Coronacrisis Turns Buyback Billionaires into the Trillion-Dollar Dozen
The Coronacrisis has been a boon for America’s wealthiest dozen, taking their aggregate wealth over the top of a trillion dollars. One think tank refers to them as the “Oligarchic Dozen”:
“The rich get richer” doesn’t even begin to tell the story these days. According to the Institute for Policy Studies, the wealth of the top 12 billionaires in the U.S. recently exploded to more than one trillion dollars — yes, 13 digits…. “This is simply too much economic and political power in the hands of twelve people. From the point of view of a democratic self-governing society, this represents an Oligarchic Dozen….”
Since the pandemic first blew up in the U.S. back in March, the “Oligarchic Dozen” has enjoyed a 40% surge in its combined wealth…. “The total wealth of the Oligarchic Dozen is greater than the GDP of Belgium and Austria combined,” said Omar Ocampo, a researcher for IPS’s program on inequality and the common good. “Meanwhile, tens of millions of Americans are unemployed or living paycheck to paycheck….”
And it’s not just Bezos and the bunch who have seen fortune smile upon them lately. CEO compensation, overall, climbed to its highest level in seven years last year, and it is positioned to rise once again in 2020…. In fact, the pay ratio between chief executives and workers at America’s 350 biggest companies has widened to 320-to-1, the researchers found.MarketWatch
The Buyback Billionaires
These are the Buyback Billionaires, some of the elite whose wealth has been expanded by the deregulation that allowed companies to buy back their own stocks and by the low capital-gains tax that gives the most benefit to those who expand their wealth through stock buybacks — the tax that Trump now wants to lower even more, thus exacerbating the extreme difference between the wealth of the rich and the survival of the rest.
Some billionaires see through it and have spoken out strongly against the buybacks that have made this leap possible and that have, again, been fueled by cheap Fed credit.
Back in March, when the Fed and feds went on their bailout binges, Mark Cuban implored the government not to allow buybacks at any corporation that received this year’s Fed bailouts.
Ostensibly still disgusted from The Great Recession, where zero executives were held accountable and most of the Fed’s TARP money went to line the pockets of executives and widen the inequality gap, Cuban had some choice words – and some good ideas – for what life should be like post-bailouts and after the coronavirus crisis ends….
Cuban lamented bailouts in the past that have ignored the middle class and sought to place accountability on the executives that have put their companies in such precarious positions, mostly through buybacks, that they can’t weather the storm of an economic slowdown on their own.
“”We already know what’s going to happen,” Cuban said. “A year after this plays out, and it will, we’ll look back and say why didn’t we consider the workers? The everyday hourly worker. The people making minimum wage. Why didn’t we reward them as well?”Zero Hedge
Well, the government did dole out some to the proletariate this time around to cauterize their losses, and it did place some window-dressing restrictions on buybacks. However, the Buyback Billionaires still benefited by far the most, getting rocketed into the new Trillion-Dollar Dozen.
Congress in its infinite trickery pretended to listen to this concern by stating in its various bailout acts that none of the money from the bailouts could go to buybacks. So what? Companies then take that cheap or free money and spend it on what it is meant for so that they can free up other funds to do buybacks, which they would have otherwise had to use just to save themselves.
If the government seriously wanted to stop the money from being used for buybacks, it would have said “No buybacks for two years.” Period. Not just “no buybacks out of these particular funds.” Better yet, just end buybacks completely for good.
Most buybacks used to be illegal for good reason. Besides creating a course for ultimate market manipulation by insiders and besides being used to milk companies dry as insiders buy themselves out with company cash, they provide a way for investors, due to the special cap-gains tax rate, to take profits that get an end run around ordinary (higher) income taxes.
“When there is a bailout … whether its an airline or whatever it may be … there are most likely going to be steps taken by the company, and historically this is what has taken place, where they reward the executives. They reprice their options, they give them more stock, they give them warrants….
“No buybacks. Not now, not a year from now, not 20 years from now. Not ever,” Cuban concluded. “Effectively you’re spending taxpayer money to buy back stock and for me, that’s just the wrong way to do that.”
But, the government allowed buybacks to continue, though not with the actual bailout funds, as if anyone can tell what funds are what once they get pooled in the company pot. So, they just continued, supposedly, from other revenue streams, never mind the fact that those revenue streams were freed up for buybacks, just as Cuban pointed out would happen, because the companies that were put in “precarious positions, mostly through buybacks” didn’t have to “weather the storm of an economic slowdown on their own.”
Though they had already spent their reserves on previous buybacks, that hasn’t stopped them from continuing with more buybacks to reward themselves during a time of extreme crisis.
Even Krazy Kramer agreed with the logic of this:
@mcuban It is very rare that i read something that i totally and unequivocally agree with. Below is one of those reads. I am so tired of the rich profiting from every cataclysm. This is the time to reset the system in favor of the working person. Right Now! https://t.co/btcvGP18Lu— Jim Cramer (@jimcramer) March 18, 2020
But none of this caused congress (or the Trump administration) to do anything that would end buybacks from bailout recipients, even for just an extended period of time, such as “no buybacks for two years,” much less Cuban’s No buybacks “ever!”
At this same time, Jeffrey Gundlach noted,
I don’t think government bailouts of over leveraged companies that got over leveraged via share buybacks at all-time highs, enriching executives and hedge fund investors, will sit well with the American people.— Jeffrey Gundlach (@TruthGundlach) March 18, 2020
It is apparently sitting better than it should. I don’t hear much outrage in the press or on the streets.
