Privatizing Profits And Socializing Losses

Submitted by Market Crumbs,

Investors continued to flee as fast as they could from risk assets yesterday, with markets getting completely annihilated as the fallout from the coronavirus continues to intensify.

The Dow dropped nearly 3,000 points, or nearly 13%, marking its worst day since the “Black Monday” crash in 1987. The Dow’s point and percentage decline was the largest and second-largest, respectively, single day decline of all time.The S&P 500 wiped out all of last year’s gains, falling nearly 12% in its third-worst day ever. The S&P 500 hit its limit down circuit breaker immediately after the open, marking the third time trading was halted over the last week. As for the Nasdaq, the index had its worst day of all time, falling more than 12%.

In a sign of just how nervous investors were yesterday, the CBOE Volatility Index, or VIX—which is a common gauge of fear in the market, closed at a record high of 82.69. The VIX exceeded the financial crisis high of 80.74, which it reached on November 21, 2008.

Despite emergency actions from the U.S. Federal Reserve on Sunday night, which included cutting the Fed Funds rate to near-zero and $750 billion in quantitative easing, or QE, investors still couldn’t get themselves to take on risk.

Amidst the carnage yesterday, a troubling pattern emerged that reminded investors of the depths of the financial crisis. Just as was the case during the financial crisis, headlines of bailouts for affected industries and companies started to make the rounds.

The airline industry, which has seen an unprecedented hit, is seeking $50 billion in emergency aid from the government. Airlines for America, which is an industry group representing some of the largest airlines, recommended airlines immediately receive $25 billion in grants as a result of reduced liquidity and $25 billion in low- or zero-interest loans.

U.S. President Donald Trump signaled they will receive assistance from the government.

“We’re going to back the airlines 100% − it’s not their fault,” President Trump said.

“We’ll be backstopping the airlines and helping them very much.”

A few hours later, Boeing, which has seen its stock give up all of its gains since October 2016 as it deals with the fallout from the troubled 737 MAX, confirmed it is also seeking government aid.

“Short-term access to public and private liquidity will be one of the most important ways for airlines, airports, suppliers and manufacturers to bridge to recovery,” Boeing said.

“We appreciate how the administration and Congress are engaging with all elements of the aviation industry during this difficult time.”

While thousands of jobs would be affected if airlines and Boeing were to fail, the issue is where their money was going when things were going well. For example, the largest U.S. airlines spent 96% of their free cash flow repurchasing shares over the last decade. In Boeing’s case, the company has repurchased more than $100 billion of its shares since 2013.

As the economic fallout from the coronavirus intensifies by the day, it’s likely other heavily-affected industries will also ask for a bailout. While bailouts can prevent mass layoffs and disruptions to the economy, the issue boils down to nothing more than privatizing profits and socializing losses. If this becomes the norm, the debate over executive compensation and restricting share buybacks will only intensify in the years to come