Companies Are Stampeding to Buy Back Their Own Stock: Just Like Before the 2008 Crash

By Pam Martens and Russ Martens: March 3, 2015 

Wall Street Bull Statue in Lower ManhattanOn December 20, 2007, Bear Stearns held a conference call with analysts to review its fourth quarter earnings. During the call, the company revealed that “For the full fiscal year, the company repurchased 12 million shares of common stock at an aggregate cost of $1.7 billion.” Less than three months later, the company collapsed.

On June 13, 2008, Michael Rapoport of Dow Jones Newswires wrote that Lehman Brothers had reported “in its most recent quarterly report in April that it had repurchased about $765 million worth of its stock during its fiscal first quarter, at an average price of $59.05 a share. That includes some shares tendered by employees as payment when exercising stock options.” Three months after Rapoport wrote those words, Lehman collapsed into bankruptcy, its shares effectively worthless.

Then there was Merrill Lynch, the century old iconic retail brokerage firm and investment bank. In a July 17, 2007 press release, Merrill Lynch reported the following: “As part of its active management of equity capital, Merrill Lynch repurchased 19.8 million shares of its common stock for $1.8 billion during the second quarter of 2007, completing the $5 billion repurchase program authorized in October 2006 and utilizing $557 million of the $6 billion repurchase program authorized in April 2007.”

In the same weekend that saw the collapse of Lehman Brothers, Merrill Lynch succumbed to a buyout from Bank of America. Merrill’s share price had fallen 65 percent during the year – notwithstanding billions of dollars in share repurchases over the prior two years.

According to Katrina Brooker, writing in Fortune Magazine in October 2008, “Between 2003 and 2007, the amount of cash S&P 500 companies spent on buybacks nearly quadrupled, from $135 billion to $590 billion. The higher the market rose, the more shares companies bought. The peak of this ‘buyback bubble’ occurred in the third quarter of 2007, when the Dow was at 14,000.”

Yesterday, both the S&P 500 and the Dow Jones Industrial Average posted record high closing levels with Nasdaq closing above 5,000 – within spitting distance of its old high set 15 years ago. (Yes, it’s been a long tough slog for investors in the Nasdaq index.) And, accompanying this seemingly bullish news for stock investors is a startling assessment this morning of what’s going on behind the scenes with share buybacks from Lu Wang and Oliver Renick at Bloomberg News. Here’s the bullet points of their story:

  • Stock buybacks and dividends are eating up “almost all the Standard & Poor’s 500’s earnings”;
  • Even with “earnings estimates deteriorating,” corporations have announced “an average of more than $5 billion in buybacks each day.”
  • “Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009”;
  • Companies could be overpaying for their stock. “The S&P 500 trades at 18.9 times earnings, compared with an average of 16.9 since 1936, data compiled by Bloomberg and S&P show.”

Buybacks in an overpriced market when corporate insiders stand to make tens of millions of dollars as their stock options move deeper into the money, is a serious cause for worry. Wall Street On Parade reported in July of last year that the largest Wall Street bank, JPMorgan Chase, had spent $18 billion buying back its shares from 2010 through 2013. According to a quarterly filing with the SEC at that time, the company said “the Firm’s Board of Directors has authorized the Firm to repurchase $6.5 billion of common equity between April 1, 2014 and March 31, 2015.”

Our thoughts back then are the same as today:

“Having a steady pool of billions of dollars to prop up a stock’s share price might seem like a neat trick to top corporate executives whose compensation is tied, in part, to the performance of the company’s stock, but it does little to help a nation struggling from the aftermath of the economic ravages unleashed by the big bank financial crash in 2008.”

Suspicions About the Federal Reserve Spill Out in House Hearing

By Pam Martens and Russ Martens: March 2, 2015 

Fed Chair Janet Yellen Testifying on February 25, 2015 Before the House Financial Services Committee

Fed Chair Janet Yellen Testifying on February 25, 2015 Before the House Financial Services Committee

Fed Chairman Janet Yellen fielded questions last Wednesday before a combative House Financial Services Committee. Tempers flared, fingers stabbed the air, arms waved wildly as House reps expressed pent up frustrations with how the Federal Reserve is handling the economy. At times, Yellen answered curtly and at one point rolled her eyes at questioning from Congressman Scott Garrett (R-NJ) who insinuated that Yellen had politicized her office by meeting so frequently with President Obama and Treasury Secretary Jack Lew.

