skews13
Diamond Member
- Mar 18, 2017
- 9,433
- 11,858
- 2,265
y radio/TV program and my daily Substack newsletter, Hartmann Report, together are a small business. The only way I can increase my income from that business is by increasing the advertising revenue to the show, getting more people signed up for the newsletter, or both.
Build the business, in other words. Do the hard work every day. Keep my “customers” informed and thus happy: add value through research and share what I learn along the way.
It used to be that way with big business as well — companies grew in value because of good management and continual reinvestment in people, facilities, and product — until Ronald Reagan adopted neoliberalism and rewrote the rules of business.
Southwest Airlines passengers, for example, are today lamenting lost time with loved ones, lost luggage, and lost money spent on hotels, airline reroutes, and rental cars.
They missed weddings and funerals, spending time with family, and some confronted life-threatening situations as luggage-packed medications went missing and dialysis appointments had to be skipped.
All, apparently, so senior executives at Southwest and their morbidly rich investor cronies could get billions richer.
Here’s how it works.
If you’re the CEO of Southwest Airlines, or most any publicly traded corporation, there are two main ways you can increase your own compensation. They are:
1. Build the company: Invest in workers and technology. Open new routes. Provide better service to passengers. Upgrade your planes so people will want to fly with you. Pay your people better to build employee retention.
2. Use company profits to buy back and retire Southwest stock.
According to corporate watchdog Accountable.US, most of the evidence suggests the immediate predecessor to Southwest’s new CEO chose door number two as often as possible.
But how and why does it happen that CEOs and senior executives make a pile of money when they direct their own corporation to buy back its stock out of the marketplace?
And how did this manipulation of stock prices ever get decriminalized after being illegal for a half-century?
Imagine you’re the CEO of Acme Airlines, a company valued at $10 billion. The company has issued a billion shares of stock that are currently trading at $10 a share ($10 x 1 billion shares = $10 billion).
As the CEO, you’re not only paid a salary, you also have the two typical forms of “stock incentives” modern corporations give their senior executives.
The first is “performance compensation,” meaning as the price of the stock goes up you get bonuses and/or an increase in your pay. The second is that you’re partly compensated with stock or stock options (the right to buy stock at a predetermined typically low price).
If you can increase the share price of Acme Airline’s stock, you not only get a big bonus for hitting your “performance” target, but the stock you hold or can buy at a fixed (lower) price also increases in value. You get rich(er)!
But let’s also say that you’re not interested in building Acme as a way of increasing the stock price: that’s a lot of work and takes years. You want big bucks fast.
So, you simply direct your company to go into the marketplace, to the stock exchange where Acme is traded, and buy up, say, a hundred million shares.
The company is still worth $10 billion, the value of all the planes, landing slots, goodwill, corporate buildings, and assets: none of that has changed.
You haven’t added a single customer or paid a single flight attendant, mechanic, gate agent, or pilot an extra penny. You haven’t improved service or widened the seats in the planes to get in new customers. All you’ve done is use $1 billion in company profits to buy a hundred million shares at $10 each and “retire” them.
But now that the company has bought and retired a hundred million shares, instead of there being a billion shares in circulation there are only 900 million, even though the company is still worth just $10 billion.
As a result of your directing Acme to do that “share buyback,” every share that still exists is worth roughly 10% more because there are 10% fewer of them.
Which means the piles of shares you’ve gotten in compensation are now worth 10% more, too. And because the stock price went up, you’ll be getting a nice “performance” bonus at the year’s end.
This used to be a crime called “stock price manipulation” and was one of President Franklin D. Roosevelt’s and Congress’ early targets when they went after the Wall Street crooks who brought us the Republican Great Depression of the 1930s.
Congress created the Securities and Exchange Commission (SEC) in 1934 and FDR put Joe Kennedy (JFK’s father) in charge of it; Kennedy ironically told my old friend the late Gloria Swanson that he was chosen because, she told me, FDR had wisecracked that, “It takes a crook to catch a crook.”
Kennedy, knowing how the game worked, outlawed stock buybacks as one of his first official acts.
But in 1982 President Reagan endorsed this very form of corporate corruption as part of his new neoliberal Reaganomics agenda, decriminalizing it for the first time in almost a half-century.
Lest you think it improbable that modern CEOs would do this, as it’s so obviously corrupt and harmful to the company itself, consider this headline from the corporate watchdog group Accountable.US:
It started with Reagan’s putting John Shad— the Vice Chairman of the monster investment house E.F. Hutton — in charge of the SEC, which regulates monster investment houses.
Shad wasted no time in deregulating stock buybacks, instituting in 1982 what’s now known as “Rule 10b-18” that made stock buybacks explicitly legal for the first time since 1934.
Since then, share buybacks have become the most personally profitable business scam CEOs and senior executives can run against their own employees, companies, and communities.
When Reagan and Shad made this change in 1982, the average compensation of CEOs was around 30 times that of their average employee. CEO’s often lived in the same communities as their workers, or in a just slightly more upscale part of town.
Today CEO compensation is between 254 and 1000 times the average employee, depending on the industry, and CEOs live in palatial estates with servants’ quarters, yachts, and private jets; much of that increase in their annual income is the result of their companies’ repeatedly executing stock buybacks over the past 40 years.
Corporate CEOs call this “maximizing shareholder value” and claim it’s how capitalism is supposed to work.
As more and more CEOs got in on the scam since Reagan legalized it in the 1980s, it’s come to account for much of the 40-year explosion in the price of publicly traded stocks.
It was a crime then, and it's a crime now. It needs to be stopped, and it is being worked on to stop it.
Build the business, in other words. Do the hard work every day. Keep my “customers” informed and thus happy: add value through research and share what I learn along the way.
