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einsteinboricua
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Stress test on all companies

Thu Mar 19, 2020 9:26 pm

One of the consequences of the 2008 financial crisis was requiring banks to have enough liquidity to handle a crisis (aka passing a stress test).

Should all companies be required to pass their own stress tests as well?

Using Boeing and airlines as an example, much of the freed up capital went towards stock buybacks and bonuses. While a company is free to do with its capital as it pleases, the reality is that those companies probably could be using that capital to mitigate the impacts this current crisis is causing. Boeing and the airlines are expecting the government to throw them a lifeline and, while I applaud lawmakers who insist on barring them from doing stock buybacks, it begs the question of whether the practice should be banned and, if not, whether they should be required to have a certain amount (percentage of revenue?) of liquidity to be used as a rainy day fund.
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AirWorthy99
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Re: Stress test on all companies

Thu Mar 19, 2020 10:03 pm

Stress test on a pandemic not experienced since 1918?

What's next a stress test on a meteor crashing into the earth? This is a freak occurrence, not seen in more than a 100 years. That's why everyone wasn't prepared for this.

I am against bailing out any corporation, what ever money they give should be given as a loan, same thing with small businesses, loans so they could cover expenses whilst this Chinese virus crisis ends.
“In my experience eloquent men are right every bit as often as imbeciles.” Tyrion Lannister
 
LCDFlight
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Re: Stress test on all companies

Thu Mar 19, 2020 10:03 pm

A bailout is really a death, an admission the old company and old leadership ideas have failed. Of course all shareholders should be zeroed out. Clawbacks from previous leaders should be looked at.

The bankruptcy court should appoint new leaders.

Any solid company has a solid warchest to endure market cycles. Berkshire Hathaway will be just fine.

And excuse me, COVID is not among the top epidemics in recorded history yet. No one denied moderate epidemics like this can happen at any time. So far, this is pretty serious but not a huge death count at all. Italy has an ordinary steady death rate of 1% per year, or 50,000 persons per month. COVID has raised the monthly death count in Italy for Feb and March appreciably, by a few thousand. In other countries the difference is so slight it would not be measured or noticed without the amazing technology and communications we currently have.
 
GalaxyFlyer
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Re: Stress test on all companies

Thu Mar 19, 2020 10:16 pm

You can’t have a “war chest” for a once in a 100 year event. It’s not a credible idea for the economy to set aside, in cash, that much capital, earning 1% p.a. The recent sell-off even included gold—it was a flight to cash.
Last edited by GalaxyFlyer on Thu Mar 19, 2020 10:19 pm, edited 1 time in total.
 
AirWorthy99
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Re: Stress test on all companies

Thu Mar 19, 2020 10:16 pm

LCDFlight wrote:

And excuse me, COVID is not among the top epidemics in recorded history yet. No one denied moderate epidemics like this can happen at any time. So far, this is pretty serious but not a huge death count at all. Italy has an ordinary steady death rate of 1% per year, or 50,000 persons per month. COVID has raised the monthly death count in Italy for Feb and March appreciably, by a few thousand. In other countries the difference is so slight it would not be measured or noticed without the amazing technology and communications we currently have.


Right, but when was the last epidemic that halted travel across the entire 7 continents. Or when was the last epidemic that almost all nations of the world closed their borders. This is unprecedented, had the airlines been around in 1918, I would have said they should have known to expect this.

They should have cash reserves and liquidity to weather any freak occurrence such as 9/11 or natural catastrophes but something such as this? We don't even know when this is going to end.
“In my experience eloquent men are right every bit as often as imbeciles.” Tyrion Lannister
 
LCDFlight
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Re: Stress test on all companies

Thu Mar 19, 2020 10:46 pm

AirWorthy99 wrote:
LCDFlight wrote:

And excuse me, COVID is not among the top epidemics in recorded history yet. No one denied moderate epidemics like this can happen at any time. So far, this is pretty serious but not a huge death count at all. Italy has an ordinary steady death rate of 1% per year, or 50,000 persons per month. COVID has raised the monthly death count in Italy for Feb and March appreciably, by a few thousand. In other countries the difference is so slight it would not be measured or noticed without the amazing technology and communications we currently have.


Right, but when was the last epidemic that halted travel across the entire 7 continents. Or when was the last epidemic that almost all nations of the world closed their borders. This is unprecedented, had the airlines been around in 1918, I would have said they should have known to expect this.

