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About Liz Iacobucci

Liz Iacobucci is the former Public Information Officer for the State Employees’ Association of New Hampshire, SEIU Local 1984. Over the past three decades, she has served in government at the federal, state and municipal levels; and she has worked for both Democratic and Republican politicians.

What Mitt Romney Taught Us About America’s Economy

Mitt Romney

With Mitt Romney edging ever-closer to another run at the Presidency, I figured it was time to re-hash what his 2012 campaign taught us.

First, we learned that some folks are willing to to spend a whole lot of money to get “the right person” elected.  Sheldon Adelson, for instance, reportedly spent almost $150 million trying buy a Mitt Romney Presidency.  (Apparently, Adelson would have saved about $2 billion in taxes, if Romney’s tax plan was enacted.)

But we also learned some fundamental things about America’s economy.  We learned that, as things stand now, our economy really doesn’t work for the 99%… because the folks who make corporate decisions are wringing money out of their businesses rather than investing in the future.   Here’s my #dejavu post from November 19, 2012:

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Mitt Romney ran on his record as a businessman. But over the summer, when bloggers and journalists started taking a closer look at that record, they shined some light into the shadows of the private equity industry.

The companies’ names change, but the sequence of events is basically the same:

  • Rolling Stone writer Matt Taibbi: “Bain put up a mere $18 million to acquire KB Toys … Less than a year and a half after the purchase, Bain decided to give itself a gift known as a ‘dividend recapitalization.’ The firm induced KB Toys to redeem $121 million in stock and take out more than $66 million in bank loans – $83 million of which went directly into the pockets of Bain’s owners and investors, including Romney. ‘The dividend recap is like borrowing someone else’s credit card to take out a cash advance, and then leaving them to pay it off.’ “
  • Pensions and Investments writer Aaron Elstein: Hospital operator HCA borrowed $2.5 billion in October to help finance a $1.2 billion dividend payout, 40% of which went into the pockets of private equity owners Bain Capital and KKR & Co.
  • Bloomberg News blogger William Cohan: “Welcome to Mitt Romney’s America. This is the true story of how in October 1993 buyout firm Bain Capital LLC, which Romney founded and ran from 1984 to (roughly) 1999, and its partners bought a steel mill in Kansas City, Missouri, from Armco Steel Corp. for $75 million, merged it with other steel companies, loaded it with too much debt, paid themselves big dividends and ran the company into the ground.”
  • San Diego Free Press writer John Lawrence: “In 1994, Bain bought medical equipment manufacturer Baxter International. After a merger with another company, it became known as Dade Behring. Bain froze the workers’ pension benefits … it used the projected savings as the basis to borrow $421 million… Dade paid Bain and its partner, Goldman Sachs, the entire amount as a dividend. … Bain and Goldman had only put down $81 million to buy the company in the first place. Yet, in June 1999 they received $365 million from the dividend—a gain of 4.3 times their initial investment.”
  • Forbes Blogger Peter Cohan: “Consider Bain Capital’s Thomas Lee Partners’ $26 billion acquisition of Clear Channel Communications — home of Rush Limbaugh … This takeover has turned a company that formerly earned net income of nearly $1 billion into a money-loser (almost $4.7 billion in cumulative losses), resulted in thousands of layoffs, extracted millions in fixed management fees, and recently resulted in a multi-billion special dividend for the two PE owners paid for by highly risky borrowing.”
  • David Stockman, Former Budget Director for President Ronald Reagan: American Pad and Paper was a 20-bagger—that is, $5 million was invested in 1992 for a $100 million profit, a miraculous outcome for Bain, but hardly so for the Ampad workers and shareholders left holding the bag when the company went bankrupt in 1999 with massive debt. … Ampad generated barely enough operating income during the first six months of 1996 to cover its swollen interest payments… Yet since Bain Capital had now harvested a dividend that was 12X its original investment, it was basically home free.
  • Bloomberg News writer Anthony Luzzatto Gardner: What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors.

Time and time again, companies controlled by Bain Capital borrowed money to pay a dividend to Bain Capital. [Bain Capital then passed the dividends through to its partners and investors, including Mitt Romney. Want to see all the different ways that dividends were passed through to Romney? Read his Personal Financial Report here.]

