Here’s Who’s Really Behind Wall Street’s $2.4 Trillion Buyback Scam

20 | By Shah Gilani

So far in the first quarter of 2016, companies have spent a combined $146 billion buying back their own shares, already surpassing the total for the entire first quarter a year ago. According to research from Bloomberg, that number could hit $165 billion.

Some of the biggest companies in markets are using buybacks to boost the value of their own shares, including:

  • FedEx Corp. (NYSE:FDX) – Announced $3.25 billion in new buybacks (on top of the $8 billion it’s already spent since September 2014).
  • General Motors Co. (NYSE:GM) – Expanded announced buybacks from $5 billion to $9 billion (ending in 2017).
  • Schlumberger Ltd. (NYSE:SLB) – Authorized $10 billion in new buybacks (after cutting 10,000 jobs in Q4 2015).
  • Wells Fargo Co. (NYSE:WFC) – Expanded its buyback plan to as much as $17 billion.

If you’ve got exposure to any of these companies, it might be time to rethink your investments…

I’ve already told you that stock buybacks represent one of the most insidious bits of financial engineering in the markets – executives that authorize these lavish buybacks can claim that they’re doing so to return money to shareholders when what they’re really doing is lining their own pockets.

But analysts and other market watchers are finally starting to take notice… because right now, the gap between investor capital in the markets and corporate money in the markets that’s being used on buybacks is wider than it’s ever been.

It’s not an overstatement to say that the majority of interest in stocks is from companies buying up their own shares. In fact, Liz Ann Sonders, chief investment strategist at Charles Schwab, recently told Business Insider, “On a cumulative basis there has not been a dollar added to the US stock market since the end of the financial crisis by retail investors and pension funds.”

You read that right – the bull market that’s raged since the end of the financial crisis was, by one measure, due entirely to buybacks.

This is unsustainable. Someone needs to fix this mess, and soon.

Unfortunately, the very people who could fix it aren’t going to lift a finger…

Why hasn’t a single “I want what’s right for the economy” politician in Congress, or a single economic hack in the Obama administration (to say nothing of the master giver-awayer himself), or a single wannabe presidential poser on the political trail in 2016 ever talked about how bad stock buybacks really are for the economy?

It’s because the dirty truth about stock buybacks is they’re part of dirty politics.

Share buybacks used to be frowned upon. In fact they were considered a form of stock manipulation by the SEC.

But 33 years ago, Congress pushed the SEC to make buybacks kosher due to the uptick in stock options as part of executive compensation packages. Obviously, those executives want to push their stock prices up to exercise those options profitably while not diluting earnings per share.

Fast forward to financial engineering.

Buyback programs are now the preferred way executives legally manipulate their stock prices.

The justification for buybacks – whether they’re funded out of cash flow or debt financed – includes rubbish like they’re a good investment when shares are “undervalued,” they’re an effective way of returning capital to shareholders, and they reduce share count against which dividends have to be paid out.

But the truth is different.

Just because executives believe their shares are undervalued doesn’t mean they actually are. The market might be discounting the share price because it doesn’t see earnings growth ahead, or maybe because earnings are going the wrong way.

If a company is generating regular excess cash flow and can’t find an earnings-building avenue to invest it in, why don’t they pay a dividend, or up the dividend payment they’re making?

Note to managers: you’re not a “growth” company if you’re generating regular free cash flow and not reinvesting it. You’ve matured to the point where you should pay dividends.

And if you’re debt financing your buybacks while calling yourself a growth company, you’re immature, or worse.

The justification about buying back shares to reduce the number of shares that dividends are paid out across has some merit. But if a company keeps buying back shares because it keeps generating more cash, at some point as an investor I’d have to ask management, why don’t you just pay me a bigger dividend?

If share buyback programs were still viewed as manipulation schemes, the trillions of dollars spent – and the hundreds of billions wasted when share prices went down – would have been spent instead on capital improvements, paying higher wages, growing businesses, and paid out in the form of dividends.

