Senate Majority Leader Mitch McConnell unveiled the Senate Republican stimulus plan last week. So far, the projected total cost to taxpayers is $1.3 trillion. Many of the details are still being negotiated, but one vital provision—shockingly—seems to be approved by Democrats.
The provision is the authorization allowing the federal government to take equity stakes in the companies that will receive federal aid. Currently, it stands that $208 billion is allocated in a way that allows Congress to provide loan guarantees to public companies through $50 billion to air carriers, $8 billion to cargo carriers, and $150 for “other large businesses.” The exact details on it are not yet public knowledge, but the following provisions should be added to the package. It will tremendously help off-set the colossal amount of debt the United States is about to take on.
Congress should increase the amount to which it will allow to be provided to public corporations in exchange for stock in them. It is paramount to do so because it will help offset the debt burden taxpayers will take on because of our need to mitigate the economic damage caused by the Wuhan virus.
Through these loans, the federal government should take equity from these companies, not as collateral on the loans in case of default, but as a cash-for-equity exchange. Moreover, there should be provisions within these loans that the companies must compensate the government for losses in share price for year-over-year negative performance. Obviously, this provision should not start until America is formally out of the impending recession and recovery is well on its way. This provision would ensure that the American taxpayer is compensated whether the stock price goes down or up.
Furthermore, the provision should mandate the federal government sell the equity stakes it gains in these corporations at certain percentage gain from the day the positions are taken. The percentage gain should be a sliding scale, such as 300-500%. The sliding scale should be based on the corporations past performance and where it has fallen to. Both the principal investment amount and profit from the stock sales should be mandated to paying off the government’s debt.
There should be a sunset provision which provides guidance regarding when the equity positions must be sold, and the positions should not be all sold off at once. The equity stakes should be first offered to the corporation in forms of a buyback, so it can guard against a massive unloading of its shares into the market, which would drive down the share price. If the corporation cannot or does not want to purchase the whole amount of the portion of the stock to be sold, the federal government should be authorized to sell them on the open market.
By mandating the stock be sold off in portions over time, it would protect the price from dropping too much and causing an unwarranted drop in the share price. Shareholders should not be harmed down the line through stock bought by the government with, essentially, the shareholders own income.
Most importantly, the stock offered to the federal government should not carry any voting rights. This, and the other provisions mentioned, will protect private sector corporations from undue arbitrary government influence over operations. The government should not be able to wield power over corporations because it used taxpayer, i.e. the corporation’s and its employee’s money, to invest in it. That would be, essentially, communist in-effect.
The cash given to these corporations should have restraints, such as it must be used for payroll and operating expenses. If it is not, the federal government keeps the equity and the cash transforms into a loan the corporation must pay back, with interest. Corporations must make reports for the Executive branch and Congress detailing how the funds were spent—with harsh civil and criminal penalties for fraud and other crimes. This will create a proper framework of incentives and constraints.
These provisions should be a welcome idea from all sides because of the massive amount of government debt our nation has and the unprecedented amount it is has spent and is about to spend in stimulus packages… with potentially more stimulus packages on the way.
For instance, American Airlines’ stock ($AAL), on February 12 of this year, closed at $30.47, now $10.46. Delta Air Lines ($DAL), $59.47, now $21.65. Boeing ($BA), $347.45, now $94.51. On January 17, Norwegian Cruise Line was trading at $59.65, now $8.74. The list goes on and on for the corporations that will potentially be receiving government aid. The stock performances of all of them tell similar stories.
If these recommendations are implemented, it will potentially offset the cost of the stimulus packages implemented and being contemplated. It could even help tackle more debt than that.
For example, if Congress allocated a total of $500 billion for a cash-for-equity exchange program and the average sale of the stocks yield a 400% return, then Congress would be able to pay down $2 trillion of debt through this.
It should be an easy message to sell to the American people. Congress is providing these corporations with cash, which will help offset unemployment by preventing large amounts of people from losing their jobs and corporations from going under. It will position our economy to be ready for when this pandemic subsides. It will provide a proper framework of incentives and constraints. There are restraints on how the cash can be used, and oversight framework, and harsh penalties for fraud and deception.
And, when all of this is over, it can potentially pay for all the debt incurred by the government while fighting the Wuhan virus, and maybe some more debt as well. It is a win-win situation.