Dividends are supposed to be a method of profit-sharing. Companies figure out what their income and expenses have been, and how much they will need to invest in growing the business. Then the rest of the profit is divided among the stockholders (that’s why the payments are called “dividends”).

Dividends used to be taxed as “ordinary income” – and for a lot of years, high-income taxpayers paid a 90% tax rate on dividend income. That tax mechanism tended to encourage corporate decision-makers to reinvest profits in growing their business, rather than paying profits out as dividends.

But the Bush tax cuts changed the law so that dividends are treated as “capital gains” – which are currently taxed at a 15% rate. That tax mechanism tends to encourage corporate decision-makers to pay out as much money as possible in dividends.

Bain, and some other private equity companies, took things one step further: they had companies paying dividends using borrowed money, not profits.

Does anyone think Bain Capital would be operating that way if dividends were still taxed at 90%?

For the past decade, our country’s tax policies have provided the wrong incentives to corporate decision-makers. The low tax rate on dividends has encouraged executives to wring as much money as possible out of companies (however they can!).

That’s not good tax policy.

Good tax policy wouldn’t provide a financial incentive for executives to mortgage their companies, inflate the books and pay bootleg dividends.

Good tax policy would encourage executives to invest in growing their businesses; to structure their companies to succeed over the long haul; and to borrow only for legitimate business needs.

As our nation teeters on the fiscal cliff, there is also an opportunity: Congress can get rid of this obscene tax incentive that we learned about from Mitt Romney.

 

Are You Tired Of Congress Manufacturing A Budget Crisis To Force Through Terrible Legislation?

government closed

Budget details: you couldn’t make this stuff up, if you tried

It’s not like Congress didn’t know they had to pass a federal budget.

It’s not like they didn’t have lots and lots of time to put an appropriations bill together, either before or after the elections.

It’s not like they didn’t know what happens when the money runs out. (Hint: not all that much, actually. Except that 800,000 federal workers are required to work without being paid.)

No, this Congress knew all too well what would happen. Since President Obama was elected, Congress has:

  1. had a budget crisis in March 2009
  2. had a budget crisis in September 2009
  3. had a budget crisis in September 2010
  4. had THREE budget crises in December 2010
  5. had TWO budget crises in March 2011
  6. had a budget crisis in April 2011
  7. had a budget crisis in August 2012
  8. had a budget crisis in September 2012
  9. had a budget crisis in March 2013
  10. had a budget crisis – and a government shutdown – in October 2013
  11. had a budget crisis in January 2014
  12. and had a budget crisis just three months ago.

(That’s a rough list. No guarantees of accuracy, I may have missed some. And it doesn’t include the debt-limit crises.)

And yet once again, this weekend, right now… Congress finds itself in a budget emergency.

And from listening to some of the politicians, you’d almost think no-one could have predicted this.

And with all their angst (“Emergency!” “Emergency!” “Can’t let the government shutdown again!”)…

… it would be really easy to overlook some of the so-called “details” of this spending bill. Details like:

  1. The so-called “Citibank” provision that would undo part of Dodd-Frank financial regulation, and allow big banks to rely on the FDIC to backstop risky derivative trades. (Read NHLN coverage here and here.)
  2. The Kline-Miller amendment, which would allow cuts to the earned retirement benefits of millions of retirees. AARP calls it a “secret attack by Congress” and a “last minute backroom deal.”   (Read the AARP alert here.)
  3. The (ahem) provision to help the GOP afford its next convention. According to the New York Times, “The secret negotiations that led to one of the most significant expansions of campaign contributions in recent years began with what Republican leaders regarded as an urgent problem: How would they pay for their presidential nominating convention in Cleveland in two years? It ended with a bipartisan agreement … that would allow wealthy donors to begin giving more than $1 million every election cycle to each party’s national committees.” (Wow. 2016 is going to be a record-breaking presidential campaign season.)
  4. The “Collins rider,” which would increase truck driver hours of service, and other provisions that would increase truck weight limits in Kentucky, Mississippi and Wisconsin. “None of these special interest [provisions] has been subject to any committee hearings, adequate safety review or cost/benefit analysis. However, all of them will have a profound impact on highway safety, deaths and injuries.” The bill will “eliminate the two nights off-duty for truck drivers to rest, while significantly increasing working and driving hours for truck drivers up to 82 hours a week when fatigue is already a well-known and well-documented highway killer.” (Read the Truck Safety Coalition alert here.)
  5. Provisions prohibiting the Fish and Wildlife Service from adding the sage grouse to the endangered species list. This one was apparently added “at the behest of grazing, mining, and oil and gas interests.” (Read more here.)

