Generally, corporations avoid excess cash especially when it is low yielding. Their job is to generate cash and deploy it to generate a return on assets which with leverage becomes a return on equity. Using cash to buy back stock makes sense when you think your stock is undervalued and you do not have a better use for the cash in your existing operation or in an appropriate acquisition.

Warren Buffet as head of Berkshire Hathaway holds over $100 billion in cash. Shareholder activists have criticized this hoard as unfair to shareholders. Buffet is a long-time thinker and has used his cash to acquire other companies such as the $32 billion purchase of Precision Castparts, Inc in 2015- his largest. He is patient and willing to sits on his cash until a true value comes along. I assume he is getting ready to deploy much of the cash soon.

This huge cash position of Berkshire means they do not need a bailout. Others such as the airlines used their improved position from the corporate tax cut and the robust economy before Covid to buy back shares and now seek a bailout. I am not critical of stock repurchases; it is prudent and frees up capital for other shareholder investments, but if they retained that cash would the bailout be as necessary?

What about the opposite? If you can buy back your shares can’t you float more shares to raise money? When your share price is in the tank it is a terrible time to raise capital, but a bailout could come with stock options allowing the federal government to recover some of their aid when the market recovers. The government recovered much of its bank bailout in 2008 with similar conditions. The government took an equity stake in GM during the 2008 and sold the shares years later when it recovered. It did not recoup all of its investment, but it was much less costly than just an unencumbered bailout.

Few are more skeptical of this involvement in corporate governance and control than I am, but this is a different market. Care should be coded in the bailout to avoid long term ownership and taking more than this tiny step toward nationalization. While the businesses are suffering this shock, the government is as well. Our refusal to control our deficit and debt has left us with fewer means to address this crisis.

Warren Buffet’s investment in Goldman Sachs in 2008 was in preferred shared and warrants to buy additional shares in the future. This gave him a generous return in exchange for providing Goldman with essential liquidity at the proper time. While we need to be concerned about the financial condition of essential industries, we should not lose sight of the need to be concerned with the financial condition of the nation they want to bail them out.

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