When it comes to profit, everyone can agree there are two kinds of greed: The positive kind allows businesses to create productivity and prosperity in society while the opposite hurts people during that process.
Manipulating a company’s stock then selling at a higher price for personal gain isn’t just negative greed, it’s against the law. But regardless of illegality, CEOs have the power to do so via share buybacks.
By purchasing shares in the open market, any company can acquire its stock, creating a reduced amount for investors to trade. Demand increases over supply, sending the stock price higher. And due to the lower net number of shares available, the company’s EPS (earnings per share) increases as if by magic, meaning they can legally and publicly cook the books, creating an illusion of growth.
But, to even fathom how they became a thing, we need to go back to the 80s.
Until 1982, share buybacks were illegal and classed as insider trading by the Securities & Exchange Commission to penalize individuals for manipulating stock prices. That is, until ex-President Ronald Reagen, feeling pressured by Wall Street, decided to legalize them.
Over the next few decades, nobody made a fuss. There was no need for them. But in 2016, that changed: corporate tax breaks were introduced by President Trump and all of a sudden, corporations had a lot of spare cash to spend.
Coincidentally, corporate profits peaked around the same time, so making up for the fact struggling companies had, and still have, little to no earnings growth, they spent their spare change on buybacks destroying shareholder value and keeping the company’s newfound wealth out of workers’ pockets.
Corporations should be using their tax breaks to pay shareholders via dividends and reward employees.
Instead, Wall Street & CEOs, under the watchful eye of the government, have knowingly or unknowingly inflated a precarious bubble from which only they gain, transforming the stock market into a temporary Ponzi scheme fueled by corporate greed.
Fearing a substantial correction in stock prices due to late-cycle indicators deteriorating, 159 CEOs left their roles in August 2019 alone, surpassing the highest rate in more than a decade. Insiders know when business turns sour, easily identifying the perfect time to get out, but what about working & middle-class shareholders who, according to FRED, own almost 50% of corporate equities? When the “share buyback bubble” bursts, they are going to be the ones left holding the bag.
Not only is the bubble concerning but also the increasing wealth divide that comes with it. The latest figures are scary, to say the least, and it’s set to worsen as we move into 2020.
Workers are taking a stand within companies such as General Motors, who are currently entering their 4th straight week of strikes over wage disputes. Coincidentally, “corporate profits” at GM are at all-time highs, but employee demands still haven’t been met. This situation is just one of many occurring in America and across the world today as workers are struggling to get by while shareholders receive unrealized profits, soon to be realized losses.
Asset bubbles continue to repress young & low-income investors as the bottom 50% own only 0.8% of the stock market, which is no surprise, considering the appreciation of asset prices with stocks and housing being the main culprits. How can a college undergrad buy even one share in popular companies such as Amazon & Netflix when their stock prices are grossly overvalued at $1,739.65, $272.79 respectively? Hopefully, they don’t believe the hype that tech stocks can continue to rise indefinitely.
Although a blanket ban on buybacks is a radical idea, both sides of the political spectrum get something out of it. In this scenario, employees receive greater rewards for their efforts from the cash used to finance buybacks: a pay rise, increase benefits, etc., while a dishonest buyer and seller no longer influence the stock market’s price discovery mechanism. Free-market advocates can call this a win.
And let’s not forgot share buybacks are part of a bigger problem that exists today: big business and government are still in cahoots. Popular movements like Occupy Wall Street that sought to limit this type of corruption have been ineffective, not because their aim isn’t achievable, it’s just improbable.
With most politicians invested in large-cap companies who operate the biggest buyback programs in the stock market, it’s hard to imagine trying to get a ban through Congress. If you proposed this, take a wild guess on the type of response you’d receive — if any.
You’d be lucky to get a reply.