By Pam Martens and Russ Martens: February 7, 2016
Last Wednesday something noteworthy happened on Wall Street. Four of the largest Wall Street banks, each holding trillions of dollars in derivatives, hit new 12-month lows in intraday trading. The banks are Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. The banks recovered a little ground by the end of the week. These banks have two other things in common: they have been spending billions buying back their own stock and they all received bailouts during the 2008 crash.
Over the past six years, publicly traded companies in the Standard and Poor’s 500 Index have bought back $2.7 trillion of their own shares according to Bloomberg data. There are four major problems with this strategy: much of the buybacks are financed with debt; some of the buybacks simply offset insider selling or stock awards to executives; none of the money goes to growing or innovating the company; the timing of the buybacks could lead to stock market manipulation.
In the September 2014 issue of the Harvard Business Review, William Lazonick sized up the share buyback phenomenon like this:
“Given incentives to maximize shareholder value and meet Wall Street’s expectations for ever higher quarterly EPS, top executives turned to massive stock repurchases, which helped them ‘manage’ stock prices. The result: Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation.”
The SEC has a very lax rule, known as 10b-18, which provides a multitude of openings for stock price manipulation. As we previously reported, Wall Street banks can even carry out buybacks in their own dark pools as the self-regulators on Wall Street look the other way.
Lazonick says the U.S. has moved from a value creation model to a value extraction model. (Senator Bernie Sanders has an even more simplified analysis, stating that the business model of Wall Street is fraud.)
“For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call ‘sustainable prosperity.’
“This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.”
And don’t forget the extraction of wealth that comes from mismanaged, publicly traded companies being owned long-term in pension funds, IRAs and 401(k) plans. Citigroup, which engaged in massive buybacks before the 2008 crash and in recent quarters, has a share price that is more than 90 percent less than before the crisis.
At the close of trading on April 18, 2000, 100 shares of Citigroup were worth $6,212. Today, a decade and a half later, that 100 shares has shrunk to 13.33 shares with a value of $531.33 as of Friday’s close. (Citigroup did a 4 for 3 stock split on August 25, 2000 and a 1 for 10 reverse split on May 9, 2011.) In other words, your value as a shareholder has been decimated by 91.4 percent.
Contrast that performance with what insiders have extracted from the company: former Citigroup CEO Sandy Weill became a billionaire from his lavish stock awards; Co-CEO John Reed received an estimated $291 million from selling his shares when he stepped down in 2000; Robert Rubin, the former U.S. Treasury Secretary who sat on Citigroup’s Board after helping push through the repeal of the Glass-Steagall Act (which allowed Citigroup to become a Frankenbank and require the largest taxpayer bailout in U.S. history), raked in more than $120 million from Citigroup over a decade. The current U.S. Treasury Secretary, Jack Lew, and current Vice Chairman of the Federal Reserve, Stanley Fischer, also received millions in compensation for stints at Citigroup before it collapsed into the arms of the U.S. taxpayer.
As Wall Street becomes an increasing focal point in this year’s race for the White House, these various institutionalized forms of looting corporations must become part of the national debate.