They should have cash reserves and liquidity to weather any freak occurrence such as 9/11 or natural catastrophes but something such as this? We don't even know when this is going to end.


Agree is an unprecedented political event. It is not an unprecedented health event at all.

So I am taking two contradictory positions. Companies should fund their own business, that isn't the government's job. But the government should not mandate that everybody shelter in place, unless it is a truly existential threat pandemic. And this is not. Business is not really optional, it is an essential activity in the modern world, if you want electricity and internet service, and shoes. Come to think of it, food is created by business also. Business will do a good job on these things unless government forces them to stop. And I am against that.
 
PPVRA
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Re: Stress test on all companies

Thu Mar 19, 2020 10:55 pm

If you owe a bank $1,000 and you can’t pay it back, you’re screwed.

If you owe a bank $10 million and you can’t pay it back, the bank is screwed.



The airlines can work it out with their lessors, banks, who don’t want to go bankrupt, either. And with their employees, which they’re already doing, because they don’t want to get fired or want to make sure they have a place to come back to at a later point when the sky is bluer.

The banks and lessors need to share in with the pain, the same way the employees of these airlines are already doing.

All these airlines had good liquidity, FYI. The problem for them is they don’t have any good way to save cash because everything they do costs a lot of cash, regardless of how much flying they’re doing.
"If goods do not cross borders, soldiers will" - Frederic Bastiat
 
DLFREEBIRD
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Re: Stress test on all companies

Fri Mar 20, 2020 3:47 am

Delta had a cash load of money, set aside before the 2008 financial crisis, and they still had to file
for bankruptcy. They were in a lot better condition than a lot of airlines.

when you run a worldwide operation and have so many expenses, you rely on bookings revenue and you don't get it until after people fly because of the way banks release money. When people cancel their plans the airlines are now in a moneyless vacuum. So they do, try to have money set aside for just this reason.
however, in this situation, it was unpredictable. with airlines any type of stress test, they would fail. simply because of the way banks release money.
 
blueflyer
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Re: Stress test on all companies

Fri Mar 20, 2020 4:28 am

einsteinboricua wrote:
Should all companies be required to pass their own stress tests as well?

Absolutely not. For one thing, you are killing all small businesses, which have over time proven to be a bigger source of innovation and a higher driver of economic growth and employment than large companies. For another, all the reasons mentioned above over this being a freak event that most companies could not financially prepare for even if given advance notice.

Where I do agree with you is that share buybacks need to be regulated or eliminated altogether. Ban them outright (they used to be), or make it so that the value of stock options cannot exceed 100% of one's annual wage (even if that means losing options), or make it illegal to tie performance bonuses to stock price, or any other restriction that would remove executives' incentive to manipulate the stock in order to fatten their wallet.

I'd go further and propose that if a company has used more than half of its free cash on share buybacks over the last few years, shareholders' equity needs to be wiped out before the company itself (not its employees) can quality for government assistance related to the current crisis. I think we'd need to rewrite the bankruptcy code to make sure that vendors, employees, and pension funds are insulated though.
Corona is God’s punishment for the amoral, principles-free, holier-than-thou Evangelicals. The rest of us are just collateral damage
 
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einsteinboricua
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Re: Stress test on all companies

Fri Mar 20, 2020 4:58 am

AirWorthy99 wrote:
Stress test on a pandemic not experienced since 1918?

GalaxyFlyer wrote:
You can’t have a “war chest” for a once in a 100 year event.

AirWorthy99 wrote:
They should have cash reserves and liquidity to weather any freak occurrence such as 9/11 or natural catastrophes but something such as this? We don't even know when this is going to end.

I'd like to know where in my opening post am I alluding to a pandemic or a once-in-a-100-year event. I'm not even talking about a stock sell-off which happens every so often.

I am talking about the overall disruption to operations. This isn't just a company going under; this is thousands if not millions of people potentially losing their jobs (or weeks worth of wages) which ripples throughout the country.

Again, I just used Boeing and the airlines as an example to showcase how they're intertwined. A slump in air travel means airlines have no need for new jets which means manufacturers like Boeing need to reduce output (or suspend it) which means potential layoffs. In Boeing's case, it has already gone through its lines of credit and is warning that without the lifeline from the government, it may be severely impacted.

Consider a grocery store. If it closes (voluntarily or government lockdown), it has produce that will likely spoil. The hourly employees are left without pay, even though they're being told to not come in. A cash reserve at least ensures that the produce can be replaced at the earliest convenience, and employees still get some form of pay.

