By Pam Martens and Russ Martens: October 28, 2019 ~
JPMorgan Chase is the largest bank in the United States with $1.6 trillion in deposits from more than 5,000 retail bank branches spread across the country. When it withdraws liquidity from the U.S. financial system, that has a reverberating impact.
According to the filings that JPMorgan Chase makes annually with the Securities and Exchange Commission (SEC), since 2013 JPMorgan Chase has spent $77 billion buying back its own stock. That includes the whopping $17.01 billion it has spent in just the first nine months of this year buying back its stock.
But here’s the shocking news. According to its SEC filings, JPMorgan Chase is partly using Federally insured deposits made by moms and pops across the country in its more than 5,000 branches to prop up its share price with buybacks. The wording in the filing is as follows:
“In 2019, cash provided resulted from higher deposits and securities loaned or sold under repurchase agreements, partially offset by net payments on long-term borrowing…cash was used for repurchases of common stock and cash dividends on common and preferred stock.”
Had JPMorgan Chase not spent $77 billion propping up its share price with stock buybacks, it would have $77 billion more in cash to loan to businesses and consumers – the actual job of its commercial bank. Add in the tens of billions of dollars that other mega banks on Wall Street have used to buy back their own stock and it’s clear why there is a liquidity crisis on Wall Street that is forcing the Federal Reserve to hurl hundreds of billions of dollars a week at the problem.
On September 17, the overnight lending rate on repurchase agreements (repos) spiked from the typical 2 percent range to 10 percent, meaning some very big lenders such as JPMorgan Chase were backing away from lending. That forced the Federal Reserve to jump in as lender of last resort, the first time it has done that in any material way since the financial crisis.
On October 1, Reuters’ David Henry reported the following:
“Analysts and bank rivals said big changes JPMorgan made in its balance sheet played a role in the spike in the repo market, which is an important adjunct to the Fed Funds market and used by the Fed to influence interest rates…
“Publicly-filed data shows JPMorgan reduced the cash it has on deposit at the Federal Reserve, from which it might have lent, by $158 billion in the year through June, a 57% decline.”
Reuters reported further that JPMorgan’s draw down on its cash “accounted for about a third of the drop in all banking reserves at the Fed during the period.”
Millions of moms and pops across America who are going into their local branch of Chase to deposit some part of their paycheck each week for a rainy-day fund are doing so because they know the money is Federally-insured. Most have no idea that Chase is part of the sprawling global investment bank JPMorgan or that their deposits helped to make Jamie Dimon, the bank’s CEO, a billionaire through stock grants to him personally, stock buybacks to prop up the share price, and the bank’s own internal dark pool that trades in the stock of the bank — all while the Securities and Exchange Commission looks the other way.
What is particularly interesting about JPMorgan Chase’s stock buybacks is that the dollar amount increases consistently each year, almost guaranteeing a nice bump in the share price. That helps to explain why Jamie Dimon is the only CEO of a major Wall Street bank still at the helm of his bank since the financial crisis and despite the bank’s guilty pleas to three criminal felony counts leveled at the bank during his tenure by the U.S. Department of Justice. Just last month the precious metals trading desk at JPMorgan Chase was labeled a criminal enterprise by the U.S. Department of Justice and three of its traders were charged under the RICO statute, which is typically reserved for organized crime figures. (At least one more indictment in the same matter is expected to be handed down by prosecutors within the next 30 days according to a prosecutor’s remarks in a recent court hearing.)
Thomas Hoenig, then Vice Chair of the Federal Deposit Insurance Corporation (FDIC), sent a letter in July of 2017 to the U.S. Senate Banking Committee, making the following points:
“[If] the 10 largest U.S. Bank Holding Companies [BHCs] were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.
“Four of the 10 BHCs will distribute more than 100 percent of their current year’s earnings, which alone could support approximately $537 billion in new loans to Main Street.
“If share buybacks of $83 billion, representing 72 percent of total payouts for these 10 BHCs in 2017, were instead retained, they could, under current capital rules, increase small business loans by three quarters of a trillion dollars or mortgage loans by almost one and a half trillion dollars.”
In an incisive report in March of last year by Lenore Palladino, Senior Economist and Policy Counsel at the Roosevelt Institute, corporate buybacks of stock work like this:
“Open-market share repurchases, often known informally as ‘stock buybacks,’ occur when companies purchase back their own stock from shareholders on the open market. When a share of stock is bought back, the company reabsorbs that portion of its ownership that was previously distributed among other investors. This reduces the amount of outstanding shares in the market, resulting in an increase in the price per share. The logic is that of supply and demand: when there are fewer supplies available to purchase, then an upward demand will increase share prices. In essence, then, stock buybacks raise share prices artificially. The value of the stock goes up as a result of a stock buyback, but without making the kinds of changes that would improve the actual value of the company—through more efficient production, new products, or better customer experience…”
Palladino has a pretty good idea of who is really benefiting from this market manipulation of share prices. She writes:
“One of the major problems with stock buybacks is that corporate executives often hold large amounts of stock themselves, and their compensation is often tied to an increase in the company’s earnings per share (EPS) metric. That gives executives a personal incentive to time buybacks so that they can profit off of a rising share price. Usually a majority of corporate executives’ pay is from ‘performance-based pay,’ which is either directly paid in stock or compensation based on rising EPS metrics (Larckar and Tayan). That means that the decision of whether and when to execute a stock buyback can affect his or her compensation by tens of millions of dollars. Despite these facts—that stocks constitute a substantial proportion of executives’ pay, and that stock buybacks provide a way for executives to raise their pay by millions of dollars—the rules that govern how the company authorizes stock buyback programs fail to account for this significant conflict of interest. The decision to authorize a new stock buyback program is made by the board of directors, including interested directors (those who hold significant shares of stock). The actual execution of buybacks is left to the executives and financial professionals inside the companies, with no board oversight as to the timing or amount of such buybacks, as long as the buybacks stay within the limit previously authorized. As long as directors are using their best ‘business judgment’ to authorize programs, there is no recourse to hold directors accountable for extremely high repurchase programs….”
It was just this past June that the Federal Reserve rubber-stamped the massive stock buybacks at the mega banks on Wall Street as part of its annual stress-tests. But three separate federal agencies have criticized the Federal Reserve’s stress tests as being seriously flawed.
Now the Federal Reserve is reaping the outcome of its own hubris. Just last week the Fed announced it would be boosting its money spigot to Wall Street to the tune of $690 billion a week. Just this morning, it flung $76.583 billion at the Wall Street liquidity crisis.
Despite all of this, Congress has yet to schedule a hearing on the Fed’s actions and drill down into the root causes of the crisis. Senator Elizabeth Warren has, however, sent a letter to U.S. Treasury Secretary Steve Mnuchin and given him until this Friday to respond with details on what is causing the liquidity problems.