Another Corporate Bailout

Canada has just engineered another corporate bailout. Andrew Jackson writes that, this time around, the circumstances are different:

Past crises such as the global financial crisis of 2008 have seen a disturbing tendency to bail out shareholders and senior corporate managers in the name of protecting jobs, with the government and ordinary citizens paying the price for poor economic decisions made by the private sector which resulted in large losses.

It is, of course, true that the current crisis was not created by reckless corporate behaviour, but by a virus. At the same time, it is also true that much of corporate Canada was carrying far too much debt before the crisis, making them vulnerable to a downturn.

Much of the debt was instead used to distribute wealth to shareholders, in the form of higher dividends, share buy backs (which reduce the number of shares, boosting stock prices) and to finance lucrative stock options packages for CEOs and senior management.

The government is quite aware of this, and promises that such practices will be severely limited for companies being granted loans from the new facility. This is commendable, and also reflects lobbying and petitions by Canadians for Tax Fairness and the Broadbent Institute.

The government has also promised, rather vaguely, to require companies receiving loans to change corporate tax arrangements which hurt Canada. This is too little, too late, but still a step forward.

There are, however, problems with the new program:

It would make much more sense to take up an equity position ie a public ownership share. This would mean that a turnaround in corporate fortunes down the road would reward taxpayers for the risk taken via an increase in share prices. Equity also means that the public would, in many cases, have board representation and with it access to information and the ability to shape corporate behaviour.

For instance, the airlines are in trouble. Germany is taking an equity position in Lufthansa.

Another problem is that all sectors are treated equally:

But some sectors are more highly indebted than others, with oil and gas and real estate leading the way, again as shown by the TD Bank report. And not all sectors make an equal contribution to our longer term economic prospects.

In the case of commercial estate, there are very few direct jobs to be saved. If highly indebted corporations go under, the office buildings and malls will still be standing.

In the case of oil and gas, many experts and observers would judge that new loans are highly likely to incur large losses and to accomplish little since resource prices are so depressed, and since much of the world is in transition to carbon free energy. Workers in the sector need massive investments to create new jobs in clean energy much more than a costly corporate bailout.

The old axiom still applies. Investments should be wise investments. It makes no sense to put your money into a dying or dead organization.

Image: The Broadbent Institute