More than 125 years ago, the American financial press emerged from the primordial ooze with a simple mission: To help even the playing field between retail investors and professionals. The theory was that by lessening the 'informational asymmetry' that gave insiders an insurmountable edge over retail investors (or at least creating the illusion of a kind of informational equality), more workers would feel comfortable plunking their savings in the public securities markets. The financial press developed in tandem with securities regulators and - of course - the Fed, and has for years been part of the Wall Street firmament.
But unfortunately, nowadays, financial media organizations like CNBC mostly exist to serve their corporate masters (NBCUniversal in CNBC's case) with an unceasingly bullish tilt, pumping markets with a never-ending barrage of 'commentary' from strategist/pitchmen, and offering little in the way of deeply researched reporting, other than the occasional scoop. We think that's why our coverage of a particularly heated interview involving CNBC's Scott "The Judge" Wapner, and Silicon Valley VC Chamath Palihapitiya, elicited such an intense reaction.
In a now-famous clip, Wapner, stunned by Palihapitiya's assertion that the government shouldn't bail out the airlines, demanded an explanation from the VC.
After dismissing the idea that Chapter 11 leads to mass layoffs as "a myth perpetuated by Wall Street," Palihapitiya explained that the underlying business typically continues to run as normal during a corporate bankruptcy. That, after all, is the point of the whole process - otherwise companies would just go straight into liquidation to pay off creditors.
The video of the interview was evidently a hit on CNBC's site, where Wapner said it attracted more than 10 million views. And so Palihapitiya was invited back to "The Halftime Report" on Wednesday afternoon - this time via video link - for a follow-up interview with Wapner to further explore some of his comments from last time.
Essentially, Palihapitiya doubled-down on his criticisms of government bailouts for wealthy private investors while delving into a new topic: The almost criminal stupidity of corporate stock buybacks.
Public companies are supposed to act in the best interest of their shareholders, Palihapitiya explained. However, in recent decades, the distortion of what is 'in the interest' of shareholders has taken on a distinctly short-term bias. This has tended to reinforce some of the worst tendencies of American corporations - namely short-term thinking and practices like share buybacks which obviously do nothing for a company other than enrich its executives and shareholders by driving up the stock price and ideally juicing EPS. Thousands of the companies lobbying the government for bailouts have spent billions on bailouts over the last decade - many public companies even issued debt to finance their stock buybacks with the full blessing of the Ratings Agencies.
Any CFO could probably tick off a litany of reasons why stock buybacks make sense. If you asked, a business school professor might tell condescendingly explain how buybacks return capital to shareholders in a more tax-effective form than dividends (as long as equity prices are going up), while also contributing to the 'efficient' distribution of capital via free and open markets.
However, Palihapitiya points out that this type of reasoning - which depends on the categorical assumption that equity markets are always efficient distributors of capital - has enabled companies to borrow billions of dollars to buy back their shares, a practice that is obviously harmful to a company's long-term odds of survival, yet excellent for goosing short-term profits.
"Executives who encourage buybacks and excessive debt-issuance are not exercising good long-term judgment," Chamath said, adding that "in my opinion, buybacks are evidence of a growing strain of incompetence among CEOs and boards...and times like this is when it gets exposed."
"The capital markets are efficient so when we do buybacks we allocate capital efficiently...my rebuttal is it's clearly not true...at a time when we need our economy to be efficient, we have people out making masks out of socks...and the profiteers buying beachfront condos."
Though many CNBC viewers might be hearing this for the first time, it's not exactly a novel view. Below our several of our many articles on the subject:
- Big Tech's Big Lie: Instead Of Hiring, Tech Companies Spent Tax Savings On Buybacks
- Corporate Share Buybacks Looking Dumber By The Day
- Buybacks Must Continue: AAPL, IBM Unveil Major Debt Issuance To Fund Shareholder-Friendliness
Chamath even cited IBM as an example.
For the morons who defend buybacks, consider this:— Chamath Palihapitiya (@chamath) April 21, 2020
IBM bought back $140 billion of stock over last 20 years
IBM market cap is now $105 billion.
IBM just reported its lowest revenue since 1998.
How is this winning, again?
Now, the virus has exposed these inefficiencies, and in a particularly brutal and painful way - a way that will make it difficult to cover them up again (though one should never underestimate the capacity of the American people's "built-in forgetter"). And if anything, it shows us why those arguing for restrictions or an outright ban on some or all buybacks might have had a point.
“Buybacks are the primary example of a growing strain of incompetence amongst CEOs and amongst boards,” Social Capital CEO Chamath Palihapitiya says. “And it’s where we need to start thinking about how the rules need to change.” https://t.co/dIbizumtqG pic.twitter.com/rCqkiyMxY7— CNBC (@CNBC) April 22, 2020
While he doesn't believe they should be banned outright, stock buybacks should be prohibited in the 'open market', Palihapitiya said. Instead, companies should only be able to buy up shares via a tender offer to shareholders, just like they used to be. Remember: 2019 was the 'year of the buyback', the second-biggest on record after 2018. Trillions was spent, most of it fueled by debt. And now that these companies need savings to ensure their long-term survival, they're turning their pockets inside out and insisting "we don't have it."
Most major American companies should have been extremely well capitalized after a record bull market. But for some inexplicable reason, they weren't.
