Executives are dumping shares straight into buyback announcements.
SEC Commissioner Robert J. Jackson Jr. appointed as SEC commissioner by Trump on January 11, 2018 wants to do something about that.
Let’s tune into his speech on Stock Buyouts and Corporate Cashouts.
We all know what happened the last time a Republican-controlled government pushed through a corporate tax holiday in 2004. As that bill’s sponsors hoped, American companies repatriated billions of dollars of overseas cash. But corporations didn’t invest most of that money in innovation. They didn’t invest it in retraining their workforce or raising wages. Instead, executives largely used the influx of fresh funds for massive stock buybacks.
In the years leading up to the financial crisis, top executives at Bear Stearns and Lehman Brothers personally cashed out $2.4 billion in stock before the firms collapsed.
That’s why, when I was sworn in a few weeks after the Trump tax bill took effect, I asked my staff to take a look at how buybacks affect how much skin executives keep in the game. I was worried that lax corporate practices and SEC rules might lead to buybacks that give executives yet another chance to cash out at investor expense.
Skin in the Game Results
- In 385 buybacks over the last fifteen months, a buyback announcement lead to a big jump in stock price.
- In half of the buybacks, at least one executive sold shares in the month following the buyback announcement.
- Twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.
- On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase.
Dodd-Frank Skin in the Game
In the wake of the financial crisis, Congress realized the importance of keeping executives’ skin in the game, so the Dodd-Frank Act included several provisions designed to give investors more information about whether and how managers cash out.
Well, that didn’t work did it?
And what’s left of Dodd-Frank is going by the wayside soon.
Rules Changes
Commissioner Jackson proposes some rule changes on executive selling.
If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is. That’s why I’m here today to call on my colleagues at the Commission to update our rules to limit executives from using stock buybacks to cash out from America’s companies.
And I am also calling for an open comment period to reexamine our rules in this area to make sure they protect employees, investors, and communities given today’s unprecedented volume of buybacks.
Complete Confidence
I have complete confidence in the ability of corporate executive to avoid whatever rules the SEC comes up with.
Mike “Mish” Shedlock
“..This is the issue with ‘regulation’ — people assume that if something is regulated that consumer/investor interests are being protected at all times.”
“If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is.”
It’s utterly unbelievable how anyone with enough semi functioning grey matter to coordinate the machinery required to inhale and exhale air, can be so dumb, naïve, indoctrinated and all around hopeless. Dude: Corporate executives announce share buybacks because they believe share buybacks are best for corporate executives. Not because of holding hands and kumbaya and community and values and stakeholders and, like, “look mom! I feel something!”
What would you suggest people do? Throw their money in a bank and get 1 or 2 percent? Throw it into gold/silver and watch the COMEX manipulate prices (since no physical delivery is necessary)? Roll the dice and gamble with crypto after the boom? Throw everything into real estate at these inflated prices? Invest in rare artwork/collectibles? Get 3% from a 30 year US T-bill?
People invest in stocks because it’s one of the only investment avenues left that provides a decent return without a perceived enormous risk. The problem here isn’t regulation (or lack thereof) when seemingly everyone is engaged in buybacks. The problem is Fed induced artificially low interest rates that encourage these companies to borrow for practically nothing and buy their own stock, allowing execs to cash out bonuses. It’s free money from the Fed, why not take advantage?
Once you realize how rigged this game has become, you stop fretting over things like regulation that fail to address the main point of incentivized fraud.
While this is undoubtedly scandalous, nobody is obliged to own the stock of companies whose executives engage in this kind of behaviour. Insider sales are public information (and very easily accessible) so you can see for yourself which execs ‘believe’ and those which don’t. Investors should vote with their feet and, if they choose not to, they’ll get what they deserve. This is the issue with ‘regulation’ — people assume that if something is regulated that consumer/investor interests are being protected at all times. If there were no regulation whatsoever consumers would pay a damn sight more attention to what it was they were consuming and the ‘burden of proof’ would shift to vendors of products and services.
What difference does speed of redemption make? The process has not changed. The C’s get stock options, the company borrows to buy back stock, the C’s fill their pants with cash, repeat.
Faster redemption may indicate the C’s don’t think the price will hold up as long as before. Bruce Karatz sold 150 million worth, the month KB Homes stock peaked in July 2005. He got while the getting was good.
Make whatever rules you want. If you’re not going to enforce them then why go through the effort? Oh yeah, you have to make us proles believe that you have a purpose and should get a paycheck. Sorry, we’ve been on to that little scam for awhile.