By Pam Martens and Russ Martens: July 14, 2020 ~
The House Financial Services’ Subcommittee on Investor Protection, Entrepreneurship and Capital Markets will convene a hearing at noon today that is titled: “Promoting Economic Recovery: Examining Capital Markets and Worker Protections in the COVID-19 Era.” You can watch the hearing live at this link.
One of the topics for the hearing will be corporations buying back their own stock and paying dividends during the pandemic, actions which benefit shareholders rather than the overall economy. The House is considering legislation that would require that until all federal aid under the CARES Act has been repaid by the corporation, it cannot “pay bonuses to executives, may not pay executives in connection with their termination, may not engage in stock buybacks, and may not pay dividends to shareholders.”
The Subcommittee has a very sound, and urgent, basis to explore this topic, particularly as it pertains to the mega banks on Wall Street. In July of 2017, Thomas Hoenig, then Vice Chair of the Federal Deposit Insurance Corporation (FDIC), sent a letter to the U.S. Senate Banking Committee. He made the following points which are more critical today than at any time in history:
“[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.”
Eight of the largest U.S. banks announced in unison on Sunday, March 15, of this year that they would halt share buybacks through the first and second quarter, but they’ve continued to pay cash dividends while some of their trading divisions have taken trillions of dollars in cumulative loans from the Federal Reserve since September 17, 2019. (See our in-depth series of articles on that topic here.)
On June 24, Bloomberg reporters Lisa Lee and Shahien Nasiripour stunned markets with the news that Bank of America, Citigroup, JPMorgan Chase and Wells Fargo have paid out more money in dividends and buybacks to shareholders than they’ve earned since the beginning of 2017. The reporters noted the following:
“From the start of 2017 through March, the four banks cumulatively returned about $1.26 to shareholders for every $1 they reported in net income, according to data compiled by Bloomberg. Citigroup returned almost twice as much money to its stockholders as it earned, according to the data, which includes dividends on preferred shares. The banks declined to comment.”
Citigroup is the bank that received the largest bailout in global banking history from December 2007 through July 21, 2010. Its bailout haul included an infusion of $45 billion in capital from the U.S. Treasury; a government guarantee of over $300 billion on its dubious “assets”; a guarantee of $5.75 billion on its senior unsecured debt and $26 billion on its commercial paper and interbank deposits by the FDIC; and secret revolving loans from the Federal Reserve that funneled a cumulative $2.5 trillion in below-market-rate loans to Citigroup, according to an audit released in July 2011 by the Government Accountability Office (GAO).
Now, it would appear, the Federal Reserve that allowed Citigroup to blow itself up in 2008 has been sitting on its hands for 3-1/2 years while Citigroup paid out to its shareholders twice as much money as it actually earned. This is just one more in a growing mountain of reasons that the Federal Reserve must be stripped of its supervisory role over banks.
The Subcommittee notes in its Memorandum for the hearing that “Until 1982 when the SEC created a safe harbor for stock buybacks, a company purchasing its own stock was an illegal market manipulation because such repurchases artificially and temporarily drive up the company’s stock price.”
Under the current market structure, banks can not only manipulate their market price by buying back their own stock, but they can do the manipulating in their own Dark Pools, unregulated, quasi stock exchanges operated internally by the banks. (See Wall Street Banks Are Trading in Their Own Company’s Stock: How Is This Legal?)
One failing of this hearing may be that it focuses on buybacks by S&P 500 corporations and neglects the mega banks on Wall Street. The Subcommittee writes in its Memorandum that “The current crisis also demonstrates the potential for stock buybacks to leave firms undercapitalized during a downturn. According to economist William Lazonick, Boeing spent $43.1 billion on stock buybacks from 2013 to 2019. Since the start of the crisis, Boeing has announced over 12,000 layoffs. Airlines, which have received large amounts of assistance during the pandemic previously used 96% of their cash flows over the past decade on stock buybacks.”
That’s an important topic but it pales in comparison to the role that undercapitalized banks play in a financial crisis, as we learned so well in the last crisis.
According to an incisive report in 2018 by Lenore Palladino, Senior Economist and Policy Counsel at the Roosevelt Institute, buybacks have the following impact:
“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…”
To express that simply: buybacks are killing U.S. competitiveness which will eventually kill the corporation and its share price. Citigroup became a 99 cent stock in 2009 and its share price at the closing bell yesterday would actually be only $5.22 had the bank not done a 1-for-10 reverse stock split in 2011, stripping away nine shares from its shareholders for every ten shares they previously held.
Boeing is another rudderless ship lost in a sea of buybacks. In addition to its 12,000 layoffs, its stock price has lost 47 percent since January.
Who is benefitting from this market manipulation with stock buybacks? Palladino explains:
“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….”
Witnesses at today’s House hearing include the following: Dr. William E. Spriggs, Chief Economist, AFL-CIO and Professor of Economics, Howard University; Anne Simpson, Director of Board Governance and Strategy, California Public Employees’ Retirement System; Camille Busette, PhD, Senior Fellow and Director of the Race, Prosperity, and Inclusion Initiative, The Brookings Institution; and Neil L. Bradley, Executive Vice President and Chief Policy Officer, Chamber of Commerce of the United States of America.
That last witness comes from a front group for U.S. corporations. See Susan Antilla’s insightful “Chamber of Commerce Gives Wall Street, Polluters, What They Pay For.”