[ How CEOs pulled off their coup, ending the Golden Age of growth
for the middle class while beginning the current era of the CEO as
modern-day superyacht-owning Emperor…]
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THE “SHARE BUYBACK” RAPE OF AMERICAN BUSINESS  
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Thom Hartmann
August 3, 2022
The Hartmann Report
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_ How CEOs pulled off their coup, ending the Golden Age of growth for
the middle class while beginning the current era of the CEO as
modern-day superyacht-owning Emperor… _

, Image by un-perfekt from Pixabay

 

Want to get rich without doing much work? Insanely, fabulously rich?
Private yacht, country estate, private jet rich? So do America’s
CEOs.

They began hustling for an old-time scam to accomplish this when
Ronald Reagan was elected president in 1980. Soon thereafter, they got
their way. This is the story.

Corporations buying back their own shares was a crime for which
corporate executives could go to prison
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1982. It was outlawed after wild manipulation of the stock market led
to the Great Crash of 1929 and the subsequent Republican Great
Depression. Joe Kennedy (JFK’s father), in fact, was the guy who
made it a crime.

President Franklin D. Roosevelt created the Securities and Exchange
Commission in the wake of that Great Crash, and put Kennedy in charge
of it. As FDR told
[[link removed]] Gloria
Swanson at the time, “It takes a crook to catch a crook.”

Kennedy and his Wall Street buddies at the SEC knew the tricks
companies would use to manipulate the price of their stock, and was
intimately familiar with the old trick of shrinking the number of
shares a company had outstanding just to jack up share prices.

HERE, IN SUPER-SIMPLIFIED FORM, IS THE BACKSTORY OF HOW CEOS PULLED
OFF THEIR COUP, ENDING THE GOLDEN AGE OF GROWTH FOR AMERICAN
CORPORATIONS AND THE MIDDLE CLASS WHILE BEGINNING THE CURRENT ERA OF
THE CEO AS MODERN-DAY EMPEROR.

Say you work for a company that is worth $1 million and has 100,000
shares of stock out there circulating in the marketplace. Each share
of stock is worth roughly $10 ($1 million company value ÷ 100,000
shares = $10 per share).

Historically, when a company wants to increase the value of their
stock, there are really only two paths, one legal and appropriate, the
other once considered an outright stock manipulation scam until Reagan
changed the rules.

THE FIRST AND LEGAL WAY TO INCREASE THE STOCK PRICE IS TO GROW THE
COMPANY, TO “INCREASE BUSINESS ACTIVITY.” DEVELOP NEW PRODUCTS,
BUILD NEW FACTORIES, OPEN NEW SALES TERRITORIES, HIRE NEW PEOPLE, OPEN
NEW LOCATIONS IN OTHER PARTS OF THE STATE OR PARTS OF THE COUNTRY.

As the company grows, so does its value.  If you could double the
size of the company this way so it’s now worth $2 million, its stock
value will have doubled.

Assuming there are still only 100,000 shares of stock issued, each
share is now worth $20 ($2 million company value ÷ 100,000 shares =
$20 per share) instead of the original $10.

This is how and why American business grew so quickly and in such a
healthy fashion from the creation of the SEC in 1934 until the Reagan
Revolution of the 1980s. We led the world in business growth, creating
real value that increased the wealth not only of shareholders but of
the entire country as new products, new employment, and new industrial
efficiencies were continuously brought to life by American businesses.

BUT WHAT IF THE CEO DOESN’T WANT TO GO THROUGH ALL THAT HARD WORK OF
BUILDING THE BUSINESS, BUT STILL WANTS TO JACK UP THE PRICE OF THE
SHARES? WHAT IF HE’S REALLY A BIT OF A GRIFTER AND DOESN’T LIKE
THE HARD WORK OF RUNNING THE COMPANY, BUT JUST WANTS TO MANIPULATE ITS
SHARE PRICE TO ENRICH HIMSELF AND HIS DRINKING BUDDIES IN THE
EXECUTIVE SUITE?

