By Thomas Ferguson Director of Research of the Institute for New Economic Thinking and Professor Emeritus, University of Massachusetts, Boston; and Rob Johnson, Institue President, Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
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 any 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/
12 comments
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The chief barrier is the political system is so corrupt, so subservient to the wealthy and the corporations that there is going to be a huge gap between what we should be doing versus what the ruling class will actually do.
Deficit hawks don’t care about the deficit. They care about using the deficit as an excuse to slash public services spending and privatize government assets. Otherwise, they would be the loudest voices opposing tax cuts on the rich, who increasingly in our unequal world control a bigger slice of the wealth pie.
So called deficit hawks also don’t care about the excessive amount of money spent on the military. About the only ones who legitimately do might be the paleo conservatives at publications like The American Conservative.
A lot of what will happen in the aftermath of the viral epidemic will be a lot of intellectual rationalization to worsen inequality and help the ruling class. To a lesser extent, they will help the 10 percenters too. There will be a lot less for the rest of us.
We all concur; I think this plan was an effort to find an agreeable approach within our political system. We need to at least try to structure something that may be accepted. I think this avoids a lot of classic declared nonstarters and a ‘Warren Buffett approach’ may be effective marketing.
I like the practicality of this idea. The net desired outcome seems to be preventing the bailout becoming ‘excess cash’ for executives and large shareholders, correct? The scope is restricted to monetary upside, which may be more palatable for decision making parties.
I assume the half measure nature of the solution is to avoid ‘government participation in the economy’ and (unstated) regulation, which would be nonstarter. Would trying for ceilings in executive pay and stock compensation be realistic as well?
From what I have read about the D side vs the R side ideas this morning, this will be worse than 2008. Much worse. Nothing for the masses…maybe some burnt ashes
What is with the memory loss?
Goldman got bailed out through the back door when AIG was used as a slush fund to make the counterparties whole and then Higgly Piggly Warren stepped in. No risk, all reward.
How about making lobbying a non tax dedutible expense and a punitive ten to one penalty dollar to lobbying dollar?
Two trillion is being thrown around, roughly $6600 for every man, woman, child and LGBQTRSTUV person, but Gates, Buffet and Bezos are licking their chops angling for a measly $100 billion each.
correct
“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”
Nonsense!….why start now??? Bend over and take it! Like the deplorables you are!
…and any suggestion conflating Congressional sell-offs with insider trading is legless…
Every four years Mainstream Media, consolidated into limited ownership, $ells billion$ in Advertising time to private political parties which have election protocols that seem to be inhibiting participatory democracy.
We the people own the Band Width which we Lease through the FCC. No Airwaves-No Media-No Advertising.
Elections are a Public Good not a Profit Center and we need the Legislation Controls to reflect that.
Let’s not waste this crises.
Every bailed-out company should also have its own special administrator who answers to the program special administrator. The position would be as a co-CEO in the same vein as co-consuls of the early Roman Republic.
Here’s what gets me –
This bailout bill is being negotiated between the Ds and the Rs.
And ordinary people who will have to pay are told nothing of the provisions of the bill. So we get the tab without knowing what we are paying for.
Stress this idea:
“Because not enough people paid attention in the last few decades, we are paying 55% of our federal taxes to the Pentagon for failing wars.
Our federal taxes are higher because not enough paid attention in 2008.
Pay attention now, or pay higher taxes in the future.”
Have you contacted you congress member about no bailouts for corporations?
That’s been called the Pelosi Principle. ” We have to pass the legislation to find out what’s in it.”
It deserves to be at least as famous as the Friedman Unit.