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This whole issue is overblown. Employees, retirees, and generic Wall Street investors have a preference for buybacks because it leaves equity holders with the a

This whole issue is overblown. Employees, retirees, and generic Wall Street investors have a preference for buybacks because it leaves equity holders with the ability to put their capital to good use. I don’t want GE to invest in vanity projects if they don’t have good ideas. Buy back shares, return capital to shareholders, and let shareholders invest in something else. There two sides to a buyback transaction, and saying it creates no value is BS. Someone is SELLING. If the issue is just using debt to buy equity, then there is some discussion to be had, but even then, the result looks more like a need for a stress test/capital buffer rather than a ban. Alternately, just modify the tax treatment of buybacks to look exactly the same as dividends.

dumbfoundded 7y ago
What prevents shareholders from just selling their shares? Why does the company have to be the buyer? A company generating demand for its own stock does not create value, it creates liquidity. I hope you understand the difference. As for the solution, I think we're on the same page. Government debt should not be used for creating liquidity for shareholders holding a shitty asset.
- abakker 7y ago
  Nothing prevents shareholders from selling shares. However, if a company does nothing - e.g. no growth, no buybacks, the future value of their stock will decline continually. through buybacks, they can hold those share prices steady, at least. This gives shareholders liquidity as you suggest - shareholders selling without buybacks means that they will push the price down. There's a line of thinking which says either a) buy all your equity and go private when the innovation runs out, or b) issue bigger and bigger dividends from FCF and then eventually go out with a bang. IMO, those are strategies that should be specific to a business model. E.g. a gas pipeline may love to pay out dividends since the business model is quite steady. A big electronics manufacturer might want to buy back its shares in the hope that it can eventually go private to restructure. my point is, the mechanic of a buyback is not inherently evil, and does provide value. I agree that the government should not be creating that liquidity. Though, in reality I don't have a specific problem with letting the government issue convertible debt if companies want a long-term counterparty. the irony is that buybacks are often seen as short-termist, but bailouts should have a long-term lens.
  - dumbfoundded 7y ago
    The value of the stock going down is the correct behavior if shareholders want to liquidate their holdings. For whatever reason. Dividends seem also like the correct way to distribute profits back to shareholders. Buybacks on the other hand, I agree, are extremely shortsighted. If not used to go private and restructure the company, buybacks are a tool to provide liquidity to the more well-informed shareholders at the expense of other shareholders. Any sort of public debt financing of buybacks should be completely off the table. Convertible debt seems like a good structure. If companies want to take the chance on the debt and they fail, the company would be effectively nationalized. In any case, a condition of any such note should be to prevent dividends and buy-backs. Any reasonable investor would probably include such terms.
    - abakker 7y ago
      Agree with you! And yet, if people want to liquidate it does drive the price down, but, the market is about price discovery and valuation - the company may have different beliefs about its value and different preferences, hence buybacks.
wcarron 7y ago
> Buy back shares, return capital to shareholders, and let shareholders invest in something else. Or GE could invest in increasing wages, particularly for the lowest-paid workers. Return capital to the actual producers of the capital.
- abakker 7y ago
  This is important, especially for those workers who do not qualify for a 401k. There is an interesting problem where if workers get a 401k or IRA, then buybacks probably help them by driving asset appreciation in a tax free investment vehicle. BUT, if you don't get that, then appreciating equities doesn't do you any good. In general, the answer is probably a moderate amount of all proposals. Increasing wages is certainly something that companies should be doing. Finally, some portions of buybacks are used for equity awards to employees, so it is possible that buybacks might end up as tax-privileged payments to workers, albeit not to the ones who are most dependent on wages.
- cutemonster 7y ago
  That'd permanently increase the expenses and reduce the dividends and stock value? (So maybe therefore the CEOs won't increase the wages unless people start resigning?)
  - wcarron 7y ago
    Yeah, it's called investing in your employees. It is growth, just not for shareholders. Shareholders do not have a divine right to all the benefits a company can produce. Stocks/dividends/buybacks are a system designed to capture all profits. No surprise and nothing really wrong there, but what annoys me is that shareholders like to pretend that __unless all profit goes into dividends/buybacks, it's a waste and a sign that the company is making poor decisions__, which is not the case. It does not take into account the lives of employees beyond the cost to company. That is also a perfectly reasonable investment for a company to make and, in fact, is one that it has a duty to invest in. Stock value is reduced because petty shareholders refuse to acknowledge that workers deserve growth from company profit just the same as they do.
- 7y ago
salawat 7y ago
Or classify buybacks as a prosecutable form of market manipulation like they were before the rule changes in the 80's that enabled this flavor of unnecessary financial engineering.

