We Squandered Our Money On Stock Buybacks But Don't Blame Us

Mish

The airline industry is howling about circumstances beyond its control.

Airline Industry Turmoil Deepens

Reuters reports Airline Industry Turmoil Deepens as Coronavirus Pain Spreads

Passenger operations have collapsed at an unprecedented rate as the virus spreads around the world, with Delta Air Lines Inc parking more than 600 jets, cutting corporate pay by as much as 50%, and scaling back its flying by more than 70% until demand begins to recover.

Shares in U.S. airlines fell sharply on Wednesday after Washington proposed a rescue package of $50 billion in loans, but no grants as the industry had requested, to help address the financial impact from the deepening coronavirus crisis.

The Trump administration’s lending proposal would require airlines to maintain a certain amount of service and limit increases in executive compensation until the loans are repaid.

American Airlines Group Inc in a memo to staff rebuffed criticism that it had rewarded its shareholders with too many dividends and stock buybacks in better times, leaving it with less cash to manage the crisis.

“Unfortunately, this is no ordinary rainy day,” said Nate Gatten, American’s senior vice president global government affairs. “These are extraordinary circumstances, and additional support is necessary to protect jobs and ensure that the flying public can continue to rely on our industry after the crisis ends.”

No Ordinary Rainy Day

Fair enough, this is no rainy day. But the sad fact is the industry did not save a dime, not enough for even an ordinary rainy day.

Neither did Boeing.

Nor did any company. None of them that I can find.

$4.5 Trillion Blown on Share Buybacks

Wolf Richter has an excellent report on the setup.

Please consider After Blowing $4.5 Trillion on Share Buybacks, Airlines, Boeing, Many Other Culprits Want Taxpayer & Fed Bailouts of their Shareholders

The big four US airlines – Delta, United, American, and Southwest – whose stocks are now getting crushed because they may run out of cash in a few months, would be the primary recipients of that $50 billion bailout, well, after they wasted, blew, and incinerated willfully and recklessly together $43.7 billion in cash on share buybacks since 2012 for the sole purpose of enriching the very shareholders that will now be bailed out by the taxpayer.

Share buybacks were considered a form of market manipulation and were illegal under SEC rules until 1982, when the SEC issued Rule 10b-18 which provided corporations a “safe harbor” to buy back their own shares under certain conditions. Once corporations figured out that no one cared about those conditions, and that no one was auditing anything, share buybacks exploded. And they’ve have been hyped endlessly by Wall Street.

The S&P 500 companies, including those that are now asking for huge bailouts from taxpayers and from the Fed, have blown, wasted and incinerated together $4.5 trillion with a T in cash to buy back their own shares just since 2012:

And those $4.5 trillion in cash that was wasted, blown, and incinerated on share buybacks since 2012 for the sole purpose of enriching shareholders is now sorely missing from corporate balance sheets, where these share buybacks were often funded with debt.

And the record amount of corporate debt – “record” by any measure – that has piled up since 2012 has become the Fed’s number one concern as trigger of the next financial crisis. So here we are.

In 2018, even the SEC got briefly nervous about the ravenous share buybacks and what they did to corporate financial and operational health. “On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs,” SEC Commissioner Jackson pointed out. And he fretted whether the existing rules “can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.”

Reckless Tax Cuts, Rate Cuts, Buybacks and Bailouts

Corporations claimed they would use the Trump tax cuts for investment.

It was a lie upfront. Amd we knew it because President Bush told the same lie with the same result. I was against the tax cuts because it was a big handout to the wealthy, not the middle class.

Those tax cuts boosted the stock market, far more than I thought, to insane levels in fact. Trump bragged about it all the way.

The problem, now obvious, is the tax cuts were not only front-loaded, but squandered as I warned about even though the cut benefitted me personally.

Supposedly 2001 was to be the last bailout. We heard that again from the Fed and Congress in 2009. And now here we go again.

And the Fed recklessly reduced rates even as the unemployment level fel to record lowes. And the Fed kept lowering and lowering rates every time the stock market sneezed.

Now the Fed Funds Rate is at 0% with the Fed totally unprepared for anything except one: Issue more bailouts and cheap money.

We had reckless tax cuts by Trump, reckless rate cuts by the Fed, reckless buybacks by corporations and reckless bailouts by Congress. And here we go again.

To hell with this.

Corporate execs and shareholders ought to be totally wiped out before corporations get a dime.

