American Consequences - September 2020

INSIGHT FROM OUR CHIEF RISK OFFICER expertise in manufacturing and automobiles contributed immeasurably to the success of Allied armed forces through the ubiquitous Jeep and the Sherman tank. It’s a remarkable success story built upon myriad failures and driven by unfettered competition. As we look to our current predicament, politicians have turned on capitalism. Jobs and job security are a remarkable vote-generator, and politicians want above all to stay in office. The bailouts of companies started with Chrysler in 1979, principally to preserve 360,000 jobs. How did that work... Chrysler was bailed out again in 2008, filed for bankruptcy in 2009, and is now a division of Fiat. Would bankruptcy have eliminated 360,000 jobs? No, it would have enabled the company to restructure and reinvent itself in 1979 and perhaps driven Ford and GM to improve quality much earlier, preserving the status of the U.S. auto industry globally. But unfortunately, today’s bailout is practically the first page of the playbook for politicians with hundreds of billions, even trillions, of dollars flowing from

prosperity along with the risk of losing everything if the venture was unsuccessful. Bankruptcy allowed for the orderly repositioning of the company, debt holders became equity holders, equity holders lost all, businesses with positive cash flow were reinvigorated and given a new capital structure... a new lease on life, with employees remaining. Who has benefited from the bailouts? I would argue almost no one. Take United Airlines. It could have reorganized in bankruptcy – with debt holders taking equity, plane leases getting renegotiated or walked away from, and the workforce getting restructured to an appropriate size for the future of travel. Instead, United Airlines workers are still likely to be unemployed, with more than 36,000 being furloughed or laid off this fall without additional billions from the government... Bond holders are looking at 20%-plus yields and market values approaching 50% of face value. Interestingly, in a world where bonds are trading at 50 cents on the dollar, equity values typically are trading at option value. United Airlines’ shares have only lost 50% of their value, with a market cap exceeding $10 billion for a firm with almost no hope to survive the next year without additional billions from the government. Additionally, we will have a firm ill-equipped to survive against more efficient nimble carriers. It will have to be subsidized forever, another postal-service debacle for taxpayers, or Chrysler part two. Without failure, you can’t have competition... Competition drives innovation, excellence, long-term economic prosperity, and job security. Bailouts preserve jobs in the short

government to businesses. Equity ownership used to come with the rewards from


September 2020

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