Corporate rescues should come with strings attached

Regulators should apply lessons learnt in 2008 from saving the banks

Patrick Jenkins

Ingram Pinn’s illustration of Patrick Jenkins column ‘Corporate rescues should come with strings attached’
© Ingram Pinn/Financial Times

If 2008 was the year of the bank rescue, 2020 is the year of the corporate bailout. As the macroeconomic repercussions of the coronavirus crisis begin to trump the health emergency, much has been made of the spiralling cost of saving swaths of the corporate world — a bill that dwarfs the bank bailouts. What no one is really talking about yet is the quid pro quo.

The popular backlash is certainly tame so far: a bit of sniping about companies paying executives or shareholders too generously, while accepting government furlough payments.

The policymaker backlash is less evident still. The idea that companies might have made themselves vulnerable to disaster through aggressive management, or that shareholders or regulators should intervene to de-risk them, has not even been raised. It should be.

By contrast, when world leaders bailed out the banks in 2008 with cheap funding and government equity, there was an outcry. Logical though the rescues were, because commerce as a whole cannot function without a banking system, there was a widespread perception that hundreds of billions of dollars had been handed to the undeserving rich.

The Occupy Wall Street protest movement was spawned. And the societal inequality that was compounded by the crash, and the policy response to it, spurred populist politicians across the western world.

There were injustices in the 2008 bailouts. Unscrupulous bankers did their reputations no favours by securing large bonus payouts when the ink was barely dry on the bailout cheques.

Many bank bosses, unhumbled by the bust-and-bailout experience, just redoubled their clout atop expanded institutions.

But for all the frustrated popular outrage, there was, as any banker would tell you, a significant programme of payback via the regulatory crackdown that followed.

Most banks are inherently leveraged institutions: they fund their lending by borrowing money — from depositors, bond markets and elsewhere. Very little of the money used in their operations is actually loss-absorbing shareholder equity.

In the boom years before the crash, banks and those who set their terms of trade had become blind to the growing risks that this created. By 2008, according to the Federal Reserve, the proportion of assets backed by equity capital had fallen below 5 per cent at the big US banks.

By last year, as regulators around the world toughened banks’ capital requirements, that US ratio had risen to 9 per cent.

Another post-crisis reform was to insist on closer ongoing scrutiny, particularly through the application of regular stress tests. Disaster scenarios are run through banks’ books to ensure buffers are strong enough.

A third area of regulatory tightening, applied most rigorously in the UK, involved new regimes to hold managers to account.Latest Coronavirus news
 The Covid-19 crisis will be a big test of these new regulations, as the full force of economic decline and mass unemployment weighs on banks’ balance sheets in the months and years ahead. However deep the recession proves to be, it is clear that banks are far better buffered than they were going into the global financial crisis — and may yet come through this one more or less intact.

Many companies will not — and for the same underlying reason that banks failed in 2008: excessive leverage. It is easy to dismiss the pandemic as a freak event that no one could have foreseen. But the triggers of most crises are unpredictable. The key is to be able to withstand the storm.

Corporate leverage is not just about aggressive financing. The whole system of corporate “best practice”, involving just-in-time deliveries, minimal inventory and the use of gig workers in place of expensive permanent staff, is an exercise in operational leverage.

Add to that the growing financial gearing evident across the corporate world. According to Goldman Sachs, the ratio of net debt to operating profits across the S&P 500 has soared to nearly 2.2, more than double the 2008 level, when finance companies are excluded. Corporate leverage will have spiked far higher given the collapse in profits and extra debt taken on during the coronavirus crisis.

On January 7 this year, the Banque de France published a paper about the systemic risk posed by large companies and their increasing indebtedness — the same day incidentally that scientists in China isolated the new coronavirus.

Few could have imagined the extent of the global public health emergency and economic crisis that Covid-19 would unleash. But the vulnerability of the corporate world was obvious to anyone who paused to think, as France’s central bank did.

“To what extent can high debt levels among certain firms be considered a source of systemic risk?” its paper asked.

The study endorsed an earlier decision by French financial regulators to limit big banks’ exposure to the most indebted companies, on grounds of systemic risk. Other markets have a less interventionist culture. But it may be both feasible and desirable to go further than the French.

Bank regulation was toughened when it became clear that public funds were needed to prop up a systemically vital sector. Now companies have been granted a similar handout, and been proved systemically vital as employers and drivers of the economy, there is a strong argument to take a similar regulatory approach: curtail aggressive leverage, stress test regularly and hold managers accountable.

Beethoven and Now

Thoughts In and Around Geopolitics

By: George Friedman

I know nothing about music. I can’t play an instrument, nor can I read music. My singing appalls even me. Yet music has defined my life.

When I hear a song it conjures in me, as it does in others, a particular place on a particular night with a particular person.

Or it conjures a phase of my life. Cyndi Lauper’s songs remind me of the time when I said to hell with duty. “Girls Just Want to Have Fun” is gender neutral.

Edith Piaf’s “Non, Je Ne Regrette Rien” – “No, I Do Not Regret Anything” – reminds me of a thing that had to be done but ought not to have been done. When I hear the Christian hymn “Let There Be Peace on Earth,” I think of my wife and the choices we’ve had to make.

