The coronacrisis turns the buyback billionaires into the trillion-dollar dozen

The Institute for Policy Studies reported in August 2020 that the combined wealth of the twelve richest Americans had passed one trillion dollars, thirteen digits, having grown by about 40 per cent since the pandemic lockdowns began in March. The institute called them the oligarchic dozen. This page called them the buyback billionaires, because the mechanism that made the leap possible was not new and had not been an accident.

Buybacks

Until 1982 a company buying its own shares on the open market risked a charge of manipulation, and most buybacks were illegal. Deregulation that year made them safe, and the capital-gains tax rate, lower than the rate on income, made them the preferred way to return cash to shareholders, since a shareholder who does not sell pays nothing. A buyback raises the share price by reducing supply and by signalling demand; executives paid in shares and options benefit directly. Through the 2010s, with credit nearly free, the largest American companies borrowed to buy their own shares in quantities that exceeded their profits.

The bailout, and the loophole

When the pandemic rescue was written in March 2020, the objection was obvious and was made loudly by people who could not be dismissed as anti-business. Mark Cuban urged Congress to prohibit buybacks at any company taking relief, on the record of 2008, when the bank rescue had gone to bonuses and nobody had been held to account. Jim Cramer said it was rare for him to agree with anything so completely. Jeffrey Gundlach wrote that bailouts of companies “that got over-leveraged via share buybacks at all-time highs” would not sit well with the public. Congress appeared to listen and wrote into the acts that no bailout funds could be used for buybacks.

That was the loophole. A company that receives cheap or free money for one purpose uses it for that purpose and frees its other money for buybacks; nobody can tell which dollar is which once they are in the same account. A prohibition that meant anything would have said no buybacks for two years, or none at all. Congress said neither, and the buybacks continued, funded, on paper, from other revenue.

Zombies

The companies being rescued had been hollowed out before the virus arrived, and the hollowing was the same policy seen from inside. Buybacks had used up cash: non-financial S&P 500 cash balances fell 11 per cent in the twelve months to November 2019, the largest decline in the series since 1980. Buybacks had used up credit: more than half of outstanding corporate debt was rated BBB, one notch above junk, and nearly 40 per cent of listed American companies had lost money over the previous twelve months. Ratings agencies, the Bank for International Settlements, the IMF and the Fed itself had all warned about corporate debt. Everyone saw the timebomb; nobody defused it; and the crisis arrived in time to justify defusing it with public money so that it could be rebuilt.

The Fed’s part was the decisive one. In March it undertook to buy corporate bonds, including new issues, which meant companies with no cash and too much debt could issue more debt to a buyer that could not say no, and use the proceeds, in part, for the buybacks the bailout acts had pretended to forbid.

Buy America, all of it

The result was the trillion-dollar dozen: fortunes held almost entirely in shares, in companies whose share prices were supported by their own purchases, funded by credit the central bank underwrote. The proposal at the time, from the same administration, was to cut the capital-gains rate further. The observation here was that a policy which produces a 40 per cent gain for twelve people during a year in which twenty million lost their jobs is not a side effect of the rescue. It is the rescue, and the rest is window dressing.

Later note. American companies bought back a record 880 billion dollars of their own shares in 2021 and again in 2022. A one per cent excise tax on buybacks took effect in 2023. The twelve fortunes had, by 2024, passed two trillion.