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Big Banks: Paying Billions (of Borrowed Money) to Stockholders

NASDAQ Watch Photo by Kowloonese used under CreativeCommons license via Wikimedia Commons

Photo by Kowloonese; used by CreativeCommons license via Wikimedia Commons


The “new economy” in a nutshell:
full-time employees need government assistance because their wages are so low. Businesses are shrinking, not growing. And corporations are borrowing money to pay it out to stockholders… because, well, that’s what the system is designed to reward.

The more I look, the more I see it. The same pattern, almost everywhere. It’s not limited to just a few rogue companies. It’s not limited to just a few industries.

And it’s not getting any better.

Here’s the view, from the financial sector.

Remember that study showing that almost one-third of bank tellers receive food stamps, Medicaid or other public assistance? The authors calculated that taxpayers pick up the tab for almost $900 million in government aid – just to bank tellers – each year. That study didn’t break those costs out by particular employer, but…

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Bank Teller Counting Money for Customer --- Image by © Duncan Smith/Corbis via Flickr

© Duncan Smith/Corbis via Flickr. Used under CreativeCommons license.

According to Glassdoor, Bank of America tellers receive an average wage of $12 per hour – or, just about poverty-line wages for a hypothetical full-time employee supporting a family of four.

And the corporation just announced another set of layoffs, bringing the total to

  • about 14,300 jobs eliminated in the past year
  • about 69,000 jobs eliminated in the past five years.

But owners of the bank’s common stock are doing OK. So far this year, the corporation has distributed $3.1 billion to shareholders, through dividends and stock buybacks. And there will be even more money going to stockholders in December.

Can’t help noticing, though… Bank of America has issued a lot of bonds this year – more than $25 billion. Which means the corporation now has more than $270 billion in long-term debt that it has to pay off between now and 2047.

Yes, Bank of America is borrowing money at the same time it’s paying money out to stockholders.

(Which, yes, is sort of like running up your credit card to buy Christmas presents for people who already have everything.)

Wondering how stock prices are affected by the amount of money paid to shareholders?  Last year, Bank of America announced it would increase dividends and start buybacks – but then discovered an accounting mistake and had to withdraw those plans. And stock prices fell by 6.3%.

Want to know why corporate executives care so very much about short-term stock prices?  Look at the way Bank of America compensates its CEO. On the 13th of every month, Brian Moynihan receives the cash equivalent of 17,747 shares of common stock. In August, the per-share price was $17.62; for 17,747 shares, that works out to a payment of $312,702. In September, the per-share price was $16.04; that works out to $284,662. In October, the per-share price was only $15.52; that works out to $275,433. Don’t you think CEO Moynihan notices, when his monthly payment drops by ten or twenty thousand dollars?

But there’s good news for him: this month – after that latest set of layoffs was announced – the per-share price is back up above $17.  (Even though the Bank is $270 billion in debt and its credit ratings are, ahem, less-than-stellar… and it borrowed almost another $3 billion since CEO Moynihan’s October payment.)

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bankerAccording to Glassdoor, J.P. Morgan bank tellers also receive an average wage of $12 per hour… which is still, yes, about the poverty line for a hypothetical full-time employee trying to support a family of four.

And the corporation is, ahem, “cutting costs” by eliminating another 5,000 jobs. (Last year, they cut 7,900 jobs.)

But… stockholders are doing OK. The corporation just raised its dividend and is buying back $6.4 billion worth of its own stock. (That’s in addition to almost $18 billion in buybacks between 2010 and 2013.)

And CEO Jamie Dimon just got tagged as “the Best Big Bank CEO, Measured by Shareholder Returns.” Between buybacks and stock dividends, Dimon has “generated a total shareholder return of 119.5%” in the last decade.

Even though… can’t help noticing… J.P. Morgan had, at last report, $434.4 billion in long-term debt (which was an increase of $8.3 billion from the previous quarter). And it will be paying off debt through 2049.

I’m sure somebody at JP Morgan can explain why it makes sense to pay billions out to stockholders at the same time the corporation is borrowing billions. (And I’m sure somebody at the Federal Reserve Bank can explain why regulators approved this plan.)