This would not be good for the company or the country because it
wouldn’t grow the company, expand new products, or increase employee
pay. But it would make an instant profit for the shareholders, and
companies have, for centuries, compensated their most senior
executives with stock packages, typically on an annual basis.

So the CEO and his buddies are sitting on piles of stock they got as
part of their compensation packages and they want the price of that
stock to go up. But, at the same time, they don’t want to use the
company’s profits and cash-on-hand to grow the company (“that’s
too much work”) and don’t want to increase pay and benefits to
workers (“who cares about them?”).

So what can they do with those profit dollars that will jack up their
stock’s value with no work or effort on their part? How can they
basically transport that profit directly out of the company and into
their own pockets — without having to use much of it to keep the
company in good shape or even grow the business?

THIS QUESTION LEADS US TO THE SECOND STRATEGY TO INCREASE A
COMPANY’S STOCK PRICE, ONE THAT THE SEC FUNCTIONALLY OUTLAWED IN
1934 WHEN THEY MADE “STOCK PRICE MANIPULATION” A CRIME.

If you’re the CEO of this imaginary company and are sitting on 1000
shares of the company’s stock — worth $10,000 (at $10 a share) —
and wanted to jack up the price of your stock so you could sell it and
make an instant profit for yourself, the way you can do this today is
pretty simple.

Just have the company go into the marketplace — the stock market —
and use the money from its profits (that would usually go to expanding
the company or increasing employee pay and benefits) to buy up, say,
50,000 shares out of the 100,000 issued, then “retire” them
(basically, just destroy them).

The company is still only worth $1 million, but now there are only
50,000 shares in circulation, half as many as before, meaning that
every share is now worth twice as much: $20 each instead of the former
$10.

YOUR 1000 SHARES THAT WERE WORTH $10,000 THE DAY BEFORE YOUR COMPANY
BOUGHT BACK AND RETIRED ITS SHARES ARE NOW, THE DAY AFTER THE SHARE
BUYBACK, WORTH $20,000. 

YOUR COMPANY HASN’T MADE AN EXTRA PENNY. IT HASN’T INVENTED A
SINGLE NEW PRODUCT OR OPENED A SINGLE NEW SALES TERRITORY. IT HASN’T
CREATED A SINGLE JOB OR DONE ANYTHING ELSE PRODUCTIVE FOR THE
COMMUNITY.

BUT YOU, AS THE CEO AND A MAJOR SHAREHOLDER, JUST PERSONALLY MADE A
$10,000 PROFIT ON YOUR STOCK IN A SINGLE DAY, AS DID YOUR OTHER SENIOR
EXECUTIVES WHO GET ANNUAL STOCK SHARES AS PART OF THEIR COMPENSATION
PACKAGES.

Not only that, instead of paying regular income taxes on that money
you make from selling your stock, you only pay capital gains tax, a
much, much lower rate.

TO DOUBLE DOWN ON THIS STRATEGY, IMAGINE THAT YOU SET UP THE RULES FOR
YOUR REGULAR PAYCHECK TO BE A FUNCTION OF THE COMPANY’S STOCK PRICE,
TOO.  WHEN THE COMPANY’S STOCK PRICE GOES UP, YOUR SALARY
AUTOMATICALLY GOES UP AS WELL.

So when the stock price goes up, not only do you get rich from cashing
in your stock, but your regular paycheck also goes up. It’s a
twofer! 

And you didn’t have to invent a single new product, build a single
new factory, or even maintain your existing business by fixing leaking
gas pipelines or upgrading your factories.

AS MENTIONED, THIS SCAM WAS MADE ILLEGAL IN 1934, BRINGING THE WHOLE
CONCEPT OF COMPANIES BUYING BACK AND RETIRING THEIR OWN SHARES TO A
SCREECHING HALT AFTER THE REPUBLICAN GREAT DEPRESSION. IT WAS THAT WAY
FOR THE 48 YEARS THAT COINCIDE WITH THE MOST RAPID AND HEALTHY
BUSINESS GROWTH IN AMERICAN HISTORY.

