If CEOs Are Left to Exploit the Coronavirus Bailout, Watch All This Fear Turn to Anger | Opinion

As the coronavirus health crisis quickly turned into a financial crisis, federal lawmakers have been locked in debate regarding how best to keep the U.S. economy afloat. The White House and Congress have just reached a deal on a $2 trillion stimulus bill that includes emergency financial assistance that certain industries need to survive.

The aircraft and airline industries, of course, have experienced an extreme decrease in demand as a result of COVID-19. Airlines are critical in terms of employment, exports and national security, as well as domestic and global transportation, and sought an emergency infusion of some $50 billion from the government. Bloomberg reported on Wednesday that, according to three unidentified sources familiar with the matter, the deal will combine plans proposed by House Democrats and Senate Republicans and offer some $25 billion in loans or grants to the airline industry and potentially $17 billion to assist planemaker Boeing.

Overshadowing lawmakers' negotiating marathon has been an enormous amount of hesitance to extend anything that looks like generous terms to industry giants, such as Boeing and the airlines, because of the vast amount of stock buybacks they have conducted over the past several years. In retrospect, these buybacks look like an absolutely horrendous use of cash that now is desperately needed.

For those who are not familiar with corporate finance, a buyback is when a company buys its own stock from the public market to shrink the amount of its stock that is outstanding. In doing so, companies attempt to drive up the price of remaining shares. Taking such action involves an explicit judgment that the company stock is "undervalued," so executives justify that they are buying stock at an attractive price, and thus hope the stock will trade at a higher price by showing the market that the company is buying its own stock, which presumably it would not do unless it believed its stock was worth more.

It has been reported, for instance, that the airline industry has engaged in over $40 billion of stock buybacks over the last decade. Yes, billions. That is an incredibly large cash hoard of profits that now looks like it is money down the drain. Boeing has purportedly also undertaken some $40 billion of stock buybacks over the last several years.

President Donald Trump talks all the time about his "wonderful" tax reductions, which sharply reduced corporate taxes and ended up driving a significant near-term budget deficit, while adding well over a trillion dollars to the national debt. Yet, in reality, much of the cash tax relief that corporations received was poured into stock buybacks, which substantially contributed to the stock price rises that took the market to exuberant new highs over the course of this administration until now.

Many economists have pointed out what a terrible use of tax policy it was to add so significantly to the budget deficit and the national debt for purposes of near-term stock price gains, which we are now seeing evaporate in front of our eyes.

However, further punishing the economy and workers by not providing emergency financial assistance to these industries because of irresponsible uses of cash for wasteful stock repurchase programs would only be shooting ourselves in the foot. Although many Americans are feeling extremely anxious watching the stock market fall and their retirement savings evaporate, we will get past this crisis. Eventually, stock prices will stabilize and then rise.

Then will come the anger. That's what happened after the 2008 financial crisis, when it became clear to the public how irresponsible actions on the part of banks and mortgage lenders had created a massive problem for the economy, yet almost none of those executives paid any personal price. In fact, many benefited. Americans were furious to see the Wall Street decision makers who created the problem get off without a scratch, while so many ordinary people had suffered.

It is hard to imagine that, when we get to the other side of this, resentment will not emerge again. There is, however, one thing we can do to dampen that anger on a key front that was not dealt with during the last financial crisis.

Many companies awarded stock options to their executives at the low point of prices, and as the market recovered, many of those executives scored a financial bonanza. When the government threw a lifeline that allowed those companies to recover and their stock prices to soar, top executives made massive gains that would never have been possible otherwise. This was particularly true of many financial services executives and their companies' stock prices.

So this time around, when the government lends a very necessary hand to get companies and the economy through this unprecedented period, more strings need to be attached. The government must not only demand a sharp reduction in executive salaries at companies that get any kind of bailout, but also insist that no stock options or other forms of equity be granted at a price lower than the highest point that a company stock buyback occurred.

If the company executives thought their stock was worth more than that high price they bought stock back at, hold them to that decision, and don't let them get the benefit of a stock option grant at deeply distressed stock prices that the government enables their company to recover from.

aircraft
Aircraft stand at Dallas/Fort Worth International Airport during the coronavirus pandemic on March 20 in Dallas, Texas. Tom Pennington/Getty

Moreover, there may be reason to look at any company that engaged in stock buybacks being precluded from issuing stock to executives at these distressed prices. If you thought your company was worth more than the price you bought it back at, then you should be held to your decision to use precious cash resources for that purpose, and only be able to personally gain if your company stock price once again exceeds the level at which the buyback occurred. There may need to be time limits placed on this type of restriction in terms of how long equity grants must be held to this price, but enabling corporate executives to throw away billions in cash to gamble on their stock price through buybacks is not rational corporate governance policy.

This kind of rule may cause important reform in terms of how stock buybacks are accomplished. If it's required for a company stock price to be above where it was when the buyback occurred for company executives to personally profit, CEOs really must have confidence that they are truly creating inherent value in their companies and not simply engaging in financial engineering to inflate their stock prices. This should help make sure more money goes toward driving innovation, investing in capital expenditures to enhance productivity and creating new products.

We have so many more important things to worry about right now on the health front than to spend much time on the pocketbook of corporate executives. Everyone in all socioeconomic sectors of our country is understandably scared right now. This would be one easy step to take to avoid so much fear turning into justifiable anger.

Tom Rogers is editor-at-large for Newsweek, the founder of CNBC and a CNBC contributor. He also established MSNBC, is the former CEO of TiVo, currently executive chairman of WinView, and is former senior counsel to a congressional committee.

The views expressed in this article are the writer's own.

If CEOs Are Left to Exploit the Coronavirus Bailout, Watch All This Fear Turn to Anger | Opinion | Opinion