No Mercy No Malice
Some Companies Deserve to Fail
Why we shouldn’t bail out the airlines and cruise companies
America is a terrible place to be stupid.
Lenin said nothing can happen for decades, and then decades can happen in weeks. Yes, a pandemic pulls the future forward, and there’s a lot to learn. Another phenomenon that forms rain clouds of perspective is, wait for it… death. Or, specifically, being close to it.
My father is approaching 90, recently divorced (for the fourth time), and spends his days watching replays of Maple Leafs games and abusing Xanax. His affinity for Xanies is a feature, not a bug, since at the end of your life “long-term effects” lose meaning. He’s near the end, exceptionally intelligent, and high. In sum, he’s my Yoda.
Our calls are mostly me yelling short questions (“HOW ARE THE LEAFS LOOKING FOR NEXT YEAR?”) and waiting for something profound in return. Occasionally he delivers.
“You must unlearn what you have learned!”
Just kidding, Yoda did actually say that. But when I asked him what he thinks makes America different, he said:
“America is a terrible place to be stupid.”
That’s why he immigrated here. A pillar of capitalism is you can’t reward the winners without punishing the losers. I worry our government has been co-opted by the wealthy and is focused on protecting the previous generation of winners, even if it means reducing future generations’ ability to win. Aren’t we borrowing against our children’s prosperity to protect the wealth of the top 10, if not 1, percent?
In Depression-era Scotland, my dad was physically abused by his father. His mother spent the money he sent home from the Royal Navy on whiskey and cigarettes. He took a huge risk and came to America. My mom took a similar risk, leaving her two youngest siblings in an orphanage (her mom and dad had both died in their early fifties), and bought a ticket on a steamship. She had a small suitcase and 110 quid that she hid in both socks. Why? Because they wanted to work their asses off and be rewarded for the risks they were willing to take. This is capitalism, a beacon of hope for people who are smart, hardworking, and comfortable with risk, promising a greater share of the spoils than those who are not.
However, no more. Modern-day “capitalism” in America is to flatten the risk curve for people who already have money, by borrowing from future generations with debt-fueled bailouts for companies. We have consciously decided to reduce the downside for the wealthy, thereby limiting the upside for future generations.
CNBC guest: Equity holders deserve to get wiped out.
CNBC host: Why does anybody deserve to get wiped out in a crisis like this? This is a natural disaster, why does anybody deserve to get wiped out? Wouldn’t that be immoral in and of itself?
“Immoral,” here we go. Morality for CNBC, and the current administration, is not capitalism but the worst type of socialism, cronyism. Rugged individualism and capitalism on the way up, privatizing the gains — and then socialism/cronyism on the way down as we socialize the losses with bailouts.
Red Envelope
In 1999, the firm I co-founded, Red Envelope, was drafting an S-1 in anticipation of an IPO. At 31, I stood to register $30–60 million on the IPO. The bursting of the bubble damaged us, but the injuries weren’t fatal, and we were the only retail IPO of 2002. In 2008, a longshoreman strike left all our holiday merchandise hostage on a cargo ship eight miles off the shores of the port of Long Beach. Then, as the credit crisis began to take hold, a prescient analyst at Wells Fargo decided to pull our credit facility. Within 90 days we were Chapter 11. That event, combined with divorce, reduced my net worth 97%.
I didn’t deserve to lose near-everything. What happened wasn’t my fault — okay, maybe the divorce. Regardless, was this fair or (im)moral? Just as there’s no crying in baseball, there’s no fairness in shareholder accretion or destruction. Looking at jets at 31 wasn’t moral or fair either. So, what happened? Exactly what’s supposed to happen in a market economy — downside registered against commensurate upside.
Red Envelope went through something also uniquely American… and productive — bankruptcy. The equity holders (that is, yours truly) were wiped out (#bummer). However, we did our duty as board members and found a buyer, Liberty Media, who paid our vendors and kept the employees. No job loss, all debtors paid. When a 31-year-old is shopping for jets in November, part of the agreement with the invisible hand is he may lose most/all of it by March. There’s a word for that… capitalism.
The capital structure of private firms is meant to balance upside and downside. CNBC/Trump want to protect current equity holders at the expense of future generations with rescue packages that explode the deficit. They also want to protect airlines, who spent $45 billion on buybacks and now want a $54 billion bailout, disincentivizing other firms (for example, Berkshire Hathaway) that have built huge cash piles foregoing current returns.