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Source: OfficialData.org
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Those decades of the 1940s, 50s, 60s, and 70s were the only decades in
American history where we continuously had over 3% annual GDP growth.
It was the time of greatest prosperity in this country for the
American working class, and quite literally created the American
middle-class. Stock market investors did well, but didn’t get
fabulously rich.

UNTIL 1982.

THE BANKERS AND BIG STOCK BROKERS WHO HELPED BRING RONALD REAGAN TO
POWER WANTED TO GO FROM INDIVIDUALLY MAKING A FEW MILLION DOLLARS A
YEAR IN 1980 TO INDIVIDUALLY MAKING HUNDREDS OF MILLIONS OR EVEN
BILLIONS OF DOLLARS A YEAR — AS THEY ARE DOING TODAY.

Bowing to their wishes, Reagan gave his fatcat campaign donors a path
to riches at the level of ancient pharaohs and European kings.

One of the most consequential outcomes of the Reagan Revolution was
Reagan’s putting John Shad
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of the monster investment house _E.F. Hutton —_ in charge of the
SEC, which regulates monster investment houses.

Shad wasted no time in deregulating stock buybacks, instituting in
1982 what’s now known as “Rule 10b-18
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stock buybacks explicitly _legal_ for the first time since 1934.

SINCE THEN, SHARE BUYBACKS HAVE BECOME THE MOST PERSONALLY PROFITABLE
BUSINESS SCAM CEOS AND SENIOR EXECUTIVES CAN RUN AGAINST THEIR OWN
COMPANIES AND COMMUNITIES.

When Reagan and Shad made this change in 1982, the average
compensation of CEOs was around 30 times that of their average
employee.  CEO’s often lived in the same communities as their
workers, or in a just slightly more upscale part of town.

Today CEO compensation is between 254
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1000 times the average employee, depending on the industry, and CEOs
live in palatial estates with servants’ quarters and private jets;
much of that increase in their annual income is the result of their
companies repeatedly executing stock buybacks over the past 40 years.

CORPORATE CEOS CALL THIS “MAXIMIZING SHAREHOLDER VALUE,” AND IT
ACCOUNTS FOR MUCH OF THE 40-YEAR EXPLOSION IN THE PRICE OF PUBLICLY
TRADED STOCKS. INVESTORS DON’T COMPLAIN BECAUSE THEY’RE MAKING OUT
WELL, TOO (AND REMEMBER THAT 85+ PERCENT OF ALL STOCK IN AMERICA IS
OWNED BY THE TOP 10 PERCENT OF AMERICANS).

It’s also why so much of America’s corporate infrastructure is
rotting, from leaking methane from oil rigs to toxic spills from
chemical factories to industrial waste being discharged into our
environment instead of being cleaned up.

AFTER ALL, WHY SPEND MONEY ON IMPROVING THE COMPANY — OR EVEN ON
ROUTINE MAINTENANCE AND SAFETY — WHEN YOU CAN PERSONALLY CASH IN
JUST AS EFFECTIVELY BY SIMPLY USING YOUR COMPANY’S REVENUES TO
ENGINEER A STOCK BUYBACK SCHEME EVERY YEAR?

As William Lazonick wrote
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Hill_ in 2018:

“Most recently, from 2007 through 2016, stock repurchases by 461
companies listed on the S&P 500 totaled $4 trillion, equal to 54
percent of profits. ... Indeed, top corporate executives are often
willing to incur debt, lay off employees, cut wages, sell assets, and
eat into cash reserves to ‘maximize shareholder value.’”

YOU’D THINK THAT IF A COMPANY’S STOCK WAS GOING UP IN VALUE THAT
WOULD INDICATE IT IS DOING WELL AND COULD EVEN WOULD PAY ITS EMPLOYEES
BETTER. IN FACT, THE CEOS OF COMPANIES NEED CASH TO DO THESE BUYBACKS,
AND TO GET THAT CASH THEY OFTEN LAY OFF WORKERS AND EVEN CUT BACK ON
THEIR MAIN BUSINESS JUST TO ENRICH THEMSELVES AND THEIR SENIOR
EXECUTIVES.

