By Pam Martens and Russ Martens: June 29, 2017
Yesterday, the Federal Reserve announced the second leg of its 2017 stress tests for the nation’s most systemic financial institutions. Known as the Comprehensive Capital Analysis and Review (CCAR), the Fed said it “did not object to the capital plans of all 34 bank holding companies” although Capital One Financial will be required to “submit a new capital plan within six months that addresses identified weaknesses in its capital planning process.”
That all clear from the Fed unleashed what JPMorgan Chase CEO Jamie Dimon fondly refers to as “animal spirits” on Wall Street. The Fed had barely made its announcement when three of the biggest Wall Street banks announced they were earmarking about $47 billion to gorging on their own share buybacks. JPMorgan Chase led the pack with a potential buyback of $19.4 billion over the next 12 months, according to Bloomberg News. Citigroup has projected potential buybacks of $15.6 billion while Bank of America said it may buy back as much as $12 billion.
The mega banks on Wall Street are engaging in these buyback binges despite a growing chorus of critics who say the practice harms the overall economy.
In the September 2014 issue of the Harvard Business Review, William Lazonick wrote the following:
“Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.
“The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.”
Last year U.S. Senators Tammy Baldwin and Jeff Merkley, together with co-sponsors Elizabeth Warren and Bernie Sanders, introduced legislation in the Senate that seeks to rein in the short term focus on quarterly profits that can be pumped up by share buybacks. In introducing the bill, known as the Brokaw Act, Senator Merkley said:
“Hollowing out longstanding companies so that a small group of the wealthy and well-connected can reap a short-term profit is not the path to a strong and sustainable economy for our nation. It’s time to take on this rigged system and stop the short-term game playing that sells our workers, businesses and economy short.”
In 2015, economist Michael Hudson authored a seminal work on the devolution of modern finance in his book “Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.” Chapter 8 opens with this quotation from John Maynard Keynes: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Hudson writes further:
“Instead of warning against turning the stock market into a predatory financial system that is de-industrializing the economy, [business schools] have jumped on the bandwagon of debt leveraging and stock buybacks. Financial wealth is the aim, not industrial wealth creation or overall prosperity. The result is that while raiders and activist shareholders have debt-leveraged companies from the outside, their internal management has followed the post-modern business school philosophy viewing ‘wealth creation’ narrowly in terms of a company’s share price. The result is financial engineering that links the remuneration of managers to how much they can increase the stock price, and by rewarding them with stock options. This gives managers an incentive to buy up company shares and even to borrow to finance such buybacks instead of to invest in expanding production and markets.”
Last year Rana Foroohar, then the Assistant Managing Editor at Time magazine, now a Global Economic Analyst at CNN and Global Business Columnist and Associate Editor at the Financial Times, authored the insightful book “Makers and Takers: The Rise of Finance and the Fall of American Business. In one case study, Foroohar looks at the technology company, Apple, and its exorbitant use of share buybacks using borrowed money. Foroohar writes:
“…Apple’s behavior is no aberration. Stock buybacks and dividend payments of the kind being made by Apple – moves that enrich mainly a firm’s top management and its largest shareholders but often stifle its capacity for innovation, depress job creation, and erode its competitive position over the longer haul – have become commonplace. The S&P 500 companies as a whole have spent more than $6 trillion on such payments between 2005 and 2014, bolstering share prices and the markets even as they were cutting jobs and investment.”
The result says Foroohar is that “our economy limps along in a ‘recovery’ that is tremendously bifurcated. Wage growth is flat. Six out of the top ten fastest-growing job categories pay $15 an hour and workforce participation is as low as it’s been since the late 1970s. It used to be that as the fortunes of American companies improved, the fortunes of the average American rose, too. But now something has broken that relationship.”
There is one more serious problem with Wall Street banks buying back their own shares. For reasons no Federal regulator has yet to explain, the banks are allowed to operate their own quasi stock exchanges known as Dark Pools and trade in their own and other Wall Street bank stocks – a potential means of manipulating the market if ever there was one. (See related articles below.)