The rescue package should protect people, not businesses. From 2017 to 2019, the CEOs of Delta, American, United, and Carnival Cruises earned over $150 million in compensation. But, now… “We’re in this together” (that is, “bail our asses out”).
And what happens if they (gasp!), go out of business? Simple, the equity holders, and unsecured debt holders, get wiped out. These are the cohorts who, despite the recent meltdown, have registered a 3.3x increase in the Dow since the lows of 2008.
As long as they keep making old people, and younger people want to take their kids to Disney’s Galaxy’s Edge, there will be cruise lines and airlines. Since 2000, U.S. airlines have declared bankruptcy 66 times. Despite the obvious vulnerability of the sector, boards/CEOs of the six largest airlines have spent 96% of their free cash flow on share buybacks, bolstering the share price and compensation of management… who now want a bailout. They should be allowed to fail. Bondholders will own the firms. Ships and planes will continue to float and fly, and there will still be a steel tube with recirculated air waiting for you post-molestation by Roy from TSA.
The Lie
Trump/CNBC have adopted a narrative that this is about protecting the most vulnerable. No, it’s about buttressing the most wealthy. Letting firms fail, and share prices fall to their market level, also provides younger generations with the same opportunities we, Gen X and boomers, were given: a chance to buy Amazon at 50x (vs. 100x) earnings and Brooklyn real estate at $300 (vs. $1,000) per sq. ft. Just as we pretend our servicemen and -women are heroes, and then treat them like chumps, CNBC advertisers and Peter Navarro want to pretend they give a sh*t about younger generations so they can protect the wealth of old people and management/advertisers. Enough already.
Earlier this week, I was on MSNBC with an early Uber employee, who reminded us, “We’re all in this together.” What bullsh*t. My guess is this executive registered $10–100 million in equity crafting software that figured out an elegant way to pay their 3.9 million “driver partners” less than minimum wage, ensure Uber isn’t obligated to provide them with health insurance, and avoid paying payroll taxes to adequately fund the CDC. But Dara Khosrowshahi and his several-hundred-strong comms department wrote a compelling letter to the government urging them to help his driver partners.
Dara, pay your “partners” before picking up the pen again.
Walking the Walk — PPP
We recently founded Prof G, a firm attempting to disrupt graduate business education. We offer online business/strategy sprints that aim to provide 30–50% of my classes at NYU Stern for 7% of the price. We are eligible for some of the $350 billion federal PPP program. With a modest amount of paperwork, in seven days or less, we’d receive a loan for approximately $250,000. If we don’t lay off any employees, most of the loan would likely be forgiven. This is meaningful cabbage for us.
We are not going to apply for the program.
Our backers are wealthy, and if we can’t make this work — pandemic or not — then we don’t deserve to be in business. Yeah, our demise wouldn’t be our fault, nor is most success. Like steroids for the body, the moral hazard of government assistance only leaves the economy less healthy in the long run.
Just as death is a key part of life, so is the demise and reinvention of firms that can’t endure tropes. Covid-19 is no more historic than an 11-year bull market. With dangerous disregard for future generations we’ve decided that hundreds of thousands of people dying is meaningful, but the Nasdaq going down would be worse. The rescue package is $2.2 trillion. The annual CDC budget — $6.6 billion.
We. Have. Lost. The. Script.
To be clear, socialism may be a better way to go, as evidenced by the study showing four of the five happiest nations are socialist democracies. However, unless we’re going to provide universal health care and universal pre-K, let’s not embrace The Hunger Games for the working class on the way up, and the Hallmark Channel for the shareholder class on the way down. The current administration, the wealthy, and the media have embraced policies that bless the caching of power and wealth, creating a nation of brittle companies and government agencies.
The terrible thing about crises is they always happen. The wonderful thing is they always end. As we fight to bring this crisis to an end, let’s re-embrace capitalism and foster a future generation of leaders and firms that are soldiers, not hoarders. Yes, America is a terrible place to be stupid. It will be a worse place if we replace capitalism with cronyism.
Life is so rich,
Scott
P.S. What happens when universities send tuition bills for $68,000 to host a bunch of marginal Zoom classes? Catch episode 4 of the Prof G Show on Apple, Spotify, or wherever you listen to podcasts.
Originally published on profgalloway.com.