Investors of all stripes would benefit and so would the economy. Whether dividends are reinvested, added to the savings pool, or spent, the economy benefits.

Here’s the Dirty, Rotten Truth

The truth is if buybacks weren’t allowed and companies paid out all that money as dividends, there wouldn’t be any “double taxation.”

Corporations would order their lackeys in Congress to change the laws so their dividend payments could be deductible at the corporate level. They could get that passed in a second… if they wanted to.

But it’s better for companies to complain that dividends are double taxed, first at the corporate level and again when investors are paid out. That way they can justify a “better” way of distributing capital to their shareholders, through the magic of buybacks.

How convenient that the “better” way to return capital to shareholders enriches executives at the expense of growing the business, at the expense of investors in the business, and ultimately at the expense of the economy.

Forget about the math of a few worried analysts who estimate that as much as 100% of the stock market’s rise since 2009 is attributable to the more than $2.4 trillion in buybacks since the financial crisis, and if the market collapses most of that money will have essentially evaporated.

What matters is if all that money had made its way through the economy, the economy, the country, savers, and investors would be better off, not just the handful of executives who’ve grossly enriched themselves while pretending their financial engineering wasn’t manipulative.

So, ask your senator or representative, ask anyone in power, ask anyone on the wannabe political trail – what are you going to do about the buyback game?

Ask if they understand how the economy could have benefited if those trillions of dollars would have been efficiently circulated throughout the economy in the form of capital expenditures, more jobs, higher wages, dividend payouts.

Ask them how much the corporations who buy back their shares spend on lobbyists.

Ask them how much they contribute to their campaigns.

Ask them why they aren’t fighting to end double taxation of dividends.

Ask them if they understand how the economy works, if they know how the stock market works, and if they have any idea that buybacks are a stock manipulation scheme that screws everybody working in the real economy.

And if you get a straight answer from any of them, send me an email or drop a note in the comments below. I’d love to hear from you.



20 Responses to Here’s Who’s Really Behind Wall Street’s $2.4 Trillion Buyback Scam

  1. Ken Ojala says:

    This is why Trump and the “Outsiders” are gaining so much traction. Anyoone who can read (with a minimum of understanding) knows that We the People have been sodomized by the financial world. Senator Corker said that people should be even more upset than they seem to be by supporting people like Trump. If you know that “the economy” has been flat, stale, uninspired, corrupted, – FUBAR – then this can be the right time to start going the right direction.
    Start with the questions Shah has projected.

    • Conrad Maher says:

      We know that Senator Corker is an example we can all follow if only we were senators of the US.

      Use insider trading to earn tens of millions of dollars while your cronies make hundreds of millions. In an institution of hypocrites he wins the brass ring.

  2. Lloyd S. says:

    Re: Paragraph beginning “What matters is if all that money had made its way . . . .”
    If “. . . the handful of executives . . . grossly enriched themselves . . .”, what have they done with the cash? Surely, they haven’t stuffed it into mattresses. Where has that cash flowed to?

    Always a treat to read your articles.

  3. Kim Zauderer says:

    Very refreshing to read a non-political analysis of buy backs!
    Your Schlumberger example is spot on!
    It seems nearly impossible for this type of information to reach mainstream.

  4. Kevin Beck says:

    I sent out a letter to each of my Senators, along with my Representative. I would be surprised, but if I get a response that addresses it, I’ll pass it on.

    It so happens I had an investment in one of the companies named, but I sold some the day that the news broke about their plan. I have not seen where buybacks work as advertised for the investor, since no one owns substantial-enough portions of any company that ever does this for them to see enough of a difference. And if I thought the company was a valuable long-term investment, I would consider reinvesting the dividends that they pay out. But at least I would have some choice in the matter.

    The scenario that’s really awful is when a company will initiate a buyback when their market value is at a new high. Talk about wasting money!

