Do billionaires and hedge fund investors deserve a bailout? : Planet Money Over the past decade, American companies spent billions buying back their own shares. Now they need a taxpayer rescue. Do they deserve it? | Subscribe to our weekly newsletter here.
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Episode 995: Buybacks And Bailouts

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Episode 995: Buybacks And Bailouts

Episode 995: Buybacks And Bailouts

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UNIDENTIFIED PERSON #1, BYLINE: Thanks for listening to PLANET MONEY. We'd like to understand better who is listening and how you are using podcasts. Please help us out by completing a short anonymous survey at npr.org/podcastsurvey - all one word. It takes less than 10 minutes, and it really helps support the show. That's npr.org/podcastsurvey.

UNIDENTIFIED PERSON #2, BYLINE: This is PLANET MONEY from NPR.

SCOTT WAPNER: Hello?

KENNY MALONE, HOST:

Hey, Scott. It's Kenny Malone from PLANET MONEY. How are you?

WAPNER: Yeah, give me a second. Just I want to clean the phone for the 50,000th time.

(LAUGHTER)

ROBERT SMITH, HOST:

Scott Wapner is a TV host on CNBC - you know, the Consumer News and Business Channel. No, seriously. CNBC actually stands for Consumer News and Business Channel.

MALONE: It's true. And when we called Scott, he was in fact at the headquarters of the Consumer News and Business Channel. That is why you might hear people mumbling about - I don't know - oil futures in the background.

SMITH: We called Scott because of something that happened on his show a couple weeks ago.

WAPNER: Well - and I've had a lot of big moments on the show. But this particular clip really somehow touched a nerve with people unlike anything I'd ever seen.

MALONE: It starts like a normal enough CNBC interview.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

WAPNER: And welcome to the "Halftime Report." I'm Scott Wapner. Momentarily...

MALONE: So there's Scott Wapner. He's in his anchor chair - perfect hair, red tie in a modest knot.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

WAPNER: Now, Social Capital's Chamath Palihapitiya, he joins us once again on the phone.

CHAMATH PALIHAPITIYA: Hey, Scott. How are you?

SMITH: Chamath is calling in, probably in a T-shirt. It sounds like he's in a T-shirt.

MALONE: And Chamath - Chamath is a venture capitalist. He's also a billionaire, which we mention only because it is relevant to why this video took off.

SMITH: To set the stage, Scott, the host, and Chamath are talking about the massive amounts of money that the federal government and the Federal Reserve are pumping into the economy right now to support American business - trillions of dollars. And Chamath starts saying we've chosen this top-down approach, giving the money to businesses for some reason.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

PALIHAPITIYA: That is not doing anything for the average person every day. OK? The average person got about two weeks of salary relief. That's all they got.

WAPNER: And they need more.

PALIHAPITIYA: It's not enough.

WAPNER: They need a lot more. There's no disagreement. There's no disagreement at all about that.

PALIHAPITIYA: But I'm saying that's been less than 10 cents on the dollar of what's been spent right now.

MALONE: As this interview goes on, it gets more contentious, and you can hear Chamath getting more and more frustrated. And he starts complaining about these government bailouts.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

WAPNER: Are you arguing to let airlines, for example, fail?

PALIHAPITIYA: Yes.

WAPNER: Why? I mean, how does that make sense in the broader scheme of the economy?

PALIHAPITIYA: Because it's not - because when you look at what it means, this is why I'm saying - like, this is a lie that's been purported by Wall Street. When a company fails, it does not fire their employees. It goes through a packaged bankruptcy.

MALONE: Chamath explains that when companies go through bankruptcy, a judge decides who gets paid and who doesn't. Oftentimes, the workers are protected in bankruptcy. And the people who are investors - the stockholders, a lot of whom are very rich - they are the ones who take the loss.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

PALIHAPITIYA: Those are the rules of the game - that's right - because these are the people that purport to be the most sophisticated investors in the world. They deserve to get wiped out. But the employees don't get wiped out. The pensions don't typically get wiped out.

WAPNER: Why does anybody...