The anger and frustration were evident from both sides of the aisle. Congressman Michael Capuano, (D-MA), was incensed that the largest, most dangerous Wall Street banks are still being allowed to fail their living wills. Capuano read a portion of a statement from FDIC Vice Chair, Thomas Hoenig, which stated that these living wills “provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support.”

Capuano barked at Yellen “if they don’t meet your requirements at the third try, what you said is…something along the lines that you’d be upset.” Yellen responded that what she had said was “we will find them to be not credible if we do not see progress…” Capuano interrupted in frustration: “Would you break them up?” Yellen responded that the banks would have two years to show that they had made changes.

Visibly showing disgust at the answer, Capuano said: “So five years after Dodd-Frank, they still have potentially three years before there are any serious consequences to prove to you that they no longer offer a threat to the entire U.S. economic system.” Yellen responded that the Fed had put higher capital standards in place. Capuano said that these capital standards have been found insufficient by everyone who studies these matters “except the Fed.”

Congressman Brad Sherman (D-CA) asked Yellen about the fact that the New York Fed represents less than 20 million people in their district but has a permanent seat on the Federal Open Market Committee which sets monetary policy. He said the San Francisco Fed represents 65 million people – three times more than New York. He argued that New York isn’t three times more important than San Francisco and asked if Yellen would support a permanent seat on the Fed for the San Francisco Fed. Yellen said that would take Congressional action.

Sherman also questioned Yellen about plans at the Fed to take away the “punch bowl,” that is, hike interest rates. Sherman said that members of the committee were in touch with constituents in their various districts and said “It ain’t good out there.”

Sean Duffy, Congressman from Wisconsin

Sean Duffy, Congressman from Wisconsin

Following accusations of political bias from Congressman Garrett early in the hearing, Congressman Sean Duffy (R-WI) picked up on the same theme later in the hearing. Duffy asked about a speech Yellen gave two weeks before the Presidential election on income inequality, grilling Yellen on which political party was pushing that same theme. Yellen said she had heard politicians on both sides of the aisle lament income inequality. Duffy aggressively sparred with Yellen, saying that if he polled everyone in the room as to which party made income inequality a political issue in the last election, everyone would get it right.

Congressman Al Green (D-TX) asked about the chasm that’s developing between the very, very rich and the rest of us. Yellen said all of us treasure living in a society where people who work hard and play by the rules can get ahead and we’ve seen that in this country generation after generation. Yellen said the rise of income inequality has been “inexorable” since the 1980s.

Congressman Al Green, Democrat from Texas, Questioning Fed Chair Yellen

Congressman Al Green, Democrat from Texas, Questioning Fed Chair Yellen

What wasn’t addressed in the hearing is that the rise of $1 trillion and $2 trillion dollar Wall Street banks has accompanied the rise in income inequality. It’s really quite a simple matter. These mega banks have served as an institutionalized mechanism to asset strip the middle class and the poor through outrageously high interest rates on credit cards, mortgages, management of 401(k) plans where two-thirds of a worker’s assets are stripped away over a lifetime of work.

These mega banks have collected the vast majority of deposits in the country and are now using those very deposits against the middle class and the poor. Instead of making prudent business loans and paying a higher rate of interest from those loans to depositors, banks have turned the deposits into a source of low-cost capital for casino bets while the Fed has looked the other way without meaningful regulatory response.

No clearer example exists than the London Whale episode at JPMorgan Chase. Rather than use its own capital to make wild derivative bets to boost profits for the house, JPMorgan used depositors’ money in its insured bank unit. It had been doing this for some time but was caught in 2012 when the press reported the bets had grown so large that they were distorting the market. At least $6.2 billion of bank deposits were lost in that operation.

JPMorgan’s national bank supervisor, the Office of the Comptroller of the Currency (OCC) found that “The credit derivatives trading activity constituted recklessly unsafe and unsound practices,” and “was part of a pattern of misconduct….”

Since that time, JPMorgan has been repeatedly charged with one violation after another. And yet, the Federal Reserve has not broken it up. The anger on the House Financial Services Committee is a tepid reflection of the growing anger among average Americans at the gross incompetence of the Federal Reserve as a regulator.

Reforming the Fed: Who’s Right; Who’s Wrong?