According to the Hill, Senate Majority Leader Harry Reid says the GOP added “nearly 100” special interest riders to the bill.

The five, above, are just the ones that have already attracted public attention.

Can’t help but wonder what ELSE is in that bill.

 

Another WIN for Wall Street… and a huge LOSS for the middle class

Happy Hour

Happy Hour

So, late last night… Congress decided that it was just fine to bailout Wall Street bankers again, if they should happen to get into trouble again. Gotta make sure the ol’ FDIC is there in times of trouble.

BUT… gosh… that old PBGC?

Oh… Congress doesn’t want to risk the possibility that taxpayers might have to bailout Middle Class pension funds. At last estimate, “the fund that backs multi-employer plans is about $42.4 billion short of the money needed to cover benefits” for pension plans that are expected to fail.

And what have private employers been doing, to keep those pension plans financially sound? Well… Hostess declared bankruptcy. Peabody Energy declared bankruptcy. Verizon “de-risked” itself of pension obligations. And that’s just what immediately comes to mind.  But I’m digressing.

So last night… LATE last night… Congress included in the “must-pass” budget bill something called the Kline amendment. The measure will allow multi-employer pension plans that are underfunded to significantly cut benefits to retirees under age 75.

Because… why would Congress want to risk having to have the PBGC bailout those middle-class pension funds? … when cutting benefits to retirees under 75 will accomplish the same thing.

Yep, what’s good for Wall Street… isn’t even a possibility for Main Street.

Want to know what I noticed?

One Federal Reserve economist put a number on how much that FDIC guarantee is worth to the Big Banks. He estimated it was worth $450 to $900 billion a year to the financial services industry.

OK, so this “government insurance policy” is coming to Wall Street through the efforts of the GOP-controlled House of Representatives.

And yes, those are the same Republicans who are such firm believers in the “free market economy” and “privatization” and “pull yourself up by your bootstraps.”  

And now they’re… giving a government benefit to the banks.

What happened to “the free market will take care of it”? Why can’t these banks buy their own insurance on the open market? From a private insurance company?

But I’m digressing again.

Here’s what I noticed: it looks to me like the annual “value” of what Congress gave away last night is about the same amount as what Congress spent on the infamous TARP program.

TARP, of course, was a one-time thing. (Or at least… hopefully… not a very frequent thing.)

The FDIC insurance is ongoing. Every year, the big banks are going to get that government-subsidized insurance policy. Underwriting their risky investments.

It’s like a TARP program, year after year after year.

While all those retirees… get their benefits cut.

ANOTHER Taxpayer handout for the Big Banks?

Fat Chance - Banks Take Responsibility for the Financial Crisis by Michael Smith via Flikr

What’s going on in Washington, DC this afternoon?  According to media reports, the House of Representatives is about to use the latest Congress-created crisis to give Big Banks a free insurance policy.

One Federal Reserve economist estimated that these types of guarantees are worth between $450 and $900 billion (yes, “billion” with a B) a year (yes, each year) to the financial industry.

Yes, I’m repeating myself again.  Here’s my #dejavu post from January 13, 2014:

Fat Chance - Banks Take Responsibility for the Financial Crisis by Michael Smith via Flikr

$53 trillion.

More than THREE TIMES the entire federal debt.

According to Saturday’s New York Times, that’s the amount of money currently held by US-based “too-big-to-fail” financial institutions.

“Too-big-to-fail” has been around for a while. It dates back to the Reagan administration’s takeover of Continental Illinois National Bank and Trust Company, which was then the seventh-largest US bank.

And it’s been a growing problem ever since.

Here’s why: “TBTF” distorts the economy. In theory, in a capitalist economy, there should be a relationship between risk and reward. In theory, people who can’t afford to lose their money will chose “safe” investments, even though they have a lower rate of return; and even those people who can afford to lose money will take fewer risks.