  5. Ken says:

    The way I see it is that each buyback reduces the total stock float, so that eventually there may be no stock market at all, which would have a seriously negative effect on the working class, since the possibilities for saving and increasing one’s security would lose a valuable possibility, and retirement savings would probably disappear entirely.
    It seems to me that since 2008, the intent of the ultra-wealthy is to eventually replace the elected officials. In the future, we could have a King Koch instead of a president and congress.

  6. Roland says:

    Ronald Reagan started this financial engineering game in 1980 and its been driven by conservatives who swore the liberals were the ones killing the economy. It turns out that all conservatives are, are scam artists who screwed the working class and enriched themselves at the same time. Now the working class wants revenge when liberals were screaming as loud as possible the scam was on but it took 30 years for them (working class) to realize that listening to conservatives they screwed themselves out of a job and their kids out of a future. It will take another generation to right the wrongs the conservatives have heaped on the working class if ever.

    • Old Jack says:

      If you redistributed all the wealth of the country equally among all its citizens then within one generation it would all be back in the hands of the 1%. That is because they know how and they can. There is no solution to a morally bankrupt country and that is what the USA has become. Unfortunately history has taught us that morally bankrupt countries end up in revolution replacing their leaders with “messiahs” that promise something different but become just the same. So if you want to get ahead financially do as the old saying says and join them because you can’t beat them. And you wonder why the crime rate is so high.

    • Edouard D'Orange says:

      Out of the 33 yrs that stock buybacks have been legitimized, Democraps have held the Presidency almost 16, not including holding power in Congress for a lot of the time. So where are they, Sir Roland? In 1983, Democraps held power in Congress, where legislation originates. So many of today’s CEOs are Democraps and democrap backers.
      Quit the partisan attacks. It’s so old and tired.

    • Sarse says:

      Roland; Wow! How mixed up can one person be? You probably still think unions are a good thing in this day and age. Are you really Hoffa in alias?

  7. Jan Mohamed says:

    Fiscally conservatism was a ploy used by Conservatives to make profits by employing labor to produce output at a markup by imposing austerity, downsizing and extracting wealth from the economy without contributing to its real growth. Despite the rise in labor and capital productivity the real wages have not increased since the 1980s. Instead of the promised economy of abundance, economic policy from the US to Europe is directed to carry the debt run up by a Bubble Economy in which most gains have been made not by industrial investment, but by borrowing to buy assets (real estate & stocks) whose price is being inflated by bank credit. The shift of focus from industrial profits to debt-leveraged capital gains has been spurred mainly by falling the interest rates, making mortgage credit easier and making higher capitalization multiples for stocks and bonds.
    The labor today is exploited increasingly in financial way. Bankers extract revenue from consumers by interest, fees and penalties on credit cards, personal loans, mortgages and student loans. Corporate raiders empty out Employee Stock-Ownership Plan and pension funds, or downsize payouts by threatening or declaring bankruptcy. The corporate sector has been financialized. Instead of raizing funds for new capital investment, the stock market has become a vehicle for raiders to buy companies on credit, replacing equity capital with debt. Debt-leveraged corporate buyouts, raids, mergers and acquisitions earmark corporate cash flow for debt service to pay junk bond holders who advance takeover funding instead of investing in new capital formation to employ labor and produce more.
    The drive to get rich by debt-leveraging has given banks, other financial institutions and the wealthiest 1% a dominant voice in government, the mass media and academic curriculum that shapes how people think about the economy. Creditors led by this 1% who have obtained most of the economic gains over past thirty years prefer to maintain their financial gains even at the cost of undercutting society’s longer-term growth.
    Equity prices to a significant extent were in a bubble recently, which was the consequence of QE. Cheap money and large profits made it possible for US corporations to do stock buybacks which bettered their earnings per share. Not one dime of this money is going into expanding operations, hiring more employees, Research and Development or improving productivity. They failed to use the period of low interest rates to make capital investment. They are not making significant capital investment because they know just how weak economic growth is. Since the investments not made are capital investments this also implies that they are not confident enough that economic growth is about to start increasing soon.
    This poses apolitical problem when it comes to proposal to bring the economy’s debt overhead back within the ability to pay. The problem is that one party’s debt is another’s savings. More to the point, the debts of the 99% are the savings of the 1% (or at least the 10%). Trying to keep today’s high debt levels on the books imposes debt deflation and fiscal austerity and hence shrinks the economy. And if the economy shrinks, more loans will go bad, in deteriorating spiral which is what happens in debt deflation.
    The choice before us is either to continue to suffer debt deflation or write down the debt and make a fresh start. But this not going to happen as long as these neoliberals are in power.