By Pam Martens and Russ Martens: February 26, 2015

Congressman Jeb Hensarling, Chair of the House Financial Services Committee

Congressman Jeb Hensarling, Chair of the House Financial Services Committee

The Republicans are making good on their campaign pledge to turn up the heat on the Federal Reserve. Sparks flew in the House Financial Services Committee hearing room yesterday as Fed Chair Janet Yellen appeared to present her semi-annual testimony. At times, the exchanges between Yellen and Republican members of the Committee were sharp and tense.

In his opening statement to the Committee, Jeb Hensarling (R-Tx), who chairs the Committee, blamed the “anemic” recovery on Obamacare, Dodd-Frank and regulatory costs. He went on to say that “Then there’s the doubt, uncertainty and regulatory burden that grows as more and more unbridled, discretionary authority is given to unaccountable government agencies.  Although monetary policy cannot remedy this, it can help.”

Republicans are locked in some kind of mind warp where the remedy for every problem is to deregulate. Despite six years of books, academic studies, investigative findings, and a 600-page report from the Financial Crisis Inquiry Commission proving that deregulation was responsible for the financial crash of 2008 – the greatest financial implosion since the Great Depression – Republicans refuse to let facts get in the way of pushing for more deregulation.

Democrats on the other hand, despite overwhelming proof that the Dodd-Frank Wall Street Reform and Consumer Protection Act has actually allowed Wall Street to grow systemically more dangerous and more corrupt since its passage, is irrationally wedded to this legislation.

No amount of evidence will change the Democrats’ position on Dodd-Frank. JPMorgan gambling with hundreds of billions of bank depositors’ money in the London Whale fiasco where $6.2 billion got flushed down the toilet will not change their mind. Cartel activity among the big banks in the interest rate market, precious metals market, foreign currency market will not change their mind. Bank chat rooms called “The Bandits Club,” “The Mafia” and “The Cartel,” where brazen market rigging is alleged to have occurred will not change their mind. Endless criminal investigations and multi-billion dollar settlements will not change their mind. Scandal after scandal destroying public trust in Wall Street and its regulators will not change their mind.

Then there is the New York Fed – the least appropriate body in all the world to be simultaneously carrying out monetary policy via instructions from the Federal Open Market Committee with the involvement of the biggest Wall Street banks while simultaneously attempting to engage in regulatory oversight of the same banks. (See related articles below.)

On Tuesday, Senator Richard Shelby (R-Ala), chair of the Senate Banking Committee indicated he is aware of the conflicted role of the Fed in regulating Wall Street banks. In his opening statement prior to Yellen’s appearance before that body, Shelby said:

“Our central bank has expanded its influence over households, businesses and markets in recent years. Not only has it pushed the boundaries of traditional monetary policy, but it has also consolidated unmatched authority as a financial regulator. As the Fed grows larger and more powerful, much of this authority has become more concentrated in Washington, DC and New York.

“The Fed emerged from the financial crisis as a super-regulator, with unprecedented power over entities that it had not previously overseen. With such a delegation of authority comes a heightened responsibility for Congress to know the impact these new requirements place on our economy as a whole.

“The role of Congress is not to serve on the Federal Open Market Committee.  But, it is to provide strong oversight and, when times demand it, bring about structural reforms.

“As part of this process, the Committee will be holding another hearing next week to discuss options for enhanced oversight and reforming the Fed.”

Let the hearings begin.

Related Articles:

Blowing the Whistle on the New York Fed and Goldman Sachs

The Carmen Segarra Case: Welcome to New York, Wall Street and McJustice

A Mangled Case of Justice on Wall Street

Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

New Documents Show How Power Moved to Wall Street, Via the New York Fed

Intelligence Gathering Plays Key Role at New York Fed’s Trading Desk

Relationship Managers at the New York Fed and Citibank: The Job Function Ripe for Corruption

As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs

At Last We Know the Real Purpose of the Federal Reserve Bank of New York: It’s a Confessional for Traders Gone Rogue

New York Fed’s Strange New Role: Big Bank Equity Analyst

As Criminal Probes of JPMorgan Expand, Documents Surface Showing JPMorgan Paid $190,000 Annually to Spouse of the Bank’s Top Regulator