dumbfoundded 7y ago

What prevents shareholders from just selling their shares? Why does the company have to be the buyer? A company generating demand for its own stock does not create value, it creates liquidity. I hope you understand the difference. As for the solution, I think we're on the same page. Government debt should not be used for creating liquidity for shareholders holding a shitty asset.

abakker 7y ago
Nothing prevents shareholders from selling shares. However, if a company does nothing - e.g. no growth, no buybacks, the future value of their stock will decline continually. through buybacks, they can hold those share prices steady, at least. This gives shareholders liquidity as you suggest - shareholders selling without buybacks means that they will push the price down. There's a line of thinking which says either a) buy all your equity and go private when the innovation runs out, or b) issue bigger and bigger dividends from FCF and then eventually go out with a bang. IMO, those are strategies that should be specific to a business model. E.g. a gas pipeline may love to pay out dividends since the business model is quite steady. A big electronics manufacturer might want to buy back its shares in the hope that it can eventually go private to restructure. my point is, the mechanic of a buyback is not inherently evil, and does provide value. I agree that the government should not be creating that liquidity. Though, in reality I don't have a specific problem with letting the government issue convertible debt if companies want a long-term counterparty. the irony is that buybacks are often seen as short-termist, but bailouts should have a long-term lens.
- dumbfoundded 7y ago
  The value of the stock going down is the correct behavior if shareholders want to liquidate their holdings. For whatever reason. Dividends seem also like the correct way to distribute profits back to shareholders. Buybacks on the other hand, I agree, are extremely shortsighted. If not used to go private and restructure the company, buybacks are a tool to provide liquidity to the more well-informed shareholders at the expense of other shareholders. Any sort of public debt financing of buybacks should be completely off the table. Convertible debt seems like a good structure. If companies want to take the chance on the debt and they fail, the company would be effectively nationalized. In any case, a condition of any such note should be to prevent dividends and buy-backs. Any reasonable investor would probably include such terms.
  - abakker 7y ago
    Agree with you! And yet, if people want to liquidate it does drive the price down, but, the market is about price discovery and valuation - the company may have different beliefs about its value and different preferences, hence buybacks.

wcarron 7y ago

> Buy back shares, return capital to shareholders, and let shareholders invest in something else. Or GE could invest in increasing wages, particularly for the lowest-paid workers. Return capital to the actual producers of the capital.

abakker 7y ago
This is important, especially for those workers who do not qualify for a 401k. There is an interesting problem where if workers get a 401k or IRA, then buybacks probably help them by driving asset appreciation in a tax free investment vehicle. BUT, if you don't get that, then appreciating equities doesn't do you any good. In general, the answer is probably a moderate amount of all proposals. Increasing wages is certainly something that companies should be doing. Finally, some portions of buybacks are used for equity awards to employees, so it is possible that buybacks might end up as tax-privileged payments to workers, albeit not to the ones who are most dependent on wages.
cutemonster 7y ago
That'd permanently increase the expenses and reduce the dividends and stock value? (So maybe therefore the CEOs won't increase the wages unless people start resigning?)
- wcarron 7y ago
  Yeah, it's called investing in your employees. It is growth, just not for shareholders. Shareholders do not have a divine right to all the benefits a company can produce. Stocks/dividends/buybacks are a system designed to capture all profits. No surprise and nothing really wrong there, but what annoys me is that shareholders like to pretend that __unless all profit goes into dividends/buybacks, it's a waste and a sign that the company is making poor decisions__, which is not the case. It does not take into account the lives of employees beyond the cost to company. That is also a perfectly reasonable investment for a company to make and, in fact, is one that it has a duty to invest in. Stock value is reduced because petty shareholders refuse to acknowledge that workers deserve growth from company profit just the same as they do.
7y ago

salawat 7y ago

Or classify buybacks as a prosecutable form of market manipulation like they were before the rule changes in the 80's that enabled this flavor of unnecessary financial engineering.