Lenin said nothing can happen for decades and then decades can happen in weeks. Yes, a pandemic pulls the future forward, and there’s a lot to learn. Another phenomenon that forms rain clouds of perspective: death — or, specifically, being close to it.
My father is approaching 90, recently divorced (for the fourth time), and spends his days watching replays of Maple Leafs games and abusing Xanax. His affinity for Xanies is a feature, not a bug, since at the end of one’s life “long-term effects” lose meaning. He’s near the end, exceptionally intelligent, and high. In sum, he’s my Yoda.
Our calls are mostly me yelling short questions and waiting for something profound in return. Occasionally he delivers: When I asked him what he thinks makes America different, he said, “America is a terrible place to be stupid.”
That’s why he immigrated here. A pillar of capitalism is you can’t reward the winners without punishing the losers. I worry our government has been co-opted by the wealthy and is focused on protecting the previous generation of winners, even if it means reducing future generations’ ability to win. Aren’t we borrowing against our children’s prosperity to protect the wealth of the top 10 percent, if not the one percent?
In Scotland during the Great Depression, my dad was physically abused by his father. His mother spent the money he sent home from the Royal Navy on whiskey and cigarettes. My dad took a huge risk and came to America. My mom took a similar risk, leaving her two youngest siblings in an orphanage (her parents had both died in their early 50s), and bought a ticket on a steamship. She had a small suitcase and 110 quid that she hid in both socks. Why? Because they wanted to work their asses off and be rewarded for the risks they were willing to take. This was capitalism, a beacon of hope for people who are smart, hardworking, and comfortable with risk, promising a greater share of the spoils to them than to those who are not.
However, no more. Modern-day capitalism in America is to flatten the risk curve for people who already have money by borrowing from future generations with debt-fueled bailouts for companies. We have consciously decided to reduce the downside for the wealthy, thereby limiting the upside for future generations.
Consider the interview with venture capitalist Chamath Palihapitiya, who told CNBC host Scott Wapner that equity holders deserve to get wiped out. “Why does anybody deserve, to use your word, to get wiped out in a crisis created like this?” Wapner responded. “This is like a natural disaster; why does anybody deserve to get wiped out? Wouldn’t that be immoral in and of itself?”
“Immoral” — here we go. Morality for CNBC, and the current administration, is not capitalism but the worst type of socialism: cronyism. Rugged individualism and capitalism on the way up, privatizing the gains — and then socialism/cronyism — on the way down, as we socialize the losses with bailouts.
In 1999, the firm I co-founded, Red Envelope, was drafting an S-1 in anticipation of an IPO. At 31, I stood to register $30 million to $60 million on the IPO. The bursting of the bubble damaged us, but the injuries weren’t fatal and we were the only retail IPO of 2002. In 2008, a longshoreman strike left all our holiday merchandise hostage on a cargo ship eight miles offshore from the port of Long Beach. Then, as the credit crisis began to take hold, a prescient analyst at Wells Fargo decided to pull our credit facility. Within 90 days, we were in Chapter 11. That event, combined with divorce, reduced my net worth 97 percent.
I didn’t deserve to lose near everything. What happened wasn’t my fault — okay, maybe the divorce. Regardless, was this fair or (im)moral? Just as there’s no crying in baseball, there’s no fairness in shareholder accretion or destruction. So what happened? Exactly what’s supposed to happen in a market economy: Downside registered against commensurate upside.
Red Envelope went through something also uniquely American and productive — bankruptcy. The equity holders (e.g., yours truly) were wiped out, but we did our duty as board members and found a buyer, Liberty Media, that paid our vendors and kept the employees. No job loss, all debtors paid. When a 31-year-old is shopping for jets in November, part of the agreement with the invisible hand is he may lose most or all of it by March. There’s a word for that: capitalism.
The capital structure of private firms is meant to balance upside and downside. CNBC and Trump want to protect current equity holders at the expense of future generations with rescue packages that explode the deficit. They also want to protect airlines, which spent $45 billion on buybacks and now want a $54 billion bailout, disincentivizing other firms (e.g., Berkshire Hathaway) that have built huge cash piles, forgoing current returns.
The rescue package should protect people, not businesses. From 2017 to 2019, the CEOs of Delta, American, United, and Carnival Cruises earned more than $150 million in compensation. But now the motto is “We’re in this together” — i.e., “Bail our asses out.”
And what happens if they go out of business? Simple, the equity holders and unsecured-debt holders get wiped out. These are the cohorts who, despite the recent meltdown, have registered a 3.3-times increase in the Dow since the lows of 2008.
As long as they keep making old people and younger people want to take their kids to Galaxy’s Edge at Disneyland, there will be cruise lines and airlines. Since 2000, U.S. airlines have declared bankruptcy 66 times. Despite the obvious vulnerability of the sector, boards and CEOs of the six largest airlines have spent 96 percent of their free cash flow on share buybacks, bolstering the share price and compensation of management — that now wants a bailout. They should be allowed to fail. Bondholders will own the firms. Ships and planes will continue to float and fly, and there will still be a steel tube with recirculated air waiting for you after the TSA line.
Trump and CNBC have adopted a narrative that this is about protecting the most vulnerable, but it’s about buttressing the most wealthy. Pandemics typically result in higher wages over the next several decades as we recognize that essential workers — now seen as the person delivering your Greek yogurt and placing your Indian food in the back seat of your car — should be paid more. It’s a good thing.
Letting firms fail and share prices fall to their market level also provides younger generations with the same opportunities that boomers and Generation X were given: a chance to buy Amazon at 50 times (vs. 100 times) earnings and Brooklyn real estate at $300 (vs. $1,000) per square foot. Just as we pretend our servicemembers are heroes and then treat them like chumps, CNBC advertisers and Peter Navarro want to pretend they care about younger generations so they can protect the wealth of older people, management, and advertisers.
Earlier this week, I was on MSNBC with an early Uber employee who reminded us, “We’re all in this together.” But my guess is this executive registered $10 million to $100 million in equity crafting software that figured out an elegant way to pay the company’s 3.9 million “driver partners” less than minimum wage, ensure Uber isn’t obligated to provide them with health insurance, and avoid paying payroll taxes to adequately fund the CDC. But Uber CEO Dara Khosrowshahi and his several-hundred-strong comms department wrote a compelling letter to the government urging it to help his driver partners. But he should pay Uber’s “partners” before picking up the pen again.
Now I’m trying to walk the walk regarding the the Paycheck Protection Program. I recently co-founded Prof G, a firm attempting to disrupt graduate business education. We offer online business and strategy sprints that aim to provide 30 to 50 percent of my classes at NYU Stern for
7 percent of the price. We are eligible for some of the $350 billion federal PPP coronavirus aid. With a modest amount of paperwork, in seven days or less, we’d receive a loan for approximately $250,000. If we don’t lay off any employees, most of the loan would likely be forgiven. This is meaningful cabbage for us.
We are not going to apply for the program.
Our backers are wealthy, and if we can’t make this work — pandemic or not — then we don’t deserve to be in business. Yeah, our demise wouldn’t be our fault, nor is most success. Like steroids for the body, the moral hazard of government assistance only leaves the economy less healthy in the long run.
Just as death is a key part of life, so is the demise and reinvention of firms that can’t endure tropes. COVID-19 is no more historic than an 11-year bull market. With dangerous disregard for future generations, we’ve decided that hundreds of thousands of people dying is meaningful, but the NASDAQ going down would be worse. The rescue package is $2.2 trillion. The annual CDC budget — $6.6 billion.
We have lost the script.
To be clear, socialism may be a better way to go, as evidenced by the study showing four of the five happiest nations are socialist democracies. However, unless we’re going to provide universal health care and universal pre-K, let’s not embrace The Hunger Games for the working class on the way up and the Hallmark Channel for the shareholder class on the way down. The current administration, the wealthy, and the media have embraced policies that bless the caching of power and wealth, creating a nation of brittle companies and government agencies.
The terrible thing about crises is they always happen. The wonderful thing is they always end. As we fight to bring this crisis to an end, let’s reembrace capitalism and foster a future generation of leaders and firms that are soldiers, not hoarders. Yes, America is a terrible place to be stupid. It will be a worse place if we replace capitalism with cronyism.