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1. I've seen various progressives suggesting we shld just run the airlines thru bankruptcy rather than bailing them out, so the shareholders who got fat on all those stock buybacks take the first hit. e.g. https://twitter.com/ndrew_lawrence/status/1248398068464025606
IMO, if u care about labor, u shld not want this
IMO, if u care about labor, u shld not want this
2. The airlines, the argument goes, wld just be reorganized, and run as before (once there is again demand), but equity-owning hedge funds wld be losers
IMO, this is only tru-ish. Many blameless union workers wld get hit, but kinda blameworthy (hedge fund) bondholders wld not.
IMO, this is only tru-ish. Many blameless union workers wld get hit, but kinda blameworthy (hedge fund) bondholders wld not.
3. I mean, sure, f**k our hedge fund overlords. But unfortunately, you can’t really do that by running the airlines thru US bankruptcy as-it-actually-exists, in the context of an economic crisis (as opposed to running them thru US bankruptcy as progressives would like it to be).
4. The secured lenders (i.e. the bondholders) are "senior" -- meaning they will get paid first. This means that they will have enormous sway over the terms of the reorganization. They are likely to get significant equity in the "new" company.
5. The shareholders and the bondholders are in some sense different.... but also kinda not.
It makes (efficient) sense in normal times to distinguish equity and debt in bankruptcy, bc of future incentives for risk and reward and so on.
It makes (efficient) sense in normal times to distinguish equity and debt in bankruptcy, bc of future incentives for risk and reward and so on.
6. But, by itself, running the airlines thru bankruptcy would not fix the incentives that turn reserves into share buybacks. It just flips control of the going concern from one set of portfolios to another.
And, if history is any guide, unions will get screwed in the process
And, if history is any guide, unions will get screwed in the process
7. This is why the flight attendants’ (very good) union fought to include the airlines in the CARES Act -- https://www.cnbc.com/2020/03/27/coronavirus-relief-bill-how-airline-workers-won-a-lifeline.html
8. And why that same union is rightly furious—and worried—that Mnuchin and co. are backstabbing them (contrary to congressional intent) by converting grant to loan, making layoffs and bankruptcies more likely https://www.cnbc.com/2020/04/11/flight-attendant-union-furious-with-treasury-bailout-offers.html
9. The best case in bankruptcy would be something like American Airlines, 2012. AA filed for bankruptcy, asking relief from their union deals.
They could not compete, AA mgmt said, if they did not cut jobs freeze pensions change work rules etc. https://oklahoman.com/article/3669072/american-airlines-makes-its-case-against-union-contracts-in-bankruptcy-court
They could not compete, AA mgmt said, if they did not cut jobs freeze pensions change work rules etc. https://oklahoman.com/article/3669072/american-airlines-makes-its-case-against-union-contracts-in-bankruptcy-court
10. But then, the union had leverage. They negotiated new (and fair) contracts with an AA competitor—US Air—to force/midwife a merger. https://qz.com/51905/how-american-airlines-labor-unions-went-behind-the-ceos-back-to-force-a-merger-with-us-airways/
11. My point, tho, is that they didn’t just have to convince US Air’s mgmt. They had to bring AA's bondholders on board bc in bankruptcy the bondholders are (usually) veto players.
12. Who were those bondholders? They were large, powerful financial firms that hold portfolios of equity, bonds, etc… (J.P. Morgan, Litespeed, Pentwater, Nuveen, Oppenheimer, Blackrock, etc..). (i.e. our hedge fund overlords)
13. Those bondholders ultimately got on board with the unions bc they offered them the best deal. They wanted their $$$ & they got it thru a merger.
That scenario is highly unlikely in the current economic crisis, when *all* the airlines are flailing, w/ the gov't we have.
That scenario is highly unlikely in the current economic crisis, when *all* the airlines are flailing, w/ the gov't we have.
14. The bondholders of today would just become the new shareholders. And they are the same people, basically. They will elect the same sorts of boards to appoint the same sorts of managers to again plunder value across stock buybacks—with even less union resistance
15. NB, also, airline bondholders have been happy the airlines didn’t keep big cash reserves (bc of buybacks), bc it meant they got higher rates.
D’you really think they didn’t assume they’d get taken care of in a crisis, that it wasn’t priced in? https://www.forbes.com/sites/investor/2019/10/09/why-i-love-airline-bonds/#53c6f36c26fa
D’you really think they didn’t assume they’d get taken care of in a crisis, that it wasn’t priced in? https://www.forbes.com/sites/investor/2019/10/09/why-i-love-airline-bonds/#53c6f36c26fa
15. Again, the airlines are a profitable going concern, in normal times. Their troubles now might be assuaged if they had reserves, but tbh they’d still need relief from their creditors bc no revenues for X months…
Some of those creditors, eff ‘em.
Some of those creditors, eff ‘em.
16. Their workers—and the rights they’ve won thru collective bargaining—*should* come out on other side of this strengthened, not weakened.
I’m pretty sure bankruptcies (as-they-would-actually-happen) would weaken them. https://www.usatoday.com/story/travel/flights/2020/04/08/coronavirus-american-airlines-southwest-workers-sickened-virus/2969220001/
I’m pretty sure bankruptcies (as-they-would-actually-happen) would weaken them. https://www.usatoday.com/story/travel/flights/2020/04/08/coronavirus-american-airlines-southwest-workers-sickened-virus/2969220001/
17. So, the progressive position: keep em out of bankruptcy and avert layoffs w/ payroll support.
There's no clear way (in bankruptcy) to claw back those f***k**g buybacks.
You shld, tho, use the leverage of the bailout to (try to) prevent new buybacks and similar plunder.
There's no clear way (in bankruptcy) to claw back those f***k**g buybacks.
You shld, tho, use the leverage of the bailout to (try to) prevent new buybacks and similar plunder.
h/t @ummodern