It used to be that way with big business as well — companies grew in value because of good management and continual reinvestment in people, facilities, and product — until Ronald Reagan adopted neoliberalism and rewrote the rules of business.
Southwest Airlines passengers, for example, are today lamenting lost time with loved ones, lost luggage, and lost money spent on hotels, airline reroutes, and rental cars.
They missed weddings and funerals, spending time with family, and some confronted life-threatening situations as luggage-packed medications went missing and dialysis appointments had to be skipped.
All, apparently, so senior executives at Southwest and their morbidly rich investor cronies could get billions richer.
Here’s how it works.
If you’re the CEO of Southwest Airlines, or most any publicly traded corporation, there are two main ways you can increase your own compensation. They are:
1. Build the company: Invest in workers and technology. Open new routes. Provide better service to passengers. Upgrade your planes so people will want to fly with you. Pay your people better to build employee retention.
2. Use company profits to buy back and retire Southwest stock.
According to corporate watchdog Accountable.US, most of the evidence suggests the immediate predecessor to Southwest’s new CEO chose door number two as often as possible.
How the stock buyback scam works
But how and why does it happen that CEOs and senior executives make a pile of money when they direct their own corporation to buy back its stock out of the marketplace?
And how did this manipulation of stock prices ever get decriminalized after being illegal for a half-century?
Imagine you’re the CEO of Acme Airlines, a company valued at $10 billion. The company has issued a billion shares of stock that are currently trading at $10 a share ($10 x 1 billion shares = $10 billion).
As the CEO, you’re not only paid a salary, you also have the two typical forms of “stock incentives” modern corporations give their senior executives.
The first is “performance compensation,” meaning as the price of the stock goes up you get bonuses and/or an increase in your pay. The second is that you’re partly compensated with stock or stock options (the right to buy stock at a predetermined typically low price).
If you can increase the share price of Acme Airline’s stock, you not only get a big bonus for hitting your “performance” target, but the stock you hold or can buy at a fixed (lower) price also increases in value. You get rich(er)!
But let’s also say that you’re not interested in building Acme as a way of increasing the stock price: that’s a lot of work and takes years. You want big bucks fast.
So, you simply direct your company to go into the marketplace, to the stock exchange where Acme is traded, and buy up, say, a hundred million shares.
The company is still worth $10 billion, the value of all the planes, landing slots, goodwill, corporate buildings, and assets: none of that has changed.
You haven’t added a single customer or paid a single flight attendant, mechanic, gate agent, or pilot an extra penny. You haven’t improved service or widened the seats in the planes to get in new customers. All you’ve done is use $1 billion in company profits to buy a hundred million shares at $10 each and “retire” them.
But now that the company has bought and retired a hundred million shares, instead of there being a billion shares in circulation there are only 900 million, even though the company is still worth just $10 billion.
As a result of your directing Acme to do that “share buyback,” every share that still exists is worth roughly 10% more because there are 10% fewer of them.
Which means the piles of shares you’ve gotten in compensation are now worth 10% more, too. And because the stock price went up, you’ll be getting a nice “performance” bonus at the year’s end.
This was once a crime - and should be now
This used to be a crime called “stock price manipulation” and was one of President Franklin D. Roosevelt’s and Congress’ early targets when they went after the Wall Street crooks who brought us the Republican Great Depression of the 1930s.
Congress created the Securities and Exchange Commission (SEC) in 1934 and FDR put Joe Kennedy (JFK’s father) in charge of it; Kennedy ironically told my old friend the late Gloria Swanson that he was chosen because, she told me, FDR had wisecracked that, “It takes a crook to catch a crook.”
Kennedy, knowing how the game worked, outlawed stock buybacks as one of his first official acts.
But in 1982 President Reagan endorsed this very form of corporate corruption as part of his new neoliberal Reaganomics agenda, decriminalizing it for the first time in almost a half-century.
Lest you think it improbable that modern CEOs would do this, as it’s so obviously corrupt and harmful to the company itself, consider this headline from the corporate watchdog group Accountable.US:
As their press release lays out:
This Reaganomics neoliberalism scam has made America’s corporate CEOs and stock speculators among the wealthiest people in the world, while keeping down wages and benefits for everybody else. It’s hurt the competitiveness of American business.
It started with Reagan’s putting John Shad— the Vice Chairman of the monster investment house E.F. Hutton — in charge of the SEC, which regulates monster investment houses.
Shad wasted no time in deregulating stock buybacks, instituting in 1982 what’s now known as “Rule 10b-18” that made stock buybacks explicitly legal for the first time since 1934.
Since then, share buybacks have become the most personally profitable business scam CEOs and senior executives can run against their own employees, companies, and communities.
When Reagan and Shad made this change in 1982, the average compensation of CEOs was around 30 times that of their average employee. CEO’s often lived in the same communities as their workers, or in a just slightly more upscale part of town.
Today CEO compensation is between 254 and 1000 times the average employee, depending on the industry, and CEOs live in palatial estates with servants’ quarters, yachts, and private jets; much of that increase in their annual income is the result of their companies’ repeatedly executing stock buybacks over the past 40 years.
Corporate CEOs call this “maximizing shareholder value” and claim it’s how capitalism is supposed to work.
As more and more CEOs got in on the scam since Reagan legalized it in the 1980s, it’s come to account for much of the 40-year explosion in the price of publicly traded stocks.
Was the Southwest Airlines Meltdown Caused By the "Great Share-Buyback Scam"?
My radio/TV program and my daily Substack newsletter, Hartmann Report, together are a small business. The only way I can increase my income from that business is by increasing the advertising revenue to the show, getting more people signed up for the...
www.dailykos.com
It was a crime then, and it's a crime now. It needs to be stopped, and it is being worked on to stop it.