And yes, folks high up the corporate ladder are doing OK, too. Their compensation includes mechanisms like restricted stock units and stock appreciation rights, which ensure they’re paying attention to share prices.  For instance, Managing Director Mary Erdoes just received stock appreciation rights equal to 200,000 shares of JP Morgan stock… on a day when the stock closed at $67.39 a share.   (Yep, some people get paid according to how high the stock price goes.)

Meanwhile… 5,000 JP Morgan employees will be looking for new jobs… and employees who still have their jobs get poverty wages and need government benefits to make ends meet.

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US states by poverty rate

States by 2013 poverty rate

And I’m betting that if I looked, most of the other Big Banks would show this same paying-low-wages-to-employees while cutting-rather-than-expanding-the-business while borrowing-against-future-revenues so they can pay-more-money-to-stockholders pattern.

It’s not just a few employers.

It’s not just a few industries.

Borrowing money in order to pay it to shareholders is the same basic thing Bain Capital was doing, back before journalists started writing about it, when Mitt Romney ran for President.

Only, this is on a bigger scale.

These are corporations that employ hundreds of thousands of people. And they’re borrowing against future revenue, in order to pay stockholders today.

While their executives rake in millions in compensation.

And their employees need government assistance just to get by.

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Read my last post, “McDonalds: Paying Billions (of Borrowed Money) to Stockholders” here.

Read my series about Verizon as a case study of what’s wrong with the economy, starting here.

 

McDonald’s: Paying Billions (of Borrowed Money) to Stockholders

Photo by Annette Bernhardt via Flickr

Photo by Annette Bernhardt via Flickr

Right there, in the USNWR story “Why McDonald’s stock is blowing the competition away,” was the clearest example yet of how our economy doesn’t work for anybody but the folks at the very, very top.

The company will cut $500 million [in costs] by 2018… it has a goal of having 4,000 stores refranchised in three years… it’s returning $30 billion to shareholders, an increase from $20 billion, through dividends and share buybacks and funded by taking on more debt.

And because of this strategy…

The famed restaurant chain has seen its stock jump by 17 percent since September.

Yes, McDonald’s. The corporation that costs taxpayers an estimated $1.2 billion a year in public assistance, because so many of its workers need government help to make ends meet. One of the employers who provoked the Fight for 15.

Yes, McDonald’s. The corporation whose per-share book value has dropped by 20% over the past decade … while its financial leverage (debt level) has more than doubled. The corporation that just saw its credit rating downgraded again, because Moody’s is concerned about “the company’s recent announcement that it intends to increase its returns to shareholders, the vast majority of which will be funded with additional debt.”

The corporation that has only $5.7 billion in net tangible assets (roughly $6.24 per share).

Yet the stock price hit $114 per share this week.

Because McDonald’s will be distributing an additional $10 billion to shareholders, “the vast majority of which will be funded with additional debt.”

(Even while its employees need $1.2 billion a year in food stamps and other assistance.)

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Image by Rose Lincoln, 1199SEIU

Image by Rose Lincoln, 1199SEIU

McDonald’s long-term debt will, as Moody’s noted, “limit its financial flexibility” for decades to come. Remember, the corporation eventually has to pay all that debt back, plus interest.  So basically, the corporation is using future revenues to pay stockholders now.

Moody’s expects the corporation to borrow even more as it increases its payments to stockholders.  At the same time, McDonald’s is selling off its assets, by “refranchising” 4,000 stores.

And Wall Street rewarded this strategy.  The stock price hit a record high this week… because McDonald’s will be distributing $30 billion, rather than only $20 billion, to shareholders.

And some McDonald’s executives took advantage of that record highChief Administrative Officer Peter Bensen reportedly exercised stock options to buy 15,870 shares – and then sold them the same day – making what I calculate to be a $1.2 million personal profit. Executive Vice President Richard Floersch exercised stock options to buy 23,910 shares, and then sold them – making a profit that I calculate at more than $1.3 million.  Executive Vice President Kevin Ozan also exercised stock options, buying 3,463 shares and then selling them at what I calculate to be almost $268,000 in profit.

