And there will be the predictable rants about putting taxpayers on the hook for “bailing out” undeserving shareholders, banks and hedge fund managers even as waiters, taxi drivers and maids are left to fend for themselves.
Democrats will accuse Republicans of groveling to Wall Street and business interests while Republicans will accuse Democrats of groveling to unions and wanting to pick winners and losers. In the end, a rescue package with a price tag of hundreds of billions of dollars will be narrowly approved by both houses of Congress over the opposition of partisans and ideological purists in both parties.
So here is a program guide for the political melodrama that is about to unfold.
Let’s start with the word “bailout,” which will be tossed around indiscriminately in coming weeks by politicians and pundits and headline writers. Bailout has a pejorative connotation, one that suggests people and companies who should have known better are saved from the consequences of their own risk-taking with large gifts of government cash.
But in this case, the pejorative does not apply. For if anything qualifies as an event outside human control — an “act of God” as the contract lawyers put it — certainly it is a pandemic. Nor is this a case of anyone acting recklessly.
Certainly any rescue will involve providing badly needed cash to private companies that would otherwise be forced to default on loans, file for bankruptcy or close their doors. But under most scenarios, the aid will come in the form of loans that will have to be repaid with interest, or equity investments that should give the government a profit once the crisis has passed. Or there could be some combination of the two, such as convertible bonds or loans packaged with warrants to give the government the right to later buy company stock at today’s low prices.
Skeptics will surely note that companies get into cash squeezes for all sorts of reasons all the time without the government riding to their rescue. But what’s different here is we’re talking about thousands of companies with tens of millions of workers and tens of billions of dollars in debt owed to American banks and investors.
If companies don’t find a way out of their temporary cash squeeze, then the collapse of one entity will lead to the collapse of another, and then another, in the manner of falling dominoes — a financial contagion to mirror the viral one going on outside. The reason for doing it is not because it’s fair — it’s not — but because lots of innocent bystanders will get hurt if you don’t. We do it for us, not for them.
From a policy standpoint, the trick is to do it in a way that provides a safety net for workers and customers who are most vulnerable, while insisting investors and lenders accept some of the financial pain. Structuring these rescues is as much art as science, and no matter how well you do it, there is no way to make them completely fair.
It is pretty clear at this point that, for the next several months, airlines, cruise lines, hotel chains and theme parks will not be taking in enough revenue to service the interest payments on the debt they took on to buy their planes, boats, buildings and other equipment. But it’s not just them.
What about the companies that sell jet fuel to the airlines, or provision food to the cruise ships, or provide sophisticated computer reservation systems to the hotels? Or the restaurants, taxi companies, bus tour operators and sidewalk vendors that are no less dependent on tourists and business travelers? And what about the owners of professional sports teams, or NASCAR sponsors or the NCAA? It’s not so obvious where the eligibility line should be drawn.
Then there is the practical reality that the government simply doesn’t have the capacity to review the financial situation of millions of businesses and quickly determine which ones genuinely need capital and will be viable enough to pay it back. In addition, the potential for fraud and political favoritism is significant.
So here’s what you can expect. For the largest companies in the industries most heavily impacted, the U.S. Treasury will likely be authorized to provide temporary equity investments, loans and loan guarantees tailored to the needs of each company, much as it did with the banks,auto companies and the mega-insurer AIG in the wake of the 2008 financial crisis.
In some cases, the mere fact that the capital is available will give lenders the comfort they need to renegotiate and extend their existing loans. In other cases, the government will have to provide funds and guarantees. No matter how they are structured, however, these rescue packages should put the government first in line for repayment and to earn a tidy profit when companies eventually return to profitability.
Behind the scenes, airlines, cruise lines, hotel companies and theme parks are already making the case that the government should simply hand over an initial tranche of cash to compensate them for the lost revenue they suffered as a result of government restrictions on travel or large gatherings. That would be a mistake.
Although there is precedent for such grants to the airlines in the 9/11 rescue package, that was a time when airlines were routinely reorganizing under the bankruptcy code. But after 20 years of unchecked consolidation, the airlines — along with hotel operators and theme parks — have become disciplined oligopolies characterized by high prices and profits. They should get no better deal from the government than if they were seeking capital from Warren Buffett and Berkshire Hathaway.
That’s not all the government should demand. Until the government gets its money back, the companies should be prevented from paying any executive more than $2 million a year in salary, bonus and stock incentives, which would be a comedown for the chief executives of nearly all of these companies. They should also be prevented from paying shareholders any dividends or buying back any shares of their stock. And rather than laying off a large number of employees, they should be required whenever possible to institute job-sharing programs so that all employees remain on the payroll part-time until the crisis has passed. The details of these deals should be posted on the Treasury website, along with an audited accounting of when and how the money has been repaid.
As for the thousands of smaller companies affected by the pandemic, the Small Business Administration should be authorized to guarantee loans made by private banks. Such guarantees, however, should extend only to 75 percent of any loan, insuring that the banks accept the first loss from any loan that is not repaid. Only in that way will banks have sufficient incentive to insure that only creditworthy companies receive the loans. Without such safeguards, the program runs a high risk of becoming a costly and embarrassing boondoggle.
The politics of these rescue packages are particularly tricky for Republicans, who will find themselves torn between the political instinct to reward their allies in the business community and their ideological opposition to government interference in the market economy.
For Democrats, it is the opposite. While they are reluctant saviors of Wall Street banks and investors, they are also eager to protect workers and demonstrate the need for government management of the economy in the face of repeated market failures.
Voters are similarly conflicted. While they demand that government do something to contain economic crises, they are resentful about anything that smacks of a bailout. President George H.W. Bush learned that lesson after the rescue of the savings and loan industry in late 1980s, as did President Barack Obama following the rescue of Wall Street and the auto companies in 2009.
President Trump seems determined to avoid the same mistake. As a faux-populist president who promised to “drain the swamp,” he cannot allow himself to be seen riding to the rescue of big business, particularly an industry in which he has a large personal financial stake. Yet as a politician he is acutely aware of the connection between the economy and his own reelection. He also knows he cannot afford to allow a public health crisis to turn into a financial crisis.
For that reason, look for Trump to keep his distance from the negotiations with industry leaders and Congress, leaving that task to Treasury Secretary Steven Mnuchin and trusted son-in-law Jared Kushner. And don’t expect any signing ceremony in the Rose Garden.
One would hope that once the rescue is put in place, top executives of the rescued firms would have the good manners to thank taxpayers publicly for helping them through these tough times. And maybe — just maybe — they will have second thoughts the next time they are tempted to complain about excessive government interference in the workings of the free market.