Submitted by Taps Coogan on the 22nd of April 2020 to The Sounding Line.
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Chamath Palihapitiya, the CEO of venture capital firm Social Capital, recently spoke with CNBC and slammed the bailouts being doled out to large publicly traded companies in the US, most of whom have blown trillions of dollars on stock buybacks in recent years. As we have frequently discussed here at The Sounding Line, many of the companies now receiving direct taxpayer grants, subsidized loans, and Federal Reserve backstops, have spent all of their income over the past decade on stock buybacks, signalling their leadership’s total disregard for rainy-day savings, or re-investing in their companies’ future. Indeed, for the last five years, the S&P 500 companies have collectively spent over 100% of their reported earnings on dividends and buybacks.
Some excerpts from Chamath Palihapitiya:
“Yes (I am arguing to let airlines fail)… This is a lie that’s been purported by Wall Street. When a company fails it does not fire their employees. It goes through a packaged bankruptcy. If anything, what happens is the people who have the pensions inside those companies, the employees, end up owning more of the company. The people that get wiped out are the speculators that own the unsecured tranches of debt or the folks that own the equity. And by the way, those are the rules of the game. That’s right because these are the people that purport to be the most sophisticated investors in the world. They deserve to get wiped out… The employees don’t… My point is who are we talking about? A bunch of hedge funds that serve billionaire family offices? Who cares? Let them get wiped out…”
“Since 2009, the 500 companies in the S&P 500, so these are the 500 best companies in the world, they bought back $7 trillion in stock and/or issued dividends. That turned out to be 90 cents of every dollar of profit that they made over the last 11 plus years. The federal government as well as the Fed, between monetary and fiscal stimulus combined, have now transferred around $7 trillion back to those said companies as well as companies slightly smaller than them… That kind of behavior makes no sense and instead of being punished, it has been rewarded… The job of a CEO, especially a public for-profit company, is to be a fabulous allocater of resources and there are only two kinds of resources that a CEO controls that matter. The first is human capital… and the second is financial capital: the money you take to invest in great ideas, to protect for the future, to prepare for… a pandemic, or a shock, or a recession, or a competitor… When you do things like buybacks and dividends, what you are essentially saying is, you are throwing up your hands up in the air and declaring to the world: I do not know what to do with this money. And instead of deciding to save that money, to try to invest in M&A… or R&D, to pay your employees more, these people have given it back in an open market purchase… Why is that a stupid idea? Well it’s a stupid idea for two reasons. The first is that it disproportionately …benefits the executives and the CEO and the board, because those are the ones that get most of the stock inside a company and it disproportionately benefits those hedge funds that were agitating for that kind of behavior… The people that believe the least in the company, i.e. people that sell the stock, get rewarded…”
“IBM, over the last decade has spent over $140 billion on buybacks. This is a company with a $100 billion market cap. The last CEO found a way to oversee 24 consecutive quarters of revenue decline and for that she was still able to compensate herself $100 million of stock based compensation. Now you look at all of this kind of behavior and ask yourself: how is this being supported? Why aren’t these companies trying to figure out how to be more resilient? And it turns out the incentives were so skewed away from being resilient…”
There is more to the interview, so enjoy it above.
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