But that’s only in theory. In reality, TBTF has separated “risk” from “reward”. The financial industry is now operating on the belief that if the loss is big enough, the government will step in.

It’s sort of like insurance… only, the financial industry doesn’t have to pay for it.

A year and a half ago, one Federal Reserve Bank economist estimated the TBTF effect is worth between $450 and $900 billion a year.

“The existence of the implicit subsidy enabled these companies to become larger and more complex than otherwise would have been the case. TBTF institutions respond to the subsidy by increasing their risk through either engaging in riskier activities or increasing their leverage. While these actions may be privately optimal, the response to the TBTF subsidy is not socially optimal, as it can pose huge risks to the financial system.”

(Gotta love that economist-speak…“Not socially optimal,” indeed.)

Even since the 2007 Wall Street meltdown, financial institutions have continued to take advantage of their TBTF status. TBTF institutions are still getting bigger and taking more risks. Here’s how Forbes described the situation last year: “Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks.”

And now, a half-decade after the bailout, the TBTF institutions are worth $53 trillion.

So why am I comparing the size of the financial industry with the size of the federal debt?

I was trying to figure out the current level of taxpayer exposure, in this “not socially optimal” arrangement. In other words: if the financial industry implodes again, how much government money is it going to cost us? And I figured the best way to figure that out was to look at what happened in the most-recent TBTF bailout.

As near as I could figure, from what’s easily available on the Internet: back before the 2007 meltdown, TBTF institutions were worth a total of about $2 trillion. The 2008 bailout bill appropriated $700 billion to deal with the crisis — or, roughly one-third of the total value of TBTF institutions, before they started to fail.

The federal budget was already running a deficit. That means: in order to fund the bailout, Congress had to borrow an amount equal to one-third of the pre-crisis value of those TBTF institutions (using my “as near as I can figure” estimate).

But those TBTF institutions are bigger now; and that means if they fail, any federal government bailout would need to be bigger, too.

TBTF are now worth $53 trillion. Do the math. If there is another Wall Street meltdown; and another bailout; and this next bailout also requires the government to borrow an amount equal to one-third of what TBTF institutions are worth now…

Well…one-third of $53 trillion is…almost exactly the current amount of the federal debt.

In other words, the next financial meltdown could double the national debt.

Are you scared yet?

Two Recent Court Rulings That Pit Legal Theories vs Workplace Realities

US Supreme Court Building

US Supreme Court BuildingCan’t help but think there’s a huge “disconnect” between recent court rulings and real-life work situations.

First Case: Yesterday, the US Supreme Court weighed in on the question of whether employees are entitled to be paid for time spent waiting for security screening as they leave the job each workday. Apparently, the Supreme Court doesn’t believe that routinely searching employees to see if they’re stealing anything is actually “integral and indispensable” to those workers’ jobs. And the law doesn’t require employers to pay wages for duties that aren’t “integral and indispensable.”

At one level, I agree with the Court wholeheartedly. Proving you’re not a thief, day after day, should not be an “integral and indispensable” part of anyone’s job.

But, in real life: what would happen if those workers refused to go through the security screening? My guess is: they’d be fired.

Which, in my mind, makes those daily screenings “integral and indispensable” – at least as long as the employer insists upon them. Myself, I would distinguish between investigating employees after a theft, and the practice of requiring workers to go through daily screenings “to prevent theft.”  And I don’t think workers should be required to donate their personal time, just because the employer mistrusts every single one if its employees.

Second Case:  This morning, the New Hampshire Supreme Court weighed in with a reverse-and-remand decision about the NH Retirement System.

The court case, Professional Fire Fighters of New Hampshire et al. v. State of New Hampshire, challenged the 2011 increase in public employees’ contributions to the NH Retirement System. That increase ranged from 2% to 2½ % of employees’ paychecks, depending on the job classification. This “pension reform” provision was included as part of the State’s biennial budget.