Mike "Mish" Shedlock

Comments (78)
Herkie
Herkie

Stock buybacks were allowed to run rampant BECAUSE they were the only thing holding up equities for more than a year now. It was planned to be that way. But look, the top 1% just got caught with their pants down in the midst of a global pandemic and the economic price simply cannot be paid by the bottom 90%. It cannot and it will not. There will have to be massive bailouts and it will have to be those with all that money who pay the bill for it.

Anything less and we all know socialists will end up winning, and at this point I am not even sure I disagree with that.

No. 1-32
abend237-04
abend237-04

I've howled about this for years. For anyone who thinks it isn't an ongoing outrage: Ask yourself how you'd react, as a shareholder, if the C suite gang rewarded itself with a handsome bonus merely for paying you a one time dividend instead of buying back stock. Right, you'd turn out with pitchforks, but by linking their comp plans to earnings per share, then reducing shares outstanding via buybacks, They're doing the same thing on a continuous basis!!! Borrowing money to do the buybacks compounds the crime.
And Mish is right, it was rightly held to be a crime to dink with the balance sheet for personal gain before 10B-18 was issued in 1982; it should be again.

An SEC bulletin disallowing any personal compensation flowing from shares outstanding would at least be a fig leaf.

Not a nickel to anyone, anywhere before any and all personal gains from past buybacks are disgorged.

If the BOD and management can't find a use for "excess" cash, resign and hand it over to people who have the vision to plan for debacles...like this, and drive R&D harder and smarter.

mark0f0
mark0f0

The problem in the airline industry is that if Airline "A" doesn't run a highly leveraged business, upstart competitors will. And the flying public just wants a cheap ticket -- and doesn't give two sh*ts about the financial position of the airline.

I think the root problem is in the banking regulators that allowed the airlines, and airplane lessors to obtain credit so inexpensively to facilitate highly leveraged business models.

A complete wipe-out of current bank/financial industry shareholders is necessary to fix the problem. Even depositors who fund those sh*t-shows probably need to feel at least some pain in order to realize the necessity of only lending to responsible banks.

stillCJ
stillCJ

Editor

Companies, like people, need to accept personal responsibility. But of course neither wants to do that if they can get out of it.

Tengen
Tengen

As a nation we've long subscribed to the idea that "everybody can't be wrong". People and companies have figured out that if they all engage in the same fraudulent behavior at the same time, they can all avoid prosecution and blame circumstances beyond their control when things go awry. We all watched bankers get away with this to a spectacular extent in 2008.

As much as I want to castigate Boeing execs for buying back their own shares to trigger their own bonuses, we let them do it in broad daylight as a country. It's not like they lied about it or covered it up, we just didn't care until now.

Casual_Observer
Casual_Observer

If there was a sustainability index one could come up with for corporations to abide by then you wouldn't have these buybacks. They have money for buybacks which goose executive compensation but claim their pensions are underfunded. The public markets are the problem here. Driving up share prices in the short run leads to problems after the run is over. The system is so screwed up. Mark Cuban is right.

PecuniaNonOlet
PecuniaNonOlet

I think it is a forgone conclusion that airlines will end up in bankruptcy, even with government help. Is the government going to carry the airlines for 6, 12, or 18 months? We are at the START of the pandemic, I dont know of a single person planning on going anywhere this year. Cities are near lockdown on the hope the virus stops, what happens when that doesnt work? China is already seeing re-infections from foreigners coming in. This goes for casinos, restaurants, hotels, travel agencies, retail stores and on and on. In many ways it is worse than 1930’s depression.

$blankman
$blankman

“Corporations claimed they would use the Trump tax cuts for investment. … It was a lie upfront.”

Exactly. The old “supply-side” patent-medicine elixir. Real productive investment is a demand-side variable – and depends upon expected demand for the products/service produced by such increased capital investment.

By using that money (and borrowing more at low interest rates) to buy back shares, the management of those corporations were showing us a “tell” – what their informed expectations for the economy were.

[Note: I am not opposed to all share buybacks – only to the lie.]

Greggg
Greggg

Carelessness https://www.youtube.com/watch?v=n7mvDOBhvnE

Ted R
Ted R

Indeed they should. I have zero interest in bailing out an person or industry. But Trump is running for reelection so let the bailout's begin.

truthseeker
truthseeker

Chris Martensen suggests a 5 year clawback provision in compensation from the executives and directors of American Airlines who used 96% of its free cash flow to fund multi year billion dollar buybacks to enrich themselves with their appreciated stock options, before he would support a government bailout. This was caused by the Fed’s extremely low interest rates, and all of Corporate America has been guilty of this gross selfishness. Malinvestment! I have to admit had I been one of these guys it would be awfully hard to just walk away from maybe in some cases, tens of millions of dollars! Great post Mish!

Jojo
Jojo

"To hell with this.

Corporate execs and shareholders ought to be totally wiped out before corporations get a dime."

That is something I can agree with and would like to see more writings calling for this! Instead, everyone has their hand out for a bailout. Latest is movie theaters. Why does every business think they are essential and someone has guaranteed them everlasting profits in all business conditions?

This was a good post that gets to the heart of the bailout begging:

The Lesson
By Sven Henrich on March 17, 2020

The lesson of it all? The lesson is that lessons are not being learned.

And here we are. Just four weeks after all time highs in markets America is again turning into bailout nation.

Yes coronavirus is an unforeseen shock. So what?
....

JonSellers
JonSellers

Just wait until the Tea Party gets wind of this and marches on Trump's Washington! /sarc

MMCLN
MMCLN

Hi Mish, if a profitable airline had paid down debt and built up a prudent cash reserve, wouldn't someone like Icahn have bought their way onto the board and then forced the firm to pare back its pension funding, raise new debt against future cash flow, and divest the surplus to shareholders?

This, (or a hostile LBO), seems to be the fate of any company that has a conservative balance sheet.

Sechel
Sechel

welcome to capitalism. we're going to repeat the experience of the bank bailout complete with CEO's pretending they weren't bailed out as soon as they are out of the woods. If companies get bailed out, shareholder equity needs to be wiped out. We have mechanisms in place but in our new capitalism stock holders never get wiped out.

are we trying to rescue jobs and keep the company going or trying to protect shareholders from losses?

klausmkl
klausmkl

let them fail. Greyhound bus for plebs

Realist
Realist

The US government is busy trying to figure out how to support the health care system and how to support the economy.

As the pandemic spreads, it is exposing the many flaws in the US approach to health care. As people lose their jobs, many also lose their health care coverage, since so many get their coverage through their employer.

Similarly, as businesses suffer, they find it impossible to continue to afford to pay health care premiums for their employees.

The result will be fewer and fewer Americans with basic health care coverage.

If the US had a single payer system, it would cover all Americans, reduce costs (as seen in other countries), and simplify a chaotic system. It would reduce the health care costs for businesses and individuals and reduce the amount needed to ”bailout” businesses in times like this.

A single payer system would result in a more coordinated system that would also make it easier to plan, prepare, and respond to a pandemic such as this.

Single payer is not perfect, and it is not the answer to every problem, but this pandemic might make the US realize the benefits of single payer.

MorrisWR
MorrisWR

Amen Mish. I was complaining to my wife last fall about her companies buybacks at high stock prices but at least they did not use debt.

thimk
thimk

Excellent article on stock buy backs from soup to nuts. SEC has evolved to be a promoter of the stock market not a regulator. Reagan got the ball rolling . And ya i'm
PO'ed.

xil
xil

i've been saying, since at least 2008, all modern economies are a ponzi scam.
i've been told (most notably by barry ritholtz @ritholtz) that i don't know what a ponzi scam is.
who's doubting now?

Carl_R
Carl_R

As a general rule I support dividends, and I therefore support stock buybacks, which are mathematically identical to dividends. The stockholders are often forgotten, as management and employees run corporations for their own benefit. Therefore, when some earnings do flow to the owners, I consider it a good thing.

I also consider it a good thing to allow the free market to work the say it's supposed to work. In this case, that is for the airlines to go through bankruptcy. By going though bankruptcy, airlines and become leaner and more efficient. Yes, the owners (stockholders) take it in the shorts, but that's only fair. If you allow that to happen, it restores a sanity where corporations avoid excessive leverage, and have plans to deal with problems, and stockholders reduce the value if a company is excessively leveraged.

Kondratiev believed that the great strength of the capitalist system is that every now and then, perhaps once a generation, some tragic event would precipitate a depression, and the depression would in turn purge the excesses out of the capitalist system, rejuvenating it, and preparing it for another long cycle of healthy growth. If we "bail out" everyone, we avoid purging out the excesses, and you allow the problems to fester until the system ultimately collapses.

If you allow the weak businesses to fail, the strong businesses will survive, and they will be poised to grow. It will create an environment where new startups can also thrive. If you protect even the weak, then the strong will also be weak, and the economy will fester.

Don't put me in the pro-socialist group-think that says that corporations should exist as an extension of government, and that all the profits they earn should go to their employees, and that shareholders should only occasionally get tokens of appreciation. Corporations should pay their employees fairly, and should return excess profits to shareholders, but they should also be accountable for their actions, and need to maintain a "safe" capital structure.

crazyworld
crazyworld

SHARE BUYBACKS INDIRECTLY BY THE FED

Our so called wonderful economies with a GDP services part above 50 per cent (70 per cent in US) are unable to produce yearly GDP grow without the hot air speculative money (money supply through loans intended to speculate).

Here above we have got the description of the corporate speculative loans and use of cash flows reserves in order to buy back their shares and make billionaires out of their C.E.O. They contributed to the GDP inflationary expansion that way.
A mass of employees ( self-employees or not) draw their yearly revenues from the activity of maintaining the assets bubbles in perfect expansion.

I see no possibility for the GDP to recover unless the bubbles (like in 2008-2009) are quickly re-inflated.
Everybody has noted this time the outstanding speed at which the Fed prepare up to 13 billions of Primary dealers loan facilities accepting in guaranty as collateral every asset now (besides Government papers), including STOCK MARKET SHARES.
Yes the primary dealers will start buying shares and deliver them to the Fed balance sheet!!!. Watch out for their action at important support levels in the markets.

conscript
conscript

New web title:
Why don't you relabel your site, "Grouse -Talk"?

Tony Bennett
Tony Bennett

I sent an email this morning to Whitehouse.gov on this. Heck no to bailouts for Wall Street. Let capitalism work. Equity takes first hit. Then junior bondholders. Then senior bondholders take haircut if necessary.

Absolutely DISGUSTING that Boeing wants to shake down taxpayers for $60 billion when they have squandered $100 billion on buybacks past 10 years.

QE2Infinity
QE2Infinity

The sad fact is America's industrial might has been squandered by incompetent management teams looking out for #1. Look at Ford, GM, GE, Boeing ... Where are the quality, well built products? Where are the investments and innovations? Instead their main focus seems to be financial shenanigans and outsourcing to China.

tokidoki
tokidoki

But, but Mish, surely nobody, nobody could have seen this coming.

ROFL.

njbr
njbr

Off track, these presidential briefings....what's the sense of crowding all of your top people in one small stage, jostling around, sharing the same microphone and air?

Isn't there an unused meeting room somewhere in DC where they could be spread out by 5 or 6 feet, each with their own microphone?

abend237-04
abend237-04

@RayLopez
"It's well known in finance."

Sorry for the rant, but your comment about the bean counter gang's wisdom has triggered yet another rant:
During the same period that Corporate America was running up a tab of $4.5 Trillion buying back stock, a now-formidable competitor for future 5G dominance, Huawei, was spending $ 66 Billion on R&D, $14 Billion of that in 2018 alone.

Yes, I know Huawei steals IP. In fact, they're almost as bad as the French used to be at it, but that fact won't save American jobs on the world market in the future.

When a management team decides it has arrived and there are no reasons to hoard cash and search harder for R&D and growth opportunities, they turn to burning cash with buybacks.

When someone steals a march on you in high tech, you can be as much as five years late in discovering it. The lag is typically less in other industries, but effects are the same: lost jobs and lower living standards.

It's near-impossible to convince the bean counter gang of the above arguments until it's obvious to the ordinary...like now.

Six000mileyear
Six000mileyear

It would be simpler for shareholders to take all the losses, and bond holders to convert into the new shareholders. The debt is wiped out quickly and a people learn to be more cautious with their investments.

frozeninthenorth
frozeninthenorth

To be honest, the C-suite's buyback strategy makes a lot of sense...if you consider the average CEO tenure (less than 5 years), the compensation package (heavily skewed towards outperformance by the stock price), and the time it take to make a capital investment work out (oh and Wall Street love of quarterly reports). Sure airlines are very very guilty of spending all their cash on share buybacks (as did Boeing BTW). The surprise is that everyone is surprised by this outcome...

Analysts (no ones listen to them) have been saying for years that the compensation packages are a problem. Moreover, if one thing has been learned by the powerful since 2008 is that you are better off to be broke when the Sh$t hits the fan that way you get a nice government bailout, no one goes to jail, and if you are a little lucky you still get your bonus.

bilejones
bilejones

It's to give us hope. They're all in their seventies.

TruthSeeking
TruthSeeking

Mish - you're right but hedge funds/activist investors are part of the problem too. IF a company didn't lever up, a hedge fund would come in and force them to or attempt a take over or board turn over or ... Same with outsourcing to China even if it made the company more fragile. What do you think of Marc Cuban's suggestion - any 'bailed out' entity can never conduct share buy backs - ever?


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