As Emily Stewart wrote
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same year for _Vox_:

“The thing is, when companies are investing in stock buybacks and
dividends, they’re spending money they could use on something
else. 

“The Roosevelt Institute in May released a report estimating
that WALMART
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for example, could boost hourly wages to more than $15 an hour with
the $20 billion it was using for a buyback. A SEPARATE STUDY
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the Roosevelt Institute released in July found that companies spent
nearly 60 percent of net profits on buybacks from 2015 to 2017. It
estimated that with the money allocated to buybacks, companies such as
Lowes, CVS, and Home Depot could give each of their workers a raise of
at least $18,000 a year [on top of their current income!].

“Harley-Davidson in February ANNOUNCED A NEARLY $700 MILLION STOCK
BUYBACK
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just days after saying it would close a plant in Kansas City. Wells
Fargo is SPENDING $25 BILLION
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buybacks and is at the same time laying off workers in MULTIPLE
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SHARE BUYBACKS HAVE REPLACED GROWING A BUSINESS AS THE MAIN WAY CEOS
JACK UP THEIR COMPENSATION TO BUY A NEW MEGA-YACHT OR SKI CHALET IN
SWITZERLAND. AND ITS JUST AS MUCH OF A SCAM TODAY, AND JUST AS
DESTRUCTIVE TO WORKING PEOPLE AND OUR NATION, AS IT WAS IN 1929 WHEN
IT HELPED CRASH THE MARKET.

Consider: if the CEO can use his company’s operating revenues to
purchase, say, $200 million worth of stock, then, depending on how
much stock the CEO holds, that $200 million expense to the company
may _all_ end up flowing, essentially, into the CEOs pocketbook
based on the increased value of his stock.

And he really doesn’t have to work an extra day to make all that
money. It’s far more than he could ever make in salary, plus he pays
a much lower tax rate on the income than do working people.

Senators Bernie Sanders and Elizabeth Warren have been shouting about
this from the rooftops for decades. Hillary Clinton brought it up in
her 2016 campaign for president, something that no doubt cost her some
CEO support.

At the time, _Financial Times_ US National Editor Ed Luce wrote, in
an article titled _Hillary’s War on Quarterly Capitalism
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“The case for reforming shareholder capitalism is strong. The level
of US investment [in actual business activity] is at its lowest since
1947. Last year, according to Goldman Sachs, S&P 500 companies spent
more than $500bn on share buybacks. This year it is expected to hit
$600bn.”

That was in 2015. Just so far this year:

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Macys bought back 28.9% of their shares spending $2 billion they could
have otherwise used to expand the business or raise workers’ pay.

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Chesapeake Energy bought back 20.6% using $2 billion.

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Diamondback Energy spent $4 billion to buy back 17.9 percent of their
own shares.

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For Morgan Stanley it was 14.8% of shares at a cost to the company of
$20 billion.

The entire list — hundreds of billions in share buybacks just in the
first few months of this year — is on this _Marketbeat
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WHEN THE BIGGEST OIL COMPANIES IN AMERICA REPORTED RECORD PROFITS,
RIPPING OFF AMERICAN DRIVERS WITH SKY-HIGH GAS PRICES,
REUTERS REPORTED
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APRIL 29 OF THIS YEAR:

“Exxon earlier this year more than doubled its projected buyback
program to $30 billion through 2022 and 2023. Shell said it would buy
back $6 billion in shares in the current quarter, while Chevron
boosted its annual buyback plans to a range of $10 billion to $15
billion, up from $5 billion to $10 billion.

“Exxon shares rose 4.6% to $96.93. Chevron shares rose almost 9%,
closing at $163.78.”