The plaintiffs and the NH Retirement Security Coalition are still reviewing this morning’s decision.  From their press release:

The NH Retirement Security Coalition has long contended that promises made to our member employees should be enforced because our members uphold their promises each and every day that they go to work. The Court’s decision today unfortunately allows public employers to renege on their promise of security in retirement. While this decision is disappointing, our members will continue to provide high quality service to the state and its cities, towns, and school districts.

We are deeply concerned about the long term impact of this decision on the people of NH. We are carefully reviewing this decision in detail with our attorneys and members of the Coalition and we will offer further in-depth comment as soon as we are able to do so.  

But as I read the decision, one thing jumped out at me: again, I see a disconnect between the legal reasoning and everyday workplace reality.

As I read the ruling – and I could be wrong on this, I am NOT a lawyer – it appears to me that the Court is viewing this from a purely theoretical perspective. It seems to me that the Court based its ruling on the theory that raising retirement contribution rates didn’t retroactively harm public workers because the retirement benefits they had already accrued (under the lower contribution rates) were still there – and the new contribution rates only applied to retirement benefits accrued going forward.

Or, in other words: if a public employee had retired on the day the new contribution rates went into effect, then he or she would still be entitled to all the retirement benefits accrued up to that point… and therefore (as I read the Court decision), the Justices do not see any unconstitutional retroactive impact.

Which I guess begs the question: what would have happened in 2011 if every single one of the public employees covered by the NH Retirement System had chosen retirement, rather than what was effectively an employer-imposed pay cut?

And in the real world, what does this do to NH RSA 273-A, the Public Employee Labor Relations Law, if public employers are now able to unilaterally change the terms and conditions of employment by increasing required “contributions” to the NH Retirement System?

The NH Supreme Court may be asked to reconsider today’s ruling. Stay tuned.

 

*       *       *       *

Members of the NH Retirement Security Coalition include:
Sandy Amlaw, New Hampshire Retired Educators Association
Steve Arnold, NE Police Benevolent Association
Dennis  Caza, Teamsters Union Local 633
Laura Hainey, American Federation of Teachers – New Hampshire
Mark Joyce, NH School Administrators Association
Rich Gulla, State Employees Association of New Hampshire – SEIU Local 1984
Dave Lang, Professional Fire Fighters of New Hampshire
Mark MacKenzie, New Hampshire AFL-CIO
Harriett Spencer, American Federation of State County and Municipal Employees Council 93
Keith Phelps, New Hampshire Police Association
Scott McGilvray, NEA – New Hampshire

What would YOU do with $707 billion?

WWYD_707_billion

WWYD_707_billionGoldman Sachs just weighed in with their predictions for next year’s economy. They expect “only a modest growth in business investment”… but a whopping increase in the amount of money corporations will spend buying back their own stock.

(Corporations buy back their own stock to increase per-share prices.  Many CEOs get paid more, if the price of their company’s stock rises.  And most CEOs receive at least some of their compensation as stock or stock options.  Either way, increasing the stock price increases how much $$$ the CEO takes home.)

Next year, Goldman Sachs analysts expect corporations to spend a total of $707 billion buying back their own stock.

What else could Corporate America do with that money?

  • Companies could create about nine million $50,000 jobs – with benefits!  (Wait… isn’t “nine million” the number of people who are unemployed in America, right now?)
  • Companies could “afford” to increase the wages of the 3.3 million minimum-wage workers in America. (Most minimum wage employees work 34 hours or less at their primary job… calculating that as 5.8 billion minimum-wage work-hours a year… would mean that all those workers could get a $122/hour increase!  Yeah, that was “one hundred twenty-two dollars an hour”… do the math yourself.)
  • It could pay for the Food Stamp program — for almost an entire decade. (Which only seems fair, since nearly three-quarters of families receiving public assistance are working families who don’t get paid enough to make ends meet. And it doesn’t matter how profitable the industry is: almost one-third of all bank tellers are on public assistance; more than half of all fast-food workers; thousands upon thousands of workers in other industries.)

But apparently Corporate America isn’t going to be doing anything like that, with that $707 billion. Not creating jobs. Not increasing wages. Not giving up the taxpayer subsidies for their low-wage jobs.

No, Goldman Sachs expects Corporate America to spend that money just… buying back shares of stock.