  8. Crawford Parr says:

    Hey Shah.
    You need to call up Mr. Trump and run for Vice President on the Trump/Gilani ticket. Double disrupters and a simultaneous end to all the “racism” rant coming from the deep state. I doubt he’d fire you.
    Sincerely, Crawford

  9. paul says:

    What happened to your short ETF positions and all the money you “made”? Thats what investors want to hear about, your pnl, not the breathless rehashing of the same old issues.

  10. Gary says:

    Shah makes some good points. Stocks that issue shares for growth, share dilution, aren’t necessarily good either. Shah’s concerns were raising dividends, reinvesting for growth, and debt. Some companies do all 4 though. A company that continues to raise dividends, reinvest for growth, cut debt, and buy back shares do well. It has to be balanced. Buy backs are good if dividends are still increased, money is reinvested for growth, and debt is reduced, if it is excessive. Buy backs are just another tool to help the company. The opposite, share dilution, is rarely good.

  11. Jeffrey Albertson says:

    It was some time back before Hillary and Obama ran against each other, that I saw, and heard, Hillary making a speech on TV that made my blood boil. I regret that I was unable to record it myself for future proof but since it was during break time in the company break room, it was not possible. I heard her make the same statement at least twice. She blamed the middle class for stealing from the poor. The greedy blue color, overpaid, middle class was ruining the country and had to go so that the poor could have a chance to survive. Now today she claims to be the champion of the Middle class and only she can promise higher wages and more jobs. What has changed? Maybe she has realized that the only real tax base comes from the MIDDLE CLASS and that Bernnie’s notion that the 1% rich should pay isn’t enough to pay for the Liberals apatite for BIG Govtment spending!

  12. Tom Somerville says:

    Wow good stuff guys! i have been trading sstocks and never looked at buybacks this way!!
    Thankyou for imfo.!
    i would still say if yur in the stock market and dont consistently make money!
    No matter what the market movers are doing U haven’t learned the game! And need to learn about market cycles and the motives behind them!!!
    The name of the game is to Make Money consistently without losing sleep!
    And I dont mean beating the S&P!
    Get some CD!s or even put your money under the mattress today ith current
    banking rules!
    Wall Street in not your Daddy their out to subtract yur cash from you and their masters of the game!

    Learn how to play-What to you think going on give money to the suckers who have dreams of yachts in yur head!
    It takes many years too develop a strategy that works for you and yur personality!
    Read some books going back to the Tulips!
    And shit you have to be in the market makers head! And of course now You have to understand how they use the computers and be hedged correctly knowing yur Risk Rewards-and turn off every TV, how to correctly price whatever it is yur playing and get a very low risk high proability position on something you understand, Perruse every newsletter not for the current news, just to make sure yur not missing a factor and be ready for the cookie monster! He eats yur cookies and you should have been ready with yur counterploy! And this is not easy for the inexperienced player in the most sophiticated casino in the world!
    later folks
    Remember if you cant spot the sucker in the room its probably you!
    but if i didnt scare you out of the game-think for yourself if you need advice not imformation looking around play with very small amounts!
    Pay yur dues commission and spreads will kill any small player but if you can break even on small bets than you can raise the bet,
    Happy Trading
    A curse for a calling now collecting a pay check and working a few more hours much better for most!
    Trading 55 years now for myself!
    yes u can win but learn the game!

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