New York Fed’s Answer to Cartels Rigging Markets – Form Another Cartel

What Dodd-Frank Didn’t Fix: The Worst Conflicts on Wall Street

By Pam Martens and Russ Martens: February 25, 2015

Mary Jo White, Testifying at Her Confirmation Hearing for SEC Chair on March 12, 2013; Her Husband, John W. White, Partner at Cravath, Swaine & Moore, Sits to Her Left

Mary Jo White, Testifying at Her Confirmation Hearing for SEC Chair on March 12, 2013; Her Husband, John W. White, Partner at Cravath, Swaine & Moore, Sits to Her Left

Two major stories have broken this week showing how little has actually changed under the much heralded financial reform legislation known as Dodd-Frank. That legislation was enacted in 2010 with the promise of ending the unchecked corruption, conflicts of interest and casino capitalism that crashed the U.S. financial system in 2008, leading to the largest taxpayer bailout in the nation’s history.

Yesterday, in a front page article, the New York Times used data to back up the withering conflicts of interests of SEC Chair Mary Jo White – the same conflicts that Wall Street On Parade reported two years ago. (See related articles below.)

The Times reported that because Mary Jo White had worked for a major Wall Street powerhouse law firm immediately preceding her term at the SEC, representing major Wall Street firms like JPMorgan Chase, she had recused herself at least 48 times on cases involving either her former law firm or clients she directly represented.

Then comes the less than credible part of the Times story. The reporters write: “But in a surprising twist, Ms. White will have to keep sitting out cases that involve her husband’s firm, Cravath, Swaine & Moore. So far, she has had to recuse herself from at least 10 investigations into clients of Cravath, interviews and records show, including some that came before Ms. White joined the agency and at least four that involved Mr. White himself.”

“Surprising twist”? This is what Wall Street On Parade reported in 2013:

“The conflicts of White, a law partner at one of Wall Street’s favorite go-to firms, Debevoise & Plimpton, and those of her husband, John White, also a partner at a Wall Street law firm, are legion. Between White and her husband, they represent every too-big-to-fail firm on Wall Street. (Under ethics laws for members of the Executive branch, the conflicts of interest of White’s spouse become her conflicts of interest. And he will remain in his job.)…

“Even if Mary Jo White is retiring from representing Wall Street clients, what happens when she sits down for dinner with her husband, John White, who continues to represent Wall Street clients. Does she say: ‘Oh by the way, honey, I’m sorry I had to prosecute your best client today; the one that provides a big part of your billable hours.’ How does John White explain to his colleagues at his law firm that his wife is prosecuting their biggest revenue clients. Why would Mary Jo White, who earns a huge salary at her law firm, want to be put in that position in order to head the SEC?”

This morning, Bloomberg News is running a headline that reads: “Lure of Wall Street Cash Said to Skew Credit Ratings.” Again, the less than credible part of this headline is “Said to.” The Financial Crisis Inquiry Commission intensely investigated the role of the credit rating agencies in the 2008 financial collapse and reported as follows:

“We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their down-grades through 2007 and 2008 wreaked havoc across markets and firms.

“In our report, you will read about the breakdowns at Moody’s, examined by the Commission as a case study. From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A. This compares with six private-sector companies in the United States that carried this coveted rating in early 2010. In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every working day. The results were disastrous: 83% of the mortgage securities rated triple-A that year ultimately were downgraded. You will also read about the forces at work behind the breakdowns at Moody’s, including the flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight. And you will see that without the active participation of the rating agencies, the market for mortgage-related securities could not have been what it became.”

It becomes clearer everyday that the only thing that is going to bring material reform to Wall Street is, tragically, another crash in the U.S. financial system and devastating economic losses to the hardworking families who believe that Congress actually reformed the system in 2010 with Dodd-Frank.

The Whites Go to the SEC: Why Wall Street Still Owns Washington 

The Extremely Strange History of SEC Nominee, Mary Jo White

JPMorgan, Still On 2-Year Probation, Under Scrutiny in Gold Fixing Probe

By Pam Martens and Russ Martens: February 24, 2015 

Gold BarsThe financial press is reporting this morning that the U.S. Justice Department is investigating at least 10 of the biggest U.S. and foreign banks for potentially rigging the gold market and other precious metals markets. That investigation comes while ongoing investigations continue into the potential rigging by big banks of the setting of interest-rate benchmarks and foreign currency.

Cartel activity in every facet of U.S. and London financial markets now seems to be the norm with regulators typically five to ten years too late in sniffing out the illegal conduct.

