Bankruptcies and toilet paper

🌱 When a tree falls, the light let in through the canopy allows new blooms 🌱

Good to see you all 👀 It’s currently 34th day in quarantine, and I have probably memorised every street in the one kilometre radius that I’m allowed in.

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Bankruptcies and toilet paper 🧻

What happens if states don’t allow companies to go bankrupt? Investors and business people would know they don’t have to bear the consequences of their risk-taking, leading to riskier and more irresponsible ventures. And that’s what we’re seeing now in economies across the world.

How does that work? 🤔

Because we’re in lockdown, many businesses such as airlines, shops and restaurants have lost all their revenue. Many of these companies will be unable to pay their fixed expenses (e.g. rent) and go bankrupt without any financial assistance from the state. To avoid that, governments have tossed them a lifeline (i.e. cash) 💸

All good. We don’t want mass bankruptcies and people being permanently unemployed. But it also means that companies which had previously made reckless bets can be saved by the state.

Let’s look at Norwegian Airlines as an example. They made a flying bet in 2012 to buy 222 new airplanes, the biggest purchase ever by a European airline at the time (i.e. very risky investment). This type of strategy requires big investment up front, so Norwegian borrowed lots of money to buy the new airplanes.

Fast forward to 2018, Norwegian steered away from that growth strategy because they had become impaired by debt. They couldn’t afford to pay it down, so they switched their focus from growth to earning money and becoming profitable.

Fast forward to today, they have billions of dollars in debt, very little cash to pay it back, and more creditors (i.e. companies, people, etc. that have lent them money) than they can keep track of. Needless to say, they were not prepared for a pandemic, and are now begging the state to help them out 🙏🏻

Should the state save Norwegian Airlines under these conditions?

Why does it matter? 💡

I believe it’s great and important that we have governments who are willing to support businesses during recessions. This is particularly important for small to medium sized companies, which often have fewer resources and less cash in buffer. But it becomes problematic when governments act as insurance agents for risky business investments. In other words, it’s problematic when tax payers end up settling the price for Norwegian Airline’s risk-taking.

You might say though, that no one could’ve foreseen a pandemic and lockdown of this magnitude. I understand that, but investors and business people should always be prepared for unforeseen events. It happened in 2008 and 2002, and it will happen again. Businesses are now in financial difficulties because they are too efficient and have little to no buffers.

Do you remember the recent lack of toilet paper in supermarkets? This happened because their supply chains are designed for what we need today, and has no buffer for bumps in demand (aka just-in-time system) 🏃‍♀️ Most people didn’t actually hoard toilet paper, but everyone bought just a little bit extra. As supply chains were already at max efficiency, they couldn’t handle the little increase in demand, hence no toilet paper. The economy is too efficient, supermarkets and airlines alike.

I love Norwegian Airlines ❤️ and I was wildly impressed when they made that huge investment back in 2012. But “capitalism without bankruptcies is like Catholicism without hell”. Corporations believing they can take risks without bearing the consequences is not sustainable — a risk-free environment is a utopia. If states constantly step in to save corporations, which are on the brink of bankruptcy due to their own chance-taking (regardless of pandemics), corporate executives will continue to behave in the same way. We can’t be afraid of bankruptcies…

When a tree falls, the light let in through the canopy allows new blooms 🌱

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