When I was studying economics at school and university, I fell in love with the concept of capitalism. It just seemed to make sense to me. If you had a good idea and worked hard, you could get ahead and reap the rewards. And if you had a bad idea, eventually, it would wither and die. And somebody would come and poke through the bones of the carcass and possibly discover something worth saving. And the cycle would continue. Good flourished, bad perished. And rightly so.
But the purity of capitalism has been prostituted. We have set up a system that rewards people who embrace high-risk strategies. If the strategy works, they walk away with tens, or even hundreds, of millions of dollars in stock-based compensation. And if the strategy fails, then they get shown the door, and as part of their exit package, they walk away with tens, or even hundreds, of millions of dollars in severance pay. Heads I win, tails you lose!
Here are two recent examples, and I must thank Ben Hunt from www.epsilontheory.com (I read everything that he writes).
Everybody is aware of the shock that COVID-19 has dealt on the global economies and the massive pain that is underway and will continue to worsen. In America, there are four major airlines; Southwest, Delta, American and United and there is no doubt that these airlines are hurting right now. There is even talk of the USA government having to bail them out. And most people would have a superficial level of sympathy with this; after all, there are hundreds of thousands of people employed by these four airlines.
BUT and this is a BIG BUT! Since 2014 these four companies have increased their debt by 78% and have used the borrowed money to purchase $42.4 billion of stock buybacks. As Ben points out “these buybacks,…. were the engine of an intentional strategy of heightened financial risk-taking, such that buybacks were greater than free-cash-flow for the group.”
And this is where it starts to get perverse. The CEO’s of these four companies. Four men. That’s right, four men received $430 million in stock-based compensation over the same period. This is separate from their annual salary, bonuses etc.
For the full article click here: https://www.epsilontheory.com/do-the-right-thing/?utm_campaign=website&utm_source=ET%20Newsletter&utm_medium=Email
And what will happen to them if they get sacked for pursuing such heightened financial risk-taking? Probably the same thing that happened to the CEO of Boeing when he got sacked last December. Everybody is aware of the problems with the MAX aircraft and the two plane crashes that killed hundreds of people. He walked away with $80.7 million in long term incentive awards (WTF!!), pension and deferred compensation benefits and the options and stock that Boeing gave him. https://www.epsilontheory.com/shot-and-chaser/
WHAT THE F^&*!!! You screw up and get nearly $81M.
Heads I win, tails you lose! And this is at a time when 40% of Americans cannot scrape together $400 to pay for an unforeseen expense.
Capitalism is dead!