Which doesn’t really create value. It’s not a new factory, or a new product, or even a new market. All stock buybacks do is concentrate corporate ownership. Like ultra-concentrated dish soap: it’s the same stuff, just in a smaller bottle.

And yes, this does have advantages if you’re looking at things from the CEO’s perspective.

All too often stock buybacks are deceptive things, which create a sugar high in the share price, a nice little windfall for management, and pretty much nothing in the way of actual value creation.

But looking at that $707 billion from the perspective of the 99%…?

  • In a stack of $100 bills… that same money would be about 480 miles high.
  • You could buy enough ultra-concentrated dish soap to fill about 75,000 Olympic-sized swimming pools.

… and from the perspective of the 99%, either of those options would probably be just as good as spending all that $$$ on stock buybacks.

Have a better idea about how to spend $707 billion? Use our comments section to share it.

Read “Nightmare on Wall Street? Are Stock Buybacks Creating Another ‘Financial Bubble?’” here.

Read “Why the Economy Doesn’t Work for the 99%: Massive Payouts to Corporate Stockholders” here.

 

Nationwide, ballot questions showed: voters care about working families

I Voted

I Voted

A quick look at ballot questions, nationwide:

  • Minimum wage hikes won, big-time in Alaska, Arkansas, Nebraska and South Dakota. Voters in those “red” states approved binding ballot questions raising their states’ minimum wages, as did voters in Oakland and San Francisco, California. Voters in Illinois and in several Wisconsin counties approved non-binding ballot questions calling for a hike in their minimum wages.
  • Guaranteed paid sick time won. In Massachusetts, voters approved paid sick time for most employees. Voters in Trenton, New Jersey, Montclair, New Jersey and Oakland, California approved local ballot questions requiring private employers to provide paid sick time.
  • Medicaid expansion won. In Wisconsin, voters who re-elected Governor Scott Walker also told him they wanted the state to join the Affordable Care Act. County after county approved non-binding questions to expand the state’s Medicaid program, “BadgerCare.”
  • Collective bargaining rights won. In Missouri, voters rejected a proposed constitutional amendment that would have eliminated teacher tenure and restricted bargaining rights. And in Anchorage, Alaska, voters repealed a law limiting public employees’ collective bargaining rights.

In Case You Don’t Remember: The Republicans Have a “Jobs Plan”

GOP Jobs Plan

Haven’t read this morning’s New York Times? Here’s what you’re missing:

WASHINGTON — Anticipating a takeover of Congress, Republicans have assembled an economic agenda that reflects their small-government, antiregulation philosophy… The proposals would mainly benefit energy industries, reduce taxes and regulations for businesses generally, and continue the attack on the Affordable Care Act. It is a mix that leaves many economists, including several conservatives, underwhelmed.

What’s on the list?


View Fraccidents Map in a larger map

What’s not on the list?

  • Fixing our roads and bridges (even though more than 177,000 bridges around the country are either structurally deficient or functionally obsolete)
  • Overhauling immigration laws (maybe Fox News and the Tea Party think xenophobia is good for the country)

Look again, at that last omission from the Republicans’ “Jobs Plan.”

A bipartisan Senate-passed bill on immigration would increase economic growth by 3.3 percent in a decade and save $175 billion by then, the Congressional Budget Office estimated.

Look again, at what could have been… if only the GOP hadn’t been so determined to stop anything and everything President Obama proposed.

When Mr. Obama sent Congress his jobs package three years ago, several forecasting firms estimated that it could add up to 150,000 jobs a month in the first year.

(Read about the Senate GOP filibuster here.)

Then, remember that the GOP’s opposition started on the first day of Obama’s first term.

WASHINGTON — As President Barack Obama was celebrating his inauguration at various balls, top Republican lawmakers and strategists were conjuring up ways to submarine his presidency at a private dinner in Washington.

And then, think about what this “GOP Jobs Plan” is really all about.

GOP Jobs Plan

Boeing: profits flying high! But “Return On Investment” for government, union givebacks is… not so great

Boeing Dreamliner

Boeing DreamlinerBoeing announced its Third Quarter financials this morning.

net earnings increased 18% to $1.36 billion, or $1.86 per share.  The quarter’s results were strong enough that Boeing increased its full-year guidance: the company is now forecasting full-year earnings per share between $8.10 and $8.30 per share.