And Executive Vice President David Fairhurst sold every share of McDonald’s stock he owned, that day of the record high.

Meanwhile… McDonald’s employees are receiving $1.2 billion in annual government assistance, because their wages are so low they can’t make ends meet.

And the financial press is trumpeting the fact that McDonald’s will be “cutting costs” – usually a euphemism for employee layoffs or wage reductions – by half a billion dollars.

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And no, I’m not the only one who thinks that our economy is being ruined by this fixation on short-term payouts to stockholders.

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Read “What Mitt Romney taught us about America’s Economy” here.

Read my series about Verizon as a case study of what’s wrong with the economy, starting here.

Dear Candidate Clinton: Disclosure isn’t enough

SOLD flagKudos to Hillary Clinton for making stock buybacks into an issue in the 2016 presidential campaign.  Most Americans don’t realize just how much money corporations spend buying back their own stock, rather than creating jobs.  It’s probably the biggest, ugliest secret of our troubled economy.

But Candidate Clinton doesn’t go far enough.

Her speech yesterday called for more-timely disclosure of buybacks. But just like with #MoneyInPolitics, public disclosure isn’t going to fix the problem.  We need to restore the laws that used to protect us, back when we had a Middle Class.

Disclosure hasn’t solved the problem of our politicians being bought by corporations and the ultra-wealthy.  Everybody knows that the Koch Brothers plan to spend almost a billion dollars buying themselves a president in 2016.  They announced it in the press.  They’re proud of it.  Disclosure isn’t stopping them.  Ever since they made the announcement, they’ve had a steady stream of sycophantic candidates “interviewing” with them, seeking their support.

Anyone who’s watching Big Oil knows that the industry has been busy buying politicians.  Starting with the Chairman of the Senate Committee on the Environment, Jim Inhofe.  Disclosure hasn’t made a difference.  He’s proud of the money he gets from Big Oil: “Whenever the media asked me how much I have received in campaign contributions from the fossil fuel industry, my unapologetic answer was ‘not enough’.”

Disclosure hasn’t fixed the problem of #MoneyInPolitics.  And it’s not going to fix the problem of stock buybacks, either.

WWYD_707_billionBefore the Securities and Exchange Commission created its “Safe Harbor Rule” in 1982, stock buybacks were almost unheard-of.  Now, they’re one of the top priorities of corporate executives.  Last year, corporations spent more than $556 billion buying back their own stock.  This year, they’re expected to spend $707 billion.

The ugly secret of our “trickle-down” economy: corporations are spending enormous amounts of money consolidating their ownership.   Rather than, say, expanding their businesses, hiring new employees or even paying existing employees a living wage.

(Can’t help but notice the trend of corporations focused on stock buybacks, while their employees need public assistance programs to make ends meet.  Walmart.  McDonalds.  Big Banks.)

Disclosure isn’t going to solve this.  Corporations are proud of their buyback programs.  They announce buybacks in press releases.

Just like the Koch Brothers used the press to announce their intention to buy a president.

Somebody needs to tell Secretary Clinton: the SEC’s 1982 “Safe Harbor Rule” is the regulatory equivalent of the Supreme Court’s Citizens United decision.  It enables corporations to do things that are really, really bad for our country.

But unlike Citizens United, the “Safe Harbor Rule” is an administrative regulation. It can be changed or repealed by the administrative agency.

And SEC members are appointed by the President.

Clinton could be pledging to only appoint SEC Commissioners who will repeal the rule.  Instead, she’s just looking for more disclosure.

Clinton deserves a whole lot of credit for raising the issue, and for talking about the impact that stock buybacks are having on our economy.

But it would be even better if she would go one step further, and talk about a solution that would actually fix the problem.

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Read more NHLN coverage of stock buybacks here.

Read Marketwatch, “Wall Street’s new drug is the stock buyback” here.

What would YOU do with $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.

 

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