JPMorgan Chase was named by the Wall Street Journal as one of the banks under scrutiny in the precious metals probe. That could pose a particularly difficult situation for JPMorgan as it is under an effective two-year probation with the U.S. Justice Department for its role in the Bernard Madoff fraud. The probation stems from a deferred prosecution agreement, signed on January 6, 2014, requiring that for the next two years, JPMorgan had to bring to the attention of Federal prosecutors any knowledge of wrongdoing inside the bank, cooperate fully and in good faith, and agree to “commit no crimes under the federal laws of the United States subsequent to the execution of this agreement…” If JPMorgan did not live up to its end of the bargain, it could be prosecuted for new crimes as well as for the two felony counts related to the Madoff matter.

JPMorgan has already had to own up to a criminal investigation involving its foreign currency trading business. On November 24 of last year, when the bank filed its quarterly report with the SEC (known as the 10Q), it reported the following:

“DOJ is conducting a criminal investigation, and various regulatory and civil enforcement authorities, including U.S. banking regulators, the Commodity Futures Trading Commission (‘CFTC’), the U.K. Financial Conduct Authority (the ‘FCA’) and other foreign government authorities, are conducting civil investigations, regarding the Firm’s foreign exchange (‘FX’) trading business.

“These investigations are focused on the Firm’s spot FX trading activities as well as controls applicable to those activities. The Firm continues to cooperate with these investigations and is currently engaged in discussions with DOJ, and various regulatory and civil enforcement authorities, about resolving their respective investigations with respect to the Firm. There is no assurance that such discussions will result in settlements.”

In a front page article on February 10 of this year, the New York Times reported that federal prosecutors at the Justice Department who are conducting the foreign currency probes had “informed Barclays, JPMorgan Chase, the Royal Bank of Scotland and Citigroup that they must enter guilty pleas to settle the cases, according to lawyers briefed on the matter.”

The most interesting facet of this story that has not been linked by the news media to the current precious metals probe, are the findings about JPMorgan Chase that were made by the U.S. Senate’s Permanent Subcommittee on Investigations, which released an alarming 396-page report in November of last year on the physical commodity holdings of the largest Wall Street banks.

The report had this to say about JPMorgan:

“When the financial holding company’s physical commodities inventory of $6.6 billion is added to the bank’s metals inventory of approximately $8.1 billion – still excluding gold, silver, and all merchant banking commodity assets – and the bank’s copper, platinum, and palladium inventories of $2.7 billion are added in as well, the total market value of JPMorgan’s combined physical commodity inventories on September 28, 2012, was $17.4 billion. That $17.4 billion was about 11.75% of the financial holding company’s Tier 1 capital of $148 billion, which meant that it was more than twice the size allowed by the Federal Reserve’s 5% limit, were it to apply…

“In 2011 (the last complete year of figures provided to the Subcommittee), those inventories included, at various times, as much as 3.3 million metric tons of aluminum (an amount which is more than half of U.S. aluminum consumption that year), 200,000 metric tons of copper, 100,000 metric tons of lead, 6.4 million barrels of crude oil, 3.6 million barrels of heating oil, 900,000 barrels of gasoline, 3.4 million barrels of jet kerosene, and 51.9 billion cubic feet of natural gas.  In addition, JPMorgan reported owning or controlling tolling agreements at 31 power plants…

“JPMorgan Chase Bank is the only national bank that, in recent years, has engaged in extensive physical metals trading and maintained a large physical metals inventory…

“JPMorgan’s physical metal activities resulted in its holding multi-billion-dollar inventories of various metals, including inventories that experienced significant volatility.  For example, in 2010, JPMorgan’s inventory of nickel peaked at nearly $2.2 billion, only to fall nearly 85% soon after.  Similarly, in 2011, JPMorgan’s platinum holdings peaked at nearly $1.5 billion, only to fall sharply after its peak.  In the largest single base metals holding seen by the Subcommittee, in January 2012, JPMorgan held a nearly $7.5 billion inventory of aluminum, consisting of a whopping 3.5 million metric tons of aluminum, an amount exceeding over half of the entire North American annual consumption of aluminum that year.”

The report did not focus on JPMorgan’s involvement in the gold market and one has to now wonder if that was because there was already an ongoing criminal investigation at the U.S. Department of Justice.

The full report, together with exhibits, can be read here.