CNBC REPORTS
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“Apple started to pay quarterly dividends and repurchase its shares
in March 2012. Since then and through last summer, Apple has spent
over $467 billion on buybacks, according to S&P Global Market
Intelligence
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which calls the iPhone maker the ‘poster child’ for share
buybacks.”

FACEBOOK, WHICH APPARENTLY DOESN’T HAVE ENOUGH CASH TO HIRE PEOPLE
TO KEEP NAZIS OFF THEIR PLATFORM, HAS MADE ITS TOP STOCKHOLDER, MARK
ZUCKERBERG, THE RICHEST MILLENNIAL IN AMERICA IN PART THROUGH SHARE
BUYBACKS, ANNOUNCING IN THEIR THIRD QUARTER 2021 EARNINGS REPORT
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“We repurchased $14.37 billion of our Class A common stock in the
third quarter and had $7.97 billion remaining on our prior share
repurchase authorization as of September 30, 2021. We also announced
today a $50 billion increase in our share repurchase authorization.”

MANY DEMOCRATIC POLITICIANS HAVE BEEN WORKING FOR YEARS TO TRY TO END
THIS CORROSIVE PRACTICE. SENATOR TAMMY BALDWIN WROTE
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A 2015 LETTER TO THE SEC’S CHAIR:

“Stock buybacks use profits to purchase a company’s own stock
instead of investing in the worker training, research, or innovation
necessary to promote long-term growth. ... In the past, this money
went to productive investments in the form of higher wages, research
and development, training, or new equipment. Today, cash is being
extracted from companies and placed on the sidelines. Buybacks are now
undermining the stock market’s role in capital formation.”

SENATOR ELIZABETH WARREN NOTED
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“Buybacks create a sugar high for the corporations. It boosts prices
in the short run, but the real way to boost the value of a corporation
is to invest in the future, and they are not doing that.”

IN 2019, SENATORS BERNIE SANDERS AND CHUCK SCHUMER CO-AUTHORED AN
ARTICLE FOR _THE NEW YORK TIMES_ IN WHICH THEY TOLD AMERICA:

“Between 2008 and 2017, 466 of the S&P 500 companies spent
around $4 trillion on stock buybacks
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equal to 53 percent of profits. An additional 40 percent of corporate
profits went to dividends. When more than 90 percent of corporate
profits go to buybacks and dividends, there is reason to be concerned.

“First, stock buybacks don’t benefit the vast majority of
Americans. That’s because large stockholders tend to be wealthier.
Nearly 85 percent of all stocks owned by Americans belong to the
wealthiest 10 percent of households. Of course, many corporate
executives are compensated through stock-based pay. So when a company
buys back its stock, boosting its value, the benefits go
overwhelmingly to shareholders and executives, not workers.”

POINTING OUT THAT SHARE BUYBACKS INFLATE THE WEALTH OF THE TOP 10% OF
AMERICANS WHO OWN MOST OF THIS NATION’S STOCKS — INCREASING
INEQUALITY — WHILE GENERALLY SCREWING THE PEOPLE WHO WORK FOR THOSE
COMPANIES, THEY ADDED:

“[W]hen corporations direct resources to buy back shares on this
scale, they restrain their capacity to reinvest profits more
meaningfully in the company in terms of R&D, equipment, higher wages,
paid medical leave, retirement benefits and worker retraining.”

It’s time to declare the 42-year Reagan Revolution’s neoliberal
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a failure, and share buybacks are one of its most visible examples.
Joe Kennedy knew what he was talking about when he criminalized them,
even if he was a crook.

A first step toward restoring vitality to America’s business sector
and providing much-needed funds to return America to our position as
the world’s innovator — with the world’s most prosperous middle
class, as we were before 1982 — is to once again outlaw stock
buybacks.

_Thom Hartmann is a NY Times bestselling author and American's #1
progressive talk-show host, carried on SiriusXM, Pacifica, radio
stations nationwide, Free Speech TV, YouTube, etc. Thom is also a
writing fellow with the Independent Media Institute._

* Stock buybacks
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* CEO Pay
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* corporate stock ownership
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