Think these better-than-expected profits are the result of skilled CEOing by Jim McNerney (who jokes about “cowering” employees)?

Think that rosy profit outlook has anything to do with Boeing’s decision to transfer 2,000 engineering jobs from the Seattle area to other, lower-cost places?

Or Boeing’s decision to assemble its Dreamliner exclusively in South Carolina (not Washington State)?

Presumably, this corporate maneuvering is “in the interests of Boeing’s stockholders”… whose dividends increased by more than 50% last year.

Stockholders including Jim McNerney… who at last report, owned more than 466,000 shares of Boeing stock… which, as I do the math, means he’s probably expecting about $340,000 in “unearned income” when Q3 dividends are announced.

Beginning to understand why he’s in a joking mood?

Read our previous Boeing coverage here.

Nightmare on Wall Street? Are Stock Buybacks Creating Another ‘Financial Bubble?’

An American flag festooned with dollar bills and corporate logos flies in front of the Supreme Court during oral arguments in the case of McCutcheon v. Federal Election Commission. 
Image by JayMallin.com
An American flag festooned with dollar bills and corporate logos flies in front of the Supreme Court during oral arguments in the case of McCutcheon v. Federal Election Commission.  Image by JayMallin.com

Image by JayMallin.com

Some blog posts are easy to forget. But the one I wrote last week is beginning to give me nightmares.

Here’s why: the stock market keeps hitting record highs. But the so-called “economic recovery” – which started in June 2009 – is just beginning to “trickle down” to us average Americans.

And oh, such a sloooooow trickle! “Although the economic recovery officially began in June 2009, the recovery in household income did not begin to emerge until after August 2011. …Median income in February 2014 [was only] 3.8 percent higher than in August 2011.”

And we’re not anywhere near “recovered” from the damage caused by the last two recessions. “The February 2014 median was [still] 6.2 percent lower than the median of $56,586 in January 2000.”

So in last week’s blog post, I took a look at the research UMass Professor Bill Lazonick and his team have done, about how top US corporations have been distributing their net income to shareholders rather than reinvesting money in their business (or workers).

What Professor Lazonick found: since 2004, the surveyed companies have returned 86% of net income to stockholders through dividends and stock buybacks. In 2013, those companies spent an average of $945 million just buying back their own stock. Repeat: $945 million is the average. That’s per company. In one year.

So I took a closer look at that, using a couple of companies as case studies. I keep hoping that I’m completely wrong. I’m not an economist, I’m not an expert. I’m just a blogger who looks at things from my own personal perspective.  And when I looked, here’s what I found:

FedEx:

  • CEO Fred Smith owns more than 15 million shares of FedEx (not counting shares held by his wife, his family holding company or his retirement plan.)
  • Last October, FedEx announced plans to buy back 32 million shares – more than 10% of its stock.
  • FedEx borrowed $2 billion to help pay for that stock repurchasing program. Those bonds run from 10 to 30 years.
  • In the past year, FedEx stock has gained over 44 percent. That translates into a huge increase in net worth for Mr. Smith… somewhere between a half-billion dollars (as of my post last week) and $600 million (the stock price kept going up). Yeah… FedEx borrowed $2 billion… and its CEO personally benefited by a half-billion-plus.
  • But maybe there’s a reason why FedEx stock soared by 44%? Let’s see… according to the International Business Times, its ground shipping business grew by 13% and it is trimming employee benefit costs by 13%; and so the overall corporate profits grew by 24%.
  • Corporate profits grew by 24%… but the stock price grew by 44% (benefiting “company executives who receive stock-based compensation”).
  • But of course there are fewer shares of stock now than there were last year, because of the buyback program. So I looked at the company’s “market cap” – or, the total value of all the outstanding shares. And that also grew: from $39.03 billion when the stock buyback was announced last October… to $50.35 billion as of Friday. So the market cap grew by $11.32 billion – or about 29% – during roughly the same time that profits grew by only 24%.
  • Let me recap: The company grew its business a bit, while at the same time cutting employee costs. It borrowed to buy back stock, enriching its CEO. And Wall Street rewarded this behavior. Stock value grew – at a much faster rate than the company’s profits were rising.

wall_streetThat difference between 24% growth in profits and 29% growth in market value? Isn’t that just a “Wall Street bonus” for taking part in this borrow-and-buyback scheme?  But why is Wall Street is rewarding FedEx for moving toward a “loot the company” model of business behavior?