Buybacks have become such an intense fixation for corporate boards and executives, Palihapitiya said, that only one-third of companies in the S&P 500 even spend money on research and development. "So much of the infrastructure of this country has been left to decay and die in the hands of these profiteers," said Chamath, who has accepted responsibility for being 'one of them' in the past.
"Equally as they are efficient, [free markets] are inefficient in other ways, and in those ways, there are rules that can be changed to make things more reasonable, so that when an exogenous shock happens, we, as a society, are not all left holding the bag," Palihapitiya said later.
While discussing these "profiteers", Wapner brought up the fact that Silicon Valley VCs, aka Palihapitiya's peers, are some of the worst of the bunch, and how many who read VC legend Marc Andreessen's latest screed scoffed at the idea of the man behind Juciero lecturing the world about innovation.
Chamath's relationship with Sir Richard Branson is another reason why his comments about bailouts were of interest to CNBC's producers. Branson is, of course, offering a private island as collateral for a UK government bailout for Virgin Atlantic, which is actually mostly owned by Air France and Delta. Chamath is chairman of one of Branson's other companies, Virgin Galactic.
Asked about whether his friend's airline should get a bailout, Chamath demurred.
But when pressed about Wednesday's blank-check offering, Palihapitiya said he vetted every investor committed to buying large chunks of shares during the roadshow phase.
"I picked and approved every single line item before we closed the deal. When we priced this deal, I picked every single name. And that's what you're supposed to do. You're supposed to partner with folks who you know are trusty and reliable and long dated."
One reason Palihapitiya apparently scheduled his interview for Wednesday was because he was finally bringing his new "blank check" firm public. But we don't really have time to go into all that now.
Moving on, after expanding on his criticism of stock buybacks, Palihapitiya laid into another favorite target: the Fed. He accused the central bank of playing a dangerous game with its rescue programs. Wapner seemed to take umbrage at this, and insisted that Chamath wouldn't have been able to get his deal done if the Fed hadn't LBO'd the entire market.
"That's not true," Chamath replied, before explaining that while the central bank managed to save the equity market (for now, at least), "many of the consequences [of what the Fed did] will only be visible in the medium to long term"
"The stepping in to the repo market was already showing that the industry has a problem with leverage," he added. Ultimately, the system of money printing and debt monetization simply reinforces the buck-passing and refusal to accept the negative consequences of investments and actions that has become endemic in the US.
"Buying billions and billions of dollars in junk debt? I'm not sure what the long term consequences of that are...I don't think it has much of an effect on good companies running there business."
But by far some of Chamath's most scathing criticisms were directed at the government's bailout plans, which he said would leave millions of consumers with too little, and too many companies that don't need the money sticking it in the bank instead of spending it.
"We really need to think about more direct payments to people...70% of GDP is consumer spending...in the US the consumer has a tremendous capacity of leading the way. Instead were giving money to companies to give to consumers," he said.
What's more, the money being handed out to companies will do nothing to fix companies' capital structure: It won't alleviate any debt. To keep the money, companies only need to keep their employees on until September. Chamath believes that once September arrives, and heavily indebted companies are still facing a recessionary environment, a delayed round of additional layoffs will begin.
"I think we'll see large waves of layoffs heading into Christmas 2020," he said. The response to the virus is one example of where developing nations responded much more efficiently and effectively than large nations, Chamath said.
Instead of corporate handouts and a poorly functioning small-business bailout program, the White House could have simply cancelled the $1 trillion in student debt sitting at the DoE, a decision that at the very least would have boosted consumption, which represents 70% of US GDP is consumption based. The government also could have directly handed out money to people via the IRS.
But for whatever reason, those straightforward solutions weren't politically feasible - even in a time of unprecedented crisis - and instead, America's leaders opted for corporate handouts, a policy that's fundamentally flawed. In the end, Chamath estimated that only 5 cents of every federal dollar spent will find its way into the hands of an actual consumer.
"When the money gets spent and the people still get let go...people will wonder...what did we accomplish?" Chamath said. Instead of handing out money to consumers, the Fed and the government decided to bailout corporations once again.
"There's nothing stopping us from saying here's two months, or here's six weeks. Instead, we continue to defend practices that were not justifiable at any point in time where we can see that an entire US economy was completely unprepared...[for] an exogenous shock."
And now millions of poor Americans will be forced to risk their health and their lives to go back to work if they need the money and earn, while the white collar workforce will remain cocooned and well-protected at home.
One easy fix to force companies that received bailout money to be more responsible would have been to require them to spend some of the money in improving their capital structure. Instead, companies will simply exhaust their lifelines and face the same reckoning...only a few months later.
As the interview drew to a close, Wapner lobbed one more softball Palihapitiya's way, asking him whether equity valuations made any sense to him. Palihapitiya replied that he has no idea what's going on with the equity market, which is trading as if it's completely "divorced from reality."
"I don't understand particularly what's going on and I think right now Wall Street is entirely divorced from mainstream. In my opinion, the stock market and the bond market should reflect actual affairs on the ground, and right now...[they don't]."
And looking ahead to the end of the year, Palihapitiya doesn't see too much promising news coming down the pike.
"Here's what I see. I see delinquencies ticking up...I see hundreds of thousands of people getting furloughed...I see us appraoching 25% unemployment...and I see the stock market largely because of the practices of the Fed ignore what is happening."
Watch a clip from the interview below: