March 05, 2024

There's A Reason Why Stock Buybacks Used to Be Illegal

Elizabeth Warren is beefing with a company that did buybacks while it also was receiving $35 million in federal money.

For a few years now, Senator Professor Warren has been at war with the notion of stock buybacks, the process by which top executives at a company reward themselves handsomely for not producing what their company is alleged to produce. Most recently, working with Rep. Sean Casten of Illinois, she has called out BAE Systems for engaging in a stock buyback scheme while it also was receiving $35 million in federal money through the CHIPS and Science Act. From Financial Regulation News:

“We are concerned by BAE Systems’ history of engaging in massive stock buyback schemes that divert capital away from important investments. This history of buybacks raises serious concerns about BAE Systems’ intent to comply with the requirements of the CHIPS incentive programs. We urge BAE Systems to hew to the spirit of the law as passed by Congress, as well as guidance issued by Commerce, and refrain from engaging in stock buybacks for the duration of its CHIPS Act grant,” they wrote in the letter.

Stock buybacks used to be illegal. They were deemed to be a form of stock manipulation, which they surely are. From Forbes:

For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed. And it’s obvious why Wall Street loves them: Buying back company stock can inflate a company’s share price and boost its earnings per share?—?metrics that often guide lucrative executive bonuses. As Reuters wrote recently, “Stock buybacks enrich the bosses even when business sags.”
Finally, more than 30 years after they were legalized, stock buybacks are getting the scrutiny they deserve. For instance, Sen. Elizabeth Warren said in a recent interview with the Boston Globe that “stock 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.”

Please note that the pivotal date is 1982. Yes, friends, stock buybacks are another blessing bestowed on the nation by President Ronald Reagan and his deregulating embrace of crackpot economic policies.

Buybacks are supposed to be funded with excess cash that the business doesn’t need for innovation or expansion. But Rule 10b-18, the rule proposed in 1982, gives executives total power (and a blank check) to determine their own incentive-based compensation.

Cutting taxes does not raise revenue. Increased executive compensation does not trickle down. Deregulation does not increase competition. It's nice that so many Republicans have declared opposition to the former president*, not that they're moving many votes or anything, but until conservative Republicans give up on these, the ur-myths of the conservative movement, the GOP will remain primarily a vehicle for plutocracy, which leads inevitably to autocracy, which is the seedbed of authoritarian rule. Defending things like the carried-interest loophole and unregulated stock buybacks means nothing important will change after the clown carnival at the top of the ticket closes.

By:  Charles P. Pierce
Source: Esquire