare for All; there is no reason why it should have one sided single payer insurance for corporations.
Deficit hawks should love this plan. Nothing in the proposal must lead to a long term increase in government participation in the economy. The stockholdings should not stick around forever. As firms and the economy recover, the shares can be sold on the open market, yielding a handsome return to the Treasury. These gains would be much larger in the aggregate than if the government were simply senior creditor to the firms. Bob Dylan riffed on Mark Twain’s comment that history rhymed by answering that it swears instead. It is high time that American bailouts, for once, belie Dylan’s ominous forecast.
Notes
Our thanks to Edward J. Kane for very helpful comments on a draft.
[1] For the details, see, e.g., https://qz.com/67052/heres-how-warren-buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/