PALIHAPITIYA: Those are lies that we've been telling people.

WAPNER: I just want to understand - why does anybody deserve, using your word, to get wiped out from a crisis created like this? How does anybody deserve to get wiped out?

PALIHAPITIYA: My point is the employees don't. Well - but just be clear. Like, who are we talking about? We're talking about a hedge fund that serves a bunch of billionaire family offices. Who cares? Let them get wiped out. Who cares? They don't get to summer in the Hamptons. Who cares?

WAPNER: I mean, there are people - you don't think the employees...

PALIHAPITIYA: Hold on, Scott.

MALONE: This video exchange has now been watched more than 10.5 million times on Twitter.

SMITH: Because, let's be honest, it is satisfying to hear a billionaire say that those other billionaires should just fail. It's like financial chicken soup for the soul - mmm, mmm good.

MALONE: But when we talked to Scott Wapner after all of this, he told us he thinks there's a lot more going on here - that there is a bigger reason this clip went viral.

WAPNER: This is a debate over whether these bailouts are propping up Wall Street at the expense of everybody else who is suffering. There are a lot of people who are struggling, and they see that we're talking about bailing out companies like airlines, which have spent tens of billions of dollars on share buybacks and things like that. And now the storm is hitting, and there's no rainy-day fund.

(SOUNDBITE OF BENJAMIN ZIAPOUR'S "GOT THE MOVES")

MALONE: Hello, and welcome to PLANET MONEY. I'm Kenny Malone.

SMITH: And I'm Robert Smith. This one TV moment is really about a deep question that's been simmering since the last financial crisis and feels like it's about to boil over during this crisis - who deserves to be saved, and who deserves to fail?

MALONE: America's businesses need money right now, which the government is quickly shoveling their way. But what happened to all that money that corporations had been making over the last very successful 10 years? A lot of it was given away. It went into a financial trick that you may have heard of - stock buybacks, a corporate maneuver that tends to drive up the price of shares. And that is at the heart of what they're talking about in that clip.

SMITH: Today on the show, we dissect this viral video and gaze lovingly at the financial guts inside.

(SOUNDBITE OF BENJAMIN ZIAPOUR'S "GOT THE MOVES")

MALONE: OK. So Chamath, we're rolling. And just to get a level on you, why don't you just tell me what - like, list off the things that you've done today.

PALIHAPITIYA: Let's see. I went for a little walk. I had a couple of meetings. I did a bunch of email, and then I have yoga at 5.

MALONE: OK.

SMITH: Didn't you also raise, like, $700 million? You left that off the list.

PALIHAPITIYA: Oh, I did that yesterday.

SMITH: Oh.

PALIHAPITIYA: Yes, yes.

SMITH: Oh, that was yesterday. Sorry (laughter).

MALONE: Chamath Palihapitiya checks a lot of billionaire boxes. Box No. 1, made a fortune in tech? Check - early Facebook executive.

SMITH: Partial owner of a sports team? Check - Golden State Warriors.

MALONE: Investor in a crazy moon-shot company? Check - literally, a moon shot. He's the chairman of Virgin Galactic.

PALIHAPITIYA: All of that said, you know, I'm 43 years old. Most of my DNA is not, you know, 43-year-old, you know, billionaire Chamath. It's - a lot of it is rooted sort of in how I grew up.

SMITH: Chamath was born in Sri Lanka. His family fled during the civil war and moved to Canada. Chamath ended up in the Bay Area in tech. And if we roll back and replay that CNBC clip, you can hear some very strong words for a Canadian.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

PALIHAPITIYA: Let them get wiped out. Who cares? They don't get to summer in the Hamptons. Who cares?

WAPNER: I mean, there are...

SMITH: You slammed people with their vacation home in the Hamptons. Where is your vacation home?

PALIHAPITIYA: I don't have one.

MALONE: Oh.

PALIHAPITIYA: I have a primary house.

MALONE: A house, I think, is what people call that, right?

PALIHAPITIYA: Yeah, a house.

MALONE: Yeah.

PALIHAPITIYA: Yeah, a primary house.