I don't expect a cash reserve to last indefinitely, but if Joe Average is urged to save enough money to cover X months worth of expenses just in case, why isn't a company required to do something similar? Not everything should be about shareholder value. All the money spent propping the stock prices up and now most of them are but a fraction of what they were.

DLFREEBIRD wrote:
Delta had a cash load of money, set aside before the 2008 financial crisis, and they still had to file
for bankruptcy. They were in a lot better condition than a lot of airlines.
Apples to oranges. Delta and Northwest filed bankruptcy in 2005 due to high oil prices and labor costs BEFORE the financial crisis and emerged from it in 2007. By then the companies were in a much better position to weather the crisis (to the point that they were able to merge operations without major issues). If both airlines had not filed, it's likely we may not have seen either of them today or they would have slimmed down a lot more.
"You haven't seen a tree until you've seen its shadow from the sky."
 
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seb146
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Re: Stress test on all companies

Fri Mar 20, 2020 5:25 am

AirWorthy99 wrote:
LCDFlight wrote:

And excuse me, COVID is not among the top epidemics in recorded history yet. No one denied moderate epidemics like this can happen at any time. So far, this is pretty serious but not a huge death count at all. Italy has an ordinary steady death rate of 1% per year, or 50,000 persons per month. COVID has raised the monthly death count in Italy for Feb and March appreciably, by a few thousand. In other countries the difference is so slight it would not be measured or noticed without the amazing technology and communications we currently have.


Right, but when was the last epidemic that halted travel across the entire 7 continents. Or when was the last epidemic that almost all nations of the world closed their borders. This is unprecedented, had the airlines been around in 1918, I would have said they should have known to expect this.

They should have cash reserves and liquidity to weather any freak occurrence such as 9/11 or natural catastrophes but something such as this? We don't even know when this is going to end.


Keep in mind that "corporations are people, my friend" as Mitt Romney declared.

So, why are individuals expected to keep three months' reserve and stockpile food and water but corporations can just get whatever they want from the government whenever they want? What makes the corporate people so much more special than us down here propping up the corporate people? Why not make a specific set of rules for the corporations? That they MUST have at least one year of liquidity if we workers must have at least three months of liquidity?

Why should corporations be bailed out when they get a boo-boo but the rest of us are welfare queens and not worthy of anything when a pandemic hits?

Also keep in mind that two REPUBLICAN Senators sold off stock BEFORE the Market crash.

That we know of so far.

https://www.nbcnews.com/politics/congre ... f-n1164401
https://www.thedailybeast.com/sen-kelly ... s-briefing

But, yeah, blame us workers who prop up the corporations.....
You bet I'm pumped!!! I just had a green tea!!!
 
KFTG
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Re: Stress test on all companies

Fri Mar 20, 2020 2:03 pm

LCDFlight wrote:
A bailout is really a death, an admission the old company and old leadership ideas have failed.

If a gov't tells a company that it cannot due business for public health or nat'l security reasons, a bailout is warranted.
The situation the airlines are in is just that. "You can no longer conduct business between X and Y."
We either bail them out, or tens of millions of jobs will be lost.
 
LCDFlight
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Re: Stress test on all companies

Fri Mar 20, 2020 2:29 pm

KFTG wrote:
LCDFlight wrote:
A bailout is really a death, an admission the old company and old leadership ideas have failed.

If a gov't tells a company that it cannot due business for public health or nat'l security reasons, a bailout is warranted.
The situation the airlines are in is just that. "You can no longer conduct business between X and Y."
We either bail them out, or tens of millions of jobs will be lost.


These were wealthy companies. They also could have negotiated labor deals that allow them to lay people off.

I think small business and workers should get a smooth bridge to when this is over, but wealthy people and business should be last in line. DL just spent 11 billion on buybacks. I do think that maybe the government should help wealthy companies, after all other companies and workers are taken care of. So, not this year.

Wealthy companies and wealthy people are important, just not as important as other things.
 
AirWorthy99
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Re: Stress test on all companies

Fri Mar 20, 2020 2:39 pm

Well people arent complaining this time about the bail outs because they aint banks, but also because people are to get checks for 1200, if its a family of 4 they will get $3,400.

I wont likely fall into getting that amount because after 75k people will receive less and me and my wife make a bit way more than that so lets see.