It’s not just FedEx.

One analysis, from June 2014:

Since the end of 2012, using the DOW (NYSEARCA:DIA) companies as a large cap company market proxy, share buybacks in dollar volume have exceeded the actual level of after tax profits recorded by the 30 companies in the index. What this means is that somewhere in the DOW there must be more than a handful of companies, which are either borrowing money or deferring capital expenditures in a potentially harmful manner for the sole purpose of buying their shares back in the market to boost share price.

From last week’s Wall Street Journal:

Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown.

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

No, it’s not just FedEx.

Cisco:

Back in February, Cisco announced an $8 billion bond issue “to help finance stock buybacks after the shares lost almost 6 percent over six months.”

  • Cisco CEO John Chambers owns about 2 million shares of Cisco stock.
  • Cisco stock was trading at $22.12 when that bond issue/buyback was announced. Now, it’s trading at $25.20. Do the math: that’s about a 14% increase in per-share price; and more than a $6 million increase in Mr. Chambers’ net worth.
  • Cisco’s market cap was $113.95 billion when the bond issue/buyback was announced.   Now, it’s $128.7 billion. Do the math: that’s about a 13% increase in Wall Street’s assessment of the company’s total value.
  • But what’s going on with the actual company?   Last month, Cisco released an earnings statement “that illustrated its troubles as one of the tech industry’s giants competing in a rapidly changing environment.”  Profits are down, compared to last year. And it is planning to eliminate 6,000 jobs.
  • Let me recap: Profits are down, layoffs are pending. But the company borrowed $billions to buy back stock, enriching its CEO and other executives.   And Wall Street rewarded this behavior.

Want to know what worries me most about Cisco? It looks like Cisco’s CEO is selling his stock. According to the filings, he owns a lot less Cisco stock now than he did when the bond issue/buyback was announced. Doesn’t he have any faith in his corporation’s long-term prospects?

It’s not just Cisco.

Bloomberg News:

American companies have seldom spent more money than they are now buying back shares. The same can’t be said for their executives. … While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren’t… Insiders buying stock have dropped 8 percent from a year ago, poised for the fewest in more than a decade.

wall street bullAnd even worse? That perspective that companies “have nothing better to do” with their money than buy back stock.

As of a couple of weeks ago:

In total, US companies have announced USD309bn worth of share repurchases year-to-date, up from USD259bn for the same period a year ago, according to Thomson Reuters data.

Do the math. Nine months of stock buybacks equals about 6 million median-wage American jobs.

Let me rephrase that.

The money that US corporations are spending buying back their own stock “because they have nothing better to do with it” could give a $52,000-a-year job to two-thirds of unemployed Americans.  

Or: a job paying more than twice minimum wage to all unemployed Americans.

Instead… Cisco’s cutting 6,000 jobs. FedEx is cutting employee benefits. And who knows what all the other companies in Professor Lazonick’s survey are doing?

Here’s the thing: buying back stock doesn’t add any intrinsic value to a company. It’s not a new product line, it’s not a new factory, it’s not any kind of investment in the company’s future. All it does is concentrate the stock ownership. Same everything else – just fewer shares of stock. (Sort of like ultra-concentrated dish soap… same basic thing, just in a smaller bottle.)

So, aren’t these rising market caps at least somewhat artificial? Why should a company be worth more, just because it has fewer shares of stock?

Cisco may have declining profits… but its market cap is growing. FedEx may be growing, but its market cap is growing faster. Why?

Here’s the other thing: To accomplish this concentration of stock ownership… corporations are bonding untold billions of dollars. (Yes, that’s another thing I couldn’t find tracked anywhere.)

So yeah, they’re borrowing against the future… to improve stock prices today.

soap bubbleAnd Wall Street is encouraging this.

There’s a technical term for those sorts of artificial increases: they’re called “bubbles.”

And that’s why I’m starting to have nightmares.

I’m wondering when this latest Wall Street bubble is going to burst.

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