The Perils of Rewarding Failure

These days, a common thing I am hearing is that a “company is too important to go under” or “a systemic risk, it can’t go under.” I don’t like these arguments at all. They are based in fear. No single company has ever been the backbone of America, in-fact it’s quite the opposite. Maybe, when companies fail, or on the verge of failure, pandemic or not, the market is telling us something very simple: this company is worth less today, than yesterday, because things have changed and are going to change.

I am rooting for a vaccine. I am consciously moving away from my old ways of living and now investing in things that we need for the future. I think about the stimulus bill and I wonder why hospitals, biotech companies (this is who will find a vaccine!), and protective equipment companies did not get much help at all. I wonder why, instead, we bailed out companies and industries that potentially will never be the same again and have very little use at the moment.

A sad thing, brace for it, I have been thinking about is that without a vaccine, this pandemic could last for 12 months, maybe longer. I find it hard to see why it would just suddenly disappear overnight. This isn’t a reason to be scared, it’s a reason to prepare. I think about how airlines and airports have suddenly gone empty because people want to contain the spread and not get sick themselves. This is incredibly smart behavior and I am on my feet applauding everyone doing this. It also demonstrates the point I’m trying to make: the sudden consumer change in preferences is smart, warranted, and it’s possible everything we did in the past no longer makes sense in the future. What were good businesses back then, more no longer be.

We are potentially doing ourselves a disservice to future progress by keeping old ways of doing things alive with bailouts and not rewarding the things that are working or needed now. There are very few countries that have free market principles and freedoms like the United States. There is no coincidence that the United States is where it is today. The smartest, the ones who adapt and are needed, move up. The others, the ones who did the opposite with reckless behavior or bad decisions, move down. That’s how progress is made. When you keep the wrong people in power, not only are we setting ourselves up for similar behavior in the future, we are also, more importantly, holding back those who are needed at this moment. We are literally stopping survival of the fittest in its tracks. I don’t think she likes being stopped in her tracks.

While looking through the latest bailout package, it appears that we once again are failing to reward the good behavior and instead are rewarding the bad. Companies on the verge of failure, because of buybacks and no cash, should get wiped out. Equity gone. The shareholder class needs no more support, they got lucky in 2008. We also have the best bankruptcy and restructuring courts in the world. Companies near failure should use those courts, because not only were they managed recklessly with absurd buybacks, no cash, leverage and large CEO salaries, but also, they may not have a place in the future like they once did. Sending money to companies so we can keep a few employees walking empty hallways is unproductive and lost resources when they’re needed somewhere else.

What’s more important is that the $500 billion that went to poorly run companies should have been diverted to biotech companies, hospitals, and protective equipment companies to prepare for the future and save as many lives as possible or find a cure right now. I heard that a hospital in New York is so unprepared they called a frozen meat truck in to help take bodies away. Hospitals, for example, could hire tons of people with that stimulus money and we would be investing in something that’s needed now, not a black hole money pit run by awful risk mangers. I am a huge supporter of the added benefits to unemployment insurance, but we could have done more. Give people 12 months of pay, even if the unemployment rate were to go to 30%, at least we would know 30% of people are still getting paychecks for a year until they find and invest in future progress.

On Twitter, many people ask me about the bailout package or they think I am being too hard on certain CEOs and irresponsible companies. I find that amusing. I am going to be rather harsh in this next sentence, but it needs to be said to those corporate apologists: I highly doubt these companies and CEOs care about you and your portfolio before they do about their own. Even your elected officials were selling stocks in February using inside information about the virus. In times like this, your own risk management deserves all of your attention, I don’t think you want to give someone who pays themselves 500x their average worker the benefit of the doubt.

Ultimately, we should be thinking about new emerging technologies and consumer habits that will come from this societal change and we need to be investing in our front line of defense more than ever.

That is all for now. Thanks for reading.

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