Molson Hart

We have a choice: buybacks or bailouts. Buybacks are just a tax efficient method of transferring money from companies to their shareholders. That’s the reason why companies exist, to allow their shareholders to profit. The problem with buybacks is that they are easily gamed by

company CEOs who issue stock options and have compliant boards. Shareholders, don’t understand this, do and hate it, or do and are okay with it because it increases their prices of their holdings. To do a buyback, the company needs to sacrifice cash or take on debt.

Both increase the risk of bankruptcy by making the company more susceptible to crises where a strong balance sheet and lots of cash allow the company to survive and thrive. This is brings us to the bailout. If we consistently and regularly bailout the companies which engage in

buybacks, it will only incentivize even more risk taking (without value creation) via buybacks, which will of course lead to the need for more bailouts. So pick one: buybacks or bailouts. We cannot have both.

For those who believe that bailing out the airlines (or whatever) will be compensated by whatever disruption it avoids, remember that: 1. If the airlines go bankrupt the planes don’t disappear 2. On the other end of your shareholder bailout are taxpayers and savers (inflation!)

3. We can bailout the industry and make shareholder equity go to zero by turning the company into a partial SOE. It’s only fair that if taxpayers take the risk and foot bill the they should partake in the reward when the government takes the company “public” and sells its shares,