Russia Today (sometimes referred to as Kremlin TV) does not have a widespread reputation as a fair and balanced news source. But occasionally if they say it’s raining, you might want to check outside to see if you need an umbrella.
So there is some interest in its reporting of ‘Black Swan’ author Nicholas Taleb’s suggestion that the UK government should let Richard Branson’s Virgin Atlantic airline go bust, rather than bail it out.
“Planes will fly w/new owners!” as he succinctly put it.
Alert readers will recall that Point of Order raised this very point last week, less directly and with more technical verbiage naturally.
RT also reported (with ill-concealed glee) some nastier bits – quoting Taleb on Branson as “a tax refugee” who “walks around virtue-faking with [the] TED [and] Davos crowd”.
And made the unevidenced allegation that the airline industry had been hugely influential in preventing governments from halting flights from China in the early stages of the epidemic.
But back to the meat of it – should governments ‘bail out’ businesses and, if so, how. The same question which arises from the global financial crisis back to the demise of Mosgiel Woollen Mills in 1980 (and before then to be clear).
The orthodox view is simple and principled.
When a complex entity is short of cash because of a crisis, but viable, you can provide loans at a penalty interest rate, that will be paid back. In general terms, this is what happened for quite a few of the big US banks (leave aside the murkier case of the dodgy mortgage lenders). It’s at the heart of central banking practice and done well, provides support at a price, rather than a moral-hazard inducing capital bailout.
Of course the owners get the upside on recovery, and, if the liquidity is cheaper than the market, a bonus. And historically those with the best political connections or visibility tend to get the most generous consideration.
If the business is not currently viable, there is a procedure to resolve the competing claims and distribute the losses. It’s called bankruptcy. If possible, a working business is plucked out of the wreckage by new owners.
This is what Taleb refers to. This normally means writing down the value of the shareholders to near-zero, concessions by workers and bankers, and restructuring the business to new patterns of demand. Note that if Mr Branson keeps his airline, the last two are likely to happen anyway.
And it’s more or less what happened with General Motors during the global financial crisis, except that in that case the government ended up chipping in an extra $11 billion, which helped reduce the pain for the auto workers and the company’s creditors.
To extend the analogy, the capital bailout of an airline by a government without a formal restructuring procedure will probably mean an even bigger increase in government debt (for us all to pay back through later ‘austerity’) in order to reduce shareholders’ capital losses and minimise the concessions which workers and creditors need to make.
This is somewhat different from the rest of us chipping in to help workers whose income has just fallen off a cliff.
But at the time it’s rarely so simple or principled. The politicians who make these decisions and the people who benefit from them are often keen to obscure the difference between temporary support eventually repaid and capital transfers. Even now when the numbers are added up, who would have thought that Morgan Stanley got the former and GM the latter?
So Mr Branson’s airline – and indeed airlines more generally – are starting to look like a good test cast for who might get favourable consideration at the expense of the rest.