SMITH: You sounded legitimately frustrated during that...

PALIHAPITIYA: I am.

SMITH: ...Interview. You could hear in your voice that you were angry.

PALIHAPITIYA: Yeah, I think angry is probably a little too dramatic. I think I'm definitely frustrated. And I'll tell you where my frustration comes from. You know, when you look at the amount of money that we've injected into the economy over the last month, less than, you know, 5 cents of every dollar has been given directly to the hands of individual Americans. And I just think that's structurally broken. There is just a complete massacre happening out on Main Street.

SMITH: It is a totally understandable frustration. But how does Chamath get from a massacre on Main Street to telling 10 million people in a viral clip that we should just let all the airlines fail? To understand his logic, Chamath gave us a bit of a corporate finance lesson.

MALONE: He says, fundamentally, the goal of a company is to create something novel in the world, sell it for more money than it costs to make it and you book a profit. And then there are essentially two things the company can do with that profit, with that pile of cash - keep it for the company or give it back to investors.

SMITH: And I know, I know - it seems like an obvious thing, keep or give back. But which way you go on this decision has huge implications not only for a company but for entire economies. And here's how that argument might play out in corporate boardrooms around the country.

MALONE: Board members, we have a giant pile of cash. If we keep the cash, we can grow the company. We can buy more companies. We can pay our workers more, build more factories, research and development - this is why you keep the money.

SMITH: Interesting. I like where you're going with this. But I'm just blue-skying it here - what if we go with the other choice? What if we give the money - give our profit back to our fine upstanding shareholders, many of whom are sitting right here in this very boardroom?

MALONE: Very interesting.

SMITH: Now, in the real world, companies usually go with a mix of these two options - keep or give back. We asked Chamath to help us balance these priorities with a simple version of a corporation - an ice cream truck.

MALONE: Let's say that your friend starts an ice cream truck and you invest, then the friend starts making bank. They've got thousands of dollars in the savings account. What should that ice cream mogul do with that ice cream money?

PALIHAPITIYA: So I think if you use the example of this ice cream truck person, I think maybe the right thing is for you to say to him or her, how much should you be keeping around in case you need to invent a new flavor or you need to upgrade the truck or, you know, you need a new engine or new tires or the insurance goes up? And then of what's left, how do you want to distribute that most effectively to your workers and to me?

MALONE: Right. So the follow-up question isn't, OK, then where's my money? It's, have you actually exhausted every opportunity...

PALIHAPITIYA: Bingo.

MALONE: ...To use this money?

PALIHAPITIYA: You just said the key thing. And what you did, the three of us there in that example, that is how a functional CEO and board should be behaving.

SMITH: And Chamath says when you look at the best of the best, the CEO icons - Warren Buffett, Tim Cook at Apple, Jeff Bezos at Amazon, Kenny Malone with his fictional ice cream company...

(LAUGHTER)

SMITH: ...In theory - they all keep a lot of cash around. They invest heavily in growing their companies or spend their money finding the next big thing.

MALONE: But in this pandemic, you can see another big reason for companies to keep their profits around. If you have some cash on hand and then bad things happen, the most valuable thing you could have is a pile of cash. Airlines do not have that, and that is why, at the moment, they are getting bailed out.

PALIHAPITIYA: I think that all companies, abstracting past airlines, need to be able to look at themselves and say - you know what? I should have some amount of rainy-day savings. You know, every state has it. Every city has it. I mean - and I think a company should have it.

SMITH: So that's the keep-the-money argument. The give-back-the-money argument is a little less idealistic.

MALONE: Yeah. Not every CEO is a Buffett or a Bezos. Some companies don't have a bunch of new ideas for shrewd takeovers or space travel. And that's fine.

SMITH: That's OK.

MALONE: Those companies often decide - you know what? We made money, and now it's time to reward our investors and give some of that money back.

SMITH: Which as an investor, I can say I appreciate it. Like, I don't want my money in a savings account at Big Company Incorporated for their rainy-day fund. I want it in my savings account for my rainy-day fund. I invest my money so that brilliant people can do brilliant things better than I can do them. But if you don't have good ideas, I can find someone else who does.