But for now people seem calm, no riots, looting so thus far the government is doing well at keeping the nation calm in the face of uncertainty.
“In my experience eloquent men are right every bit as often as imbeciles.” Tyrion Lannister
 
KFTG
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Re: Stress test on all companies

Fri Mar 20, 2020 2:54 pm

LCDFlight wrote:
KFTG wrote:
LCDFlight wrote:
A bailout is really a death, an admission the old company and old leadership ideas have failed.

If a gov't tells a company that it cannot due business for public health or nat'l security reasons, a bailout is warranted.
The situation the airlines are in is just that. "You can no longer conduct business between X and Y."
We either bail them out, or tens of millions of jobs will be lost.


These were wealthy companies. They also could have negotiated labor deals that allow them to lay people off.

I think small business and workers should get a smooth bridge to when this is over, but wealthy people and business should be last in line. DL just spent 11 billion on buybacks. I do think that maybe the government should help wealthy companies, after all other companies and workers are taken care of. So, not this year.

Wealthy companies and wealthy people are important, just not as important as other things.

The buybacks are a major problem, I agree. The rank and file employees of these companies had no say in the matter.
 
PPVRA
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Re: Stress test on all companies

Fri Mar 20, 2020 4:27 pm

KFTG wrote:
LCDFlight wrote:
KFTG wrote:
If a gov't tells a company that it cannot due business for public health or nat'l security reasons, a bailout is warranted.
The situation the airlines are in is just that. "You can no longer conduct business between X and Y."
We either bail them out, or tens of millions of jobs will be lost.


These were wealthy companies. They also could have negotiated labor deals that allow them to lay people off.

I think small business and workers should get a smooth bridge to when this is over, but wealthy people and business should be last in line. DL just spent 11 billion on buybacks. I do think that maybe the government should help wealthy companies, after all other companies and workers are taken care of. So, not this year.

Wealthy companies and wealthy people are important, just not as important as other things.

The buybacks are a major problem, I agree. The rank and file employees of these companies had no say in the matter.


That money doesn’t belong to the rank and file. They have no right to dictate on how it is used.

Good chance that money would have simply be returned to investors as dividends were it not for dividend taxes. Which is a perfectly normal thing to do.

And please, don’t tell me companies should hoard all the profits they generate and only invest on themselves or turn it into an emergency fund. That’s insanity, ignorant and horrible for the economy.
Last edited by PPVRA on Fri Mar 20, 2020 4:34 pm, edited 1 time in total.
"If goods do not cross borders, soldiers will" - Frederic Bastiat
 
LCDFlight
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Re: Stress test on all companies

Fri Mar 20, 2020 4:33 pm

PPVRA wrote:
KFTG wrote:
LCDFlight wrote:

These were wealthy companies. They also could have negotiated labor deals that allow them to lay people off.

I think small business and workers should get a smooth bridge to when this is over, but wealthy people and business should be last in line. DL just spent 11 billion on buybacks. I do think that maybe the government should help wealthy companies, after all other companies and workers are taken care of. So, not this year.

Wealthy companies and wealthy people are important, just not as important as other things.

The buybacks are a major problem, I agree. The rank and file employees of these companies had no say in the matter.


That money doesn’t belong to the rank and file. It’s non of their business what is done with it.

Good chance that money would have simply be returned to investors as dividends were it not for dividend taxes. Which is a perfectly normal thing to do.

And please, don’t tell me companies should hoard all the profits they generate and only invest on themselves or turn it into an emergency fund. That’s insanity, ignorant and horrible for the economy.


It's insane and ignorant for a large company to have an emergency fund / diversified capital structure? Really?

I'll tell you why airlines don't: If there is a pot with billions of dollars in it, inevitably the pilots will think of a reason to try to take it by force. It is that simple. Company needs to keep that money out of the picture. And as a result, they are financially brittle.
Last edited by LCDFlight on Fri Mar 20, 2020 4:37 pm, edited 1 time in total.
 
PPVRA
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Re: Stress test on all companies

Fri Mar 20, 2020 4:36 pm

LCDFlight wrote:
PPVRA wrote:
KFTG wrote:
The buybacks are a major problem, I agree. The rank and file employees of these companies had no say in the matter.


That money doesn’t belong to the rank and file. It’s non of their business what is done with it.

Good chance that money would have simply be returned to investors as dividends were it not for dividend taxes. Which is a perfectly normal thing to do.

And please, don’t tell me companies should hoard all the profits they generate and only invest on themselves or turn it into an emergency fund. That’s insanity, ignorant and horrible for the economy.


It's insane and ignorant for a large company to have an emergency fund / diversified capital structure? Really?

