I have several comments about the severity of the current situation and prospects for bailouts.
- Many financial analysts believe the stock market is oversold and will rebound quite quickly once the pandemic ends. However, many companies with debt are likely headed towards bankruptcy. The economic fallout could result in an economic downturn that leads to a long recession and a sustained downturn in stock prices.
- Many politicians in the “center” are going to want to bailout Boeing, airlines, hotels and other industries. A distinction has to be made between bailing out companies and bailing out shareholders. Hard for me to justify unconditional bailouts of companies that issued a lot of debt and used cash to buy back stock to reward shareholders and CEOs with large bonuses. Taxpayers should receive an equity stake in businesses receiving financial assistance as they did for bailing out companies like GM and AIG in 2009. There should be restrictions on management salaries and dividends at companies accepting federal funds. Some bailouts will occur through a chapter 11 bankruptcy process and reorganization that impacts creditors and shareholders. I suspect Congress will eventually bail out some firms but there must be conditions and the process towards a bailout may not be a smooth one.
- One way to structure a bailout so that the American people obtain some financial benefit is to give each household shares of companies receiving financial assistance. Another way for American taxpayers to benefit from a bailout is to give the Social Security Administration ownership of share in companies purchased with general Treasury funds.
- The tax code needs to be modified to reduce incentives for companies to issue debt and purchase company shares.
- Bank stocks are cratering even though bank analysts argue that banks are in good financial shape. The banking sector is likely to realize large losses from loans to oil sector on top of losses related to the pandemic.
- The 10-year U.S. government bond interest rate is rising rapidly going from 0.65 on Monday 3/16 to 1.26 on Wednesday 3/18. Rate was even lower last week. The Fed does not have much control over long rates and may be out of ammo. Typically, investors count on increased bond prices to coincide with and offset downturns in stock prices. This result is unlikely this time because interest rates are starting at such a low level and people are selling all assets, including bonds, to get cash.