American businesses devour themselves to enrich the 1%

A Goldman Sachs report on stock buybacks shows a suspicious clustering in the fourth quarter, just when management bonuses are being calculated.

These expensive gambits weaken the health of companies by gutting their cash reserves to jack up the share-price, which is one way of thinking about "building shareholder value" (if the shareholders you're thinking about are giant hedge-funds who don't care about the health of the business and just want to asset-strip them, sell their shares, and move on to the next business).

The "job creators" who benefit from this move are long gone by the time the business starts to teeter, and the management teams that run the buy-backs get huge bonuses for "creating shareholder value." The actual working stiffs at the company -- and the suppliers and customers that support it -- are left holding the bag.

Notice how the bulk of buybacks are concentrated in the fourth quarter, with the obvious intent of goosing prices at year end so as to lead to higher executive pay for “increasing shareholder value”? In fact, these companies are being gradually liquidated. Issuing debt, which public companies have done in copious volumes since the crash, and using it to buy shares is dissipating corporate assets. They are over time shrinking their businesses. That is also reflected in aggressive headcount cuts and cost-saving measures. Even though analysts like to tout the cash that companies have sitting on their balance sheets as a source of potential investment, as we’ve discussed in previous posts, public companies are so terrified of even a quarterly blip in earnings due to incurring expenses relating to long-term investments that they’d rather do nothing, or go the inertial path of cutting costs to show higher profits.

Goldman Makes It Official That the Stock Market is Manipulated, Buybacks Drive Valuations [Naked Capitalism]

(Image: Ouroboros, Zanaq, CC-BY-SA)

Notable Replies

  1. This is an excellent example of how the secondary market causes companies to eviscerate themselves.

  2. Hanlon's razor could apply here (Never attribute to malice that which is adequately explained by incompetence)

    IIRC, stock buybacks are typically signalled ahead of time for the following year, but then they wait to a "good" time to execute them. So when year-end comes around they realize they haven't bought back all the stock they said they would, so they panic buy.

    The counter-argument here is that fiscal years rarely correspond to calendar years. So probably greed, yup.

  3. It's the cancer that's killing American society. People used to invest for the dividends, long term gains, and investing in the workers.

    Now capital is being transformed into paper money rather than the other way around, all to satisfy short term greed that's kicking the country in the back of the knees. The government would probably take care if this if it weren't already bought by the people profiting from this dangerous and unsustainable extraction of wealth.

  4. I understand. I'm just getting really tired of the entire world blaming their own bad actions on abstractions. The market made me do it. Optimizing this. Maximizing that. All those people Mitt Romney laid off had families.

  5. The central point of the article was that execs. were manipulating companies' stock to drop at the date of option grants.

    Manipulating stock prices to give execs. an added perk when options are being granted is in no sense benefitting shareholders.

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