Yesterday, Chamath Palihapitiya went on CNBC and stated that companies should be allowed to fail rather that get taxpayer money.
While the host, Scott Wapner, couldn’t seem to wrap his head around this idea, I completely agree with it. Ok. I’m aware that no company could have foreseen a pandemic of this magnitude where their revenues would go to zero. However, if you truly believe in the capitalist system, this is the correct course of action.
The most important point in this is that when a business “fails” or goes bankrupt, it doesn’t cease to exist. In fact, bankruptcy can provide optionality for the business to thrive as the equity and junior debt holders get wiped out and the senior debt holders become the equity owners allowing the company to deleverage and come out a healthier company. Essentially, the shareholders, mostly funds (hedge, mutual, and pension) who owned the risk asset will lose their investment.
Since we are in a global pandemic, we shouldn’t allow people to get fired without any backstops. The current policies being implemented to increase unemployment benefits and provide stimulus checks are crucial to ensure that the employees don’t suffer. The junior employee who has no say in how the company allocates capital should be given the bailout. If the taxpayer gives companies money, gives its current and former employees money, AND bails out the funds who own the junk debt or equity that were facing margin calls, we are left with a zombie economy that is saddled with debt and filled with moral hazard.
While this may seem harsh or that unintended consequences may occur, that’s certainly true. However, at what point do we end the cycle of bailouts? Do we assume that the national debt will never matter? Possible, but highly unlikely.
I’ve always felt that one of the things that makes the American system above the others is the bankruptcy system we have. A global pandemic where the entire country is affected certainly tests this idea. The key moment that enforced my feelings that companies should be allowed to fail was when the Boeing CEO said he would refuse bailout money if the government required an equity stake in the company. He then stated that they had other options and didn’t need the money. If this is the case, then why are we bailing out companies that claim they don’t need the money and, in the case of Boeing, has proven a lack of ethical business practices well before the pandemic.
The money should find its way into small businesses and employees rather than the executives coffers and the funds who assumed the risk. If Wimbledon had the foresight to add a pandemic rider to their insurance policy, perhaps Fortune 500 companies would heed similar precautions via insurance or retaining cash rather than paying all excess cash to shareholders.
the counterfactual 