MALONE: There are two ways a public company gives money back to its investors. One is dividends, and the other is buybacks. Dividends are easy. Companies just send a check to everybody who owns a share, who own stock in the company. And this usually amounts to some funny number like 33 cents for every share. This is a classic way to distribute profit. We've been doing it for a hundred years.

SMITH: But especially over the last decade or so, more and more money has been paid back through that other little financial trick that we mentioned - buybacks. You're going to hear this a lot on places like CNBC, home of Scott Wapner.

WAPNER: I'm betting that more people have heard of buybacks now than have ever heard of them before, just by nature of where the debate is.

SMITH: Here's how buybacks work. A company - sure, like, we can make it an airline. An airline has got a corporate wallet bursting with cash, and so it wanders into the stock market building and it buys its own stock. You might even say it buys back its own stock.

MALONE: (Laughter) Here is the twist. Once that airline has bought back said stock, the company can make those shares of stock disappear - magikazam (ph).

WAPNER: What that does is it reduces the supply, so it makes the remaining shares more valuable. Right? If you take supply out of the system, the existing ones become more valuable, stock prices tend to go up. Thus, existing shareholders generally benefit.

MALONE: Because some shares disappear, each remaining shareholder now owns a bigger slice of the company and a bigger share of the earnings.

SMITH: Scott, just to make this clear, the company is the same company after a buyback. It's not a better company. It's not making more profits. It's not serving its customers any better. It's the same company.

WAPNER: It is the same company. People sometimes use the term financial engineering when they talk about a company using a buyback.

SMITH: And let me tell you, they are not using that term, financial engineering, as a compliment.

MALONE: Robert Financial Engineering Smith, every time I've called you that, is it a compliment?

SMITH: No, do not use that.

MALONE: For some people, buybacks are everything that is hateable about Wall Street. You got these bigwigs at a company buying back a bunch of their own stock which then pumps up the value of that stock. And here's the kicker - oftentimes the CEO and other board members are paid in stock - stock that is now, magikazam, worth more money.

SMITH: If you're a worker at that company and you're not being paid in stock, then you didn't get to share in the miracle of the buyback. Cue the outrage after the break.

(SOUNDBITE OF JOHN WINSTON'S "PAST LIFE")

MALONE: Now, this choice we've been talking about here - should a company keep its profits or give them back to investors? - it's worth mentioning again, this is not a binary thing. Companies are constantly weighing one versus the other and trying to find the right mix of both.

SMITH: And there are a ton of factors that go into this corporate decision, including the perceived value of the company and various tax benefits for buybacks versus dividend - all that stuff. But over the last decade, that mix has been pretty buyback-heavy. And this was the subject of a less viral but still important Chamath moment from CNBC.

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

PALIHAPITIYA: Since 2009, the 500 companies in the S&P 500 - so these are the 500 best companies in the world - they bought back $7 trillion of stock and/or issued dividends. OK? That turned out to be more than 90 cents of every single dollar of profit that they made over the last 11-plus years.

SMITH: Especially viewing those numbers from today - from after the pandemic - it does seem a wee bit shortsighted of companies to have given away all their profits when you know they could actually use some of that cash right now.

MALONE: ...Which brings us back to the airlines. In this big congressional rescue package, U.S. airlines got a bailout - a bailout in the form of grants and loans totaling around $50 billion, which makes sense on one level. Airlines are vital to the American economy, and they've been devastated by government restrictions on travel. But remember...

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

WAPNER: Are you arguing to let airlines, for example, fail?

PALIHAPITIYA: Yes.

SMITH: Yes.

MALONE: You got the timing down even. That pause is the perfect pause. It's perfect.

SMITH: Yes.

MALONE: (Laughter).

SMITH: Here's why Chamath answers so definitively - is this little fact. Bloomberg News did the calculations, and they found that once you take into account what the top five airlines spent on all their expenses and reinvesting in the company in new planes and that sort of stuff, over the past decade, 96% of their free cash flow went to buybacks - 96%.