I'll tell you why airlines don't: If there is a pot with billions of dollars in it, inevitably the pilots will take strong actions to get it for themselves. It is that simple. They need to get that money out of there. And as a result, they are financially brittle.


Huh? I never said it’s “ It's insane and ignorant for a large company to have an emergency fund / diversified capital structure? Really?”

Fact of the matter is, they already do have emergency funds and diversified capital structures.
Last edited by PPVRA on Fri Mar 20, 2020 4:40 pm, edited 1 time in total.
"If goods do not cross borders, soldiers will" - Frederic Bastiat
 
PPVRA
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Re: Stress test on all companies

Fri Mar 20, 2020 4:40 pm

LCDFlight wrote:
They also could have negotiated labor deals that allow them to lay people off.

I think small business and workers should get a smooth bridge to when this .



1. You’re ignorant of what’s going on with pilots and their unions. You should spend some time researching. They’re sharing in the pain, as are every other airline employees.

2. Nobody is going to nor “should” have a smooth bridge build out by the government for them. EVERYBODY will have to share in the pain.
"If goods do not cross borders, soldiers will" - Frederic Bastiat
 
LCDFlight
Posts: 190
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Re: Stress test on all companies

Fri Mar 20, 2020 7:49 pm

PPVRA wrote:
LCDFlight wrote:
They also could have negotiated labor deals that allow them to lay people off.

I think small business and workers should get a smooth bridge to when this .



1. You’re ignorant of what’s going on with pilots and their unions. You should spend some time researching. They’re sharing in the pain, as are every other airline employees.

2. Nobody is going to nor “should” have a smooth bridge build out by the government for them. EVERYBODY will have to share in the pain.


I've been there done that airline chapter 11 filings, more than 1. I do not blame pilots for looking out for their own. I only raise an eyebrow when we talk about bailouts to them. The industry has harsh cycles because they don't have enough cash on hand or contract flexibility. It's the way it is. It's real people, I get that. I do care.
 
Okie
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Re: Stress test on all companies

Fri Mar 20, 2020 8:57 pm

einsteinboricua wrote:
Consider a grocery store. If it closes (voluntarily or government lockdown), it has produce that will likely spoil. The hourly employees are left without pay, even though they're being told to not come in. A cash reserve at least ensures that the produce can be replaced at the earliest convenience, and employees still get some form of pay.


It already exists, like who besides your employer did you think pays the state for unemployment insurance for their employee's?
You appear to miss the concept of an employers requirements, rules and regulations from the get go.

I am not sure that the idea of cradle to grave utopia was such a wonderful concept. Slavery was an evil time.


Okie
 
AirWorthy99
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Re: Stress test on all companies

Fri Mar 20, 2020 9:21 pm

Basically the government is 'compensating' private business for shutting down private business.

In reality this isn't much of a 'bailout' this is all happening because the government is intervening in closing businesses, be that a small business or a corporation. I am totally against government bailing out anything, but in reality this is the as much the government can do as to compensate for telling everyone to stop working.

Anyone getting fired because the government ordered to close up shop, I think should be compensated for not working and earning any income.
“In my experience eloquent men are right every bit as often as imbeciles.” Tyrion Lannister
 
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Aesma
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Re: Stress test on all companies

Mon Mar 23, 2020 11:07 am

Banks have stress tests because they're systemic. If other companies are systemic, then why not ?

I see a GOP Senator want to put tariffs on oil to protect US shale oil companies that can't survive the current stress test of Russia and Saudi Arabia just ramping up production, are these companies systemic ? Of course not.

Stock buybacks are overt stock manipulation and should be banned. Let companies buy back their shares only in moments like now when the value is down. That's also when some investors might be asking for a government to bail them out so win win.
New Technology is the name we give to stuff that doesn't work yet. Douglas Adams
 
GalaxyFlyer
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Re: Stress test on all companies

Mon Mar 23, 2020 3:44 pm

You need to remember why stock “buybacks” occur. First, the 1993 tax bill reacted to massively large executive pay by limiting the corporate tax deduction for pay to $1 million per executive. It applied to about the top 5 execs. Then, it encouraged “aligning” executive pay with performance thru stock options. The road to stock buybacks was paved with good intentions.

Second, if not bought back with cash, the cash could be distributed to stockholders as dividends, but then that money maybe taxed a second time as qualified dividends at capital gains rates. Taxed first as corporate income, then as capital gains, the marginal tax to the holder gets into the 50% range.

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