Music is the sound that happens to be permanently linked to a memory, and the memory fixed to an emotion that I felt then. The emotions can be exuberant or thoughtful, but they are always tinged with sadness. They all speak of the past that I cannot forget but cannot relive.

I discovered the music that will always remind me of this time: Beethoven’s “Pathetique.” It is a somber piece but not sad. It tells me that time is not of the essence, and it invites me to think deeply, or as deeply as I can.

And then it breaks into a tempo, with a sound that admits that time is of course of the essence.

And then it breaks into a strange celebration of life, not of its finitude but of the passions that should be embedded there.

Today, time has slowed, and our mood is somber. Thanks to quarantine measures imposed because of the COVID-19 pandemic, we live the same day over and over again until we cannot remember what day it is. We search for an exit, but there is none. We look for something different only to discover that mere difference doesn’t redeem the day.

The sense of rebellion we feel subsides, and we accept that time isn’t of the essence any longer.

But, of course, it is. It is not simply that life is short, but that it has so much to offer. And then you learn to celebrate the things you cannot have now, but in that celebration, as Beethoven teaches, there arises a sense of being that is distinct from doing.

You are drawn into yourself, and find the music that Beethoven tried to teach us. “Pathetique” is far from the pathetic. It is an invitation to see that the somber is the preface to the joyous, but that the work and discipline to achieve that is more difficult than contemplating the status of the Chinese navy. The latter has rules. Beethoven demands that you make your own rules.

That seems to me to be the nature of our moment. We do not know whether it will be long or short. It is in this moment that we live, and the music of the beginning is not that of the end.

This is a difficult and even terrible time. Arguing that it is not as bad as this or that moment is pointless. The moment in which we are living is what matters. The worst part of it is that we didn’t choose it; it chose us, and that is outrageous.

The issue facing us we know how to resist: by not going outside and living with the consequences. But even then we are helpless. Courage won’t save us, and fear really doesn’t protect us.

Beethoven has the virtue of being accessible to those without learning or even taste in music, such as myself. The opening to "Symphony No. 5" fills me with a dreadful anticipation.

"Symphony No. 9" and its "Ode to Joy" remind of the moments of delirious happiness before revolutions turn into monstrosities.

“Moonlight Sonata” draws out the rare moments that make a love affair a moment of redemption. And "Pathetique" reassures us that ennui and sorrow are a preface to triumph – and that is for me the music of this moment.

The virtue of feelings is that no one can tell us that we are wrong. What we feel is what we feel.

The virtue of Beethoven, for me, is that he evokes feeling, where there is much music that I can’t understand. I take meaning from The Doors because they remind me of a night I treasure.

But these are merely reactions. I rarely have time to consider these things. But now there is time, and that has transformed living.

One of the singular characteristics of the moment is that there is time, time in excess of what we might be able to bear. For some, this time is a period of reprieve from a life of endless urgency and activity. For them, this time may be a gift, a time to be free from the constraints of the urgent, to the consideration of the urgent. It is also a dangerous time.

With endless empty days, we have a chance to confront who we are and what we have been and what, because of the choices we made, we will never do. We may also confront, with our significant others, what we have been together, the answer to which may be the discovery of mutual loathing or the rebirth of the joy we once felt.

As humanity suffers from a host of maladies, this may sound like narcissism, but it is merely the inevitable outcome of the cessation of happening that these past few months have brought us, and which will likely continue for a long time. Our civilization has been built around doing, and doing is seen as a sign of our success.

Those who had failed in life were thought not to be busy. Those who were busy were in demand, and the demand for our time was affirmation of our worth.

Many of us remain busy today, but even the busiest among us have had the pattern of our lives changed. Most of us thrive in social life, be it tennis, dinner parties or getting drunk together.

Those moments now carry with them the possibility of disease and death, so we avoid them.

And so even for those who eagerly await a teleconference, time has changed its shape. More precisely, time has emerged, demanding that we fill it.

Importantly, this emergence of time is greater for the older than the younger among us, especially for the younger who have children who never cease to devour every moment. But for those who never had children or whose children now need little from their parents, their lives have vast gaps in them.

Beethoven is making a vital point. Life is difficult and tedious, and for many of us it will always be that. We all long to be free of constraints, to shape our lives, but that is an illusion. The most brilliant investor makes his money by aligning his actions with the market. Generals align their orders with the reality of the enemy they are facing.

Doctors align with the reality of nature. The brilliant can see what must be done before others, but in the end they are no more free for that. They are held in the constraints of the beginning of the “Pathetique” like anyone else.

They live life by its own rules.

When I play the songs I remember, and think of the things I was doing at the time, I realize what I didn’t know then: When I broke free of all responsibility, the constraints of life dictated the exit and the return.

When I heard Edith Piaf regretting nothing, regrets were too late. And when I heard the alien sounds of Protestant hymns and wondered whether I could live with them, the decision had already been made and there could be no other answer.

This is not a sense of helplessness. As the last movement of the “Pathetique” makes clear, the logical necessity of the music takes us to the logical necessity of our lives and times. What we feel does not matter to a virus. But it matters to us.

This for now is our life, and Beethoven is inviting us to listen to Cyndi Lauper. We may not be able to do what she says, but we can think, and that thought can be enough.