Qantas / Virgin, Moral Hazard, & the Real Deal ESG Investing

The only government measure that is likely to stave off deep recession / depression risk is extending a government (tax payer funded) first loss debt program to the banks and, in turn, on to the SME sector. Similarly, the only thing that will save Qantas and Virgin is a tax payer funded bailout. 

But if the tax payer is being asked to, in effect, act as a distressed debt investor then it incumbent on the Government to do so with the stipulation of a component of equity upside - equity warrants, in effect. Just as any distressed debt investor would do so. 

This would dilute existing shareholders. But so it should. Such investors enjoyed the full upside return, knowing the risk of the highly leveraged airlines sector. It is not the job of tax payers (mainly the younger and uninvested) to bail out the investors (mainly the older and, in many cases, non tax payers). If you invest in the markets then, by extension, you are an advocate of capitalism. And in capitalism, as Milton Freidman said, there is no such thing as a free lunch.

Just as the GFC led to a decade long binge on cheap money, in turn leading ultimately to the greatest marginal call of all time when the music stopped, a massive fiscal bailout will lead to significant future and inter-generational wealth issues (add that to an already significant list regarding the latter). And that'd be just another case of kicking the can down the road, and which will raise its head at another, unexpected point in time. 

And that becomes an issue for all - both invested and uninvested. Expectations are that some Australian superannuation 'balanced' funds have recorded material drawdowns (another discussion on appropriate portfolio allocations). For those in the retirement drawdown stage, the potentially ugly issue of sequencing risk raises its head. 

Maybe its time for Australia to bring in a Chapter 11 style provision. Let the debt and equity holders go to the wall, and then restructure what is an essential service for the country. This would also have the benefit of investors appropriately pricing the real risk premia in relation to the industry. In a similar sense, global debt and equity risk premia have cascaded to historic lows, with investors effectively gaming moral hazard with respect to government back stops. And the irony being, the greater the degree of wealth creation, the greater the 'too big to fail risk' for central banks and governments. 

Loss on equities? - Welcome to the Asset Class. Equities is last on the capital stack, and it should be appropriately priced that way in relation to risk premia. NO MORE RISK FREE TAX PAYER FUNDED BAILOUTS - DEMAND EQUITY UPSIDE OR WALK. It's also a cancer on inter-generational wealth - and that will only come back to bite, and bite hard if left unchecked. Any given demographic eventually gets wise to a Political-Vested Interest Group nexus. So, for Fund Managers that are truly true to the basis of ESG investor, my suggestion would be to add to the list badly tax-payer industry bailouts to the list of non-investibles. We all need to do our part. 

Certain billionaires in the US have been pressing for a wealth tax, knowing that the system that has given them at everything is at risk from inter-generational wealth social disruption risk. The hardest hit from this impending recession / depression is casual staff / gig economy types (who of course are renters). When unemployment hits maybe the penny will drop. French Revolution? Maybe? At least my head is safe.

Real / evolving ESG investing? Yes, that'll exclude such risk-free bailed out industries. Take a real (vs. lip sevice) stance.