MALONE: It looks not great that the airlines used money for all these buybacks - making their investors richer - instead of building a rainy-day fund and now are asking for a taxpayer bailout. But still, in the viral words of Scott Wapner...

(SOUNDBITE OF TV SHOW, "FAST MONEY HALFTIME REPORT")

WAPNER: Why does anybody deserve, using your word, to get wiped out from a crisis created like this? How does anybody...

PALIHAPITIYA: My point is the employees don't.

WAPNER: ...Deserve to get wiped out?

SMITH: As he starts to say we should let them fail, like, what is going through your head?

WAPNER: You know, I was a little taken aback by his comment most especially because, you know, there's a real question as to - you know, these aren't normal times. So maybe the normal rules shouldn't apply here. You know, I don't think anybody in their right mind would say, if they had the choice - well, sure, I'm all for taxpayer-led bailouts.

MALONE: (Laughter).

WAPNER: Right?

MALONE: Yes.

SMITH: (Laughter).

WAPNER: But these are extraordinary times. So I think that's why I was taken aback that, you know, this is the equivalent of a natural disaster of sorts, of a Category 100 hurricane - impossible for anybody to plan for no matter, you know, how much money you could have saved rather than spending on something else. This was just such a different type of crisis.

MALONE: And the rules are changing for this crisis. In order to get that bailout money, the airlines have had to promise not to use any of the government cash to do buybacks or dividends. The money, much of it anyway, has to go to the workers. It needs to stay inside the company. The decision is made for the airlines.

SMITH: Normally, these fine points of accounting do not get the notice they might deserve in this cruel world - but not this time.

MALONE: So after the appearance, was there a moment you knew it took off?

PALIHAPITIYA: I checked on Twitter and Susan Sarandon had followed me and then tweeted it. And I was like, oh, my God. And then I was like, I've made it. No (laughter).

MALONE: And then did you get texts from billionaire friends?

PALIHAPITIYA: Yeah.

MALONE: What did they say?

PALIHAPITIYA: Yeah. I mean, there was a bunch. Most of them were pretty expletive-laden but meaning, like, in a supportive way. And then there's just a bunch of player haters, but they were haters before.

MALONE: But for most of us, as in 99.9% of us, this was a eat popcorn, watch the billionaire fight moment. And it was (imitates kissing sound) great. Let them all fail. But the truth is, even Chamath, when we asked him, he is far more nuanced than that. Some companies have made terrible greedy decisions, yes. But others have just been caught up in this once-in-a-lifetime event.

SMITH: Part of the core of his argument was that we might be building this new world where there is no failure for enormous corporations. In some ways, Chamath's argument is the most capitalist thing you could say right now. One of the basic rules of business is that if you take a big risk, you should expect a big reward when you succeed and a big loss when you fail. It's two sides of the same coin. It's why stocks sometimes make gobs of money and sometimes go to nothing. Like, that is the game. It's hard to argue that investors should be rewarded in good times with those juicy dividends and those luscious buybacks if investors are not also willing to suffer the risk of failure when that company they love so much suddenly needs a big pile of cash.

(SOUNDBITE OF TORD JUNGSTEN AND TRENT LARSEN'S "SWITCHBLADE LIPS")

SMITH: PLANET MONEY has a newsletter. We write about things like venture capital and the Fed. But this week, we just sent out a love letter to the joys and not-so-joys of working from home. Check it out - npr.org/planetmoneynewsletter.

MALONE: You can always email us. We are planetmoney@npr.org. We're on Instagram, Facebook and Twitter @planetmoney. Today's show was produced by Darian Woods and James Sneed. Alex Goldmark is our supervising producer, and Bryant Urstadt edits the show.

SMITH: Special thanks this week to Josh Brown, the reformed broker extraordinaire. If you liked this show, we have an assignment for you this week - tell a friend. I'm Robert Smith.

MALONE: And I'm Kenny Malone. This is NPR. Thanks for listening.

(SOUNDBITE OF TORD JUNGSTEN AND TRENT LARSEN'S "SWITCHBLADE LIPS")

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