Rich got richer by turning their companies into zombies
Of course, corporations didn’t just use company cash (surplus revenue) to enrich shareholders by buying back stocks; they also used up all the company’s good credit.
Corporate debt is the timebomb everyone saw ticking, but no one was able to defuse. Ratings agencies warned about it: Moody’s, S&P. Central banks and international financial institutions did too: the Fed, the Bank of England, the Bank for International Settlements, the IMF. Financial luminaries expressed concern: Jamie Dimon, Seth Klarman, Jes Staley, Jeffrey Gundlach, Henry McVey. Even a presidential candidate brought the issue on the campaign trail: Elizabeth Warren. Yet, as we’ve documented in these pages for more than two years, corporations have only piled on more debt as their balance sheet health has deteriorated…. One in six U.S. companies is now a zombie, meaning their interest expenses exceed their earnings before interest and taxes.Zero Hedge
This zombification isn’t something that happened just because of the Covidcrisis. It all happened prior to COVID-19 ever making its way out of a Wuhan lab on the wings of bats (or however it escaped):
As of year-end 2019, the percentage of listed companies in the U.S. losing money over 12 months sat close to 40%. In the 12 months to November, non-financial S&P 500 cash balances had declined by 11%, the largest percentage decline since at least 1980.
Cash balances were depleted and corporations were strapped with more debt than their revenue streams could cover, even at the ridiculously low interest this millennium is becoming infamous for … all to make shareholders richer at the expense of what could have been robust, profitable companies able to weather a crisis on their own.
Greater than 50% of outstanding debt is rated BBB, one rung above junk.
But we keep letting it happen!
Have no fear. The Covidcrisis arrived just in time to justify bailing them all out so they can do it again. The government allowed them to continue buybacks (but just earmark the bailout funds for their designated purpose, not to include bailouts).
Here’s how that works: Thanks to the Covidcrisis, the Fed promised to soak up all this bad debt. It even soaked up new debt that the banks created through new bond issuances on behalf of these cash-starved corporations, much of which is being used for new buybacks!
Yay! And the circus was great fun for all!
Any really bad debt, of course, will be covered by the tax payer via the US Treasury as we again socialized the risk of all the losses of the capitalists, not just in the US, but throughout the world:
For the first time in the history of the Federal Reserve, it has signed on to a plan with Congress to nationalize the unmanageable debts of global banks and other multinational corporations and put the U.S. taxpayer on the hook for the losses. Conducting the bulk of these programs will be the Federal Reserve Bank of New York, known as the New York Fed, which is a private institution owned by (wait for it) multinational banks….
According to the language in the recent stimulus bill (CARES Act) passed by Congress and signed into law by President Trump … the U.S. Treasury will hand $454 billion of taxpayers’ money to the Federal Reserve. The Fed will, in turn, hand the bulk of this money to the New York Fed. The New York Fed will then create Special Purpose Vehicles (SPVs) using the $454 billion as loss absorbing capital (equity) to leverage its purchases of bad debts to $4.54 trillion….
So far, the Fed has newly announced it will be engaging in outright purchases of corporate bonds in both the primary and secondary markets, exchange traded funds, asset-backed commercial paper along with its ongoing purchases of Treasury securities and agency mortgage-backed securities.Wall Street on Parade
Yay! Such fun! And everyone let it happen because, again, we wouldn’t want the too-big-to-fail to fall upon us.
That, Folks, is how trillions in mediocre bad debt and half a trillion to bad debt that outright fails gets hosed up into the Fed’s great Wondersuck Vacuum Cleaner with the outright fails being inherited by you!
The false gods of great fortunes delivered a good crisis when we needed it most
And that is how the stock market keeps rising, even as the businesses being traded are dying. They are soon to be shell corporations, trading as trillion-dollar chips in the Wall Street Casino. Some actually would-be shell corporations already if not for the Fed fuel hose pumping new money in as it sucks bad debt out.
As Powell, demurely explained, regarding how times like the Covidcrisis help out:
In certain circumstances like the present, we do have the ability to essentially use our emergency lending authorities and the only limit on that will be how much backstop we get from the Treasury Department. We’re required to get full security for our loans so that we don’t lose money.
Yeah, you wouldn’t want the Federal Reserve System, owned entirely by the banks as it, in fact, is to lose money. Much better to make sure any actual losses from these bailed out blimps accrue to the tax payer in the form of higher mountains of federal debt. The Fed will eventually finance all of that anyway, meaning more money going to the member banks in the form of interest on the debt as they buy that debt up and sell it for a profit to the Federal Reserve, which they own.
This is exactly what happened during the last financial crisis: the New York Fed was put in charge of the bailout programs and then farmed them out to multinational banks like Goldman Sachs and JPMorgan Chase – who are among the largest shareowner owners of the New York Fed.
Buy Amerika! (All of it!)
The banks, of course, already made bank on all of this year’s bailouts, which was exactly why their corporate reports for the second quarter came out so golden during such tough times, pushing their stock values even higher.
They made money off the fees they charged for issuing all the new bonds on behalf of numerous client corporations — both national and multi-national. They made money off of fees for the counsel they provided. Then they sold their clients’ debt to the Fed for a tidy profit, including no doubt some of their own corporate bonds.
Some of these are the same banks routinely fined for mega-billion scams and racketeering, such as Bank of America (to whom I sang my own post-2008 tribute), Goldman Sachs, Wells Fargo, JPMorgan Chase, etc.. Those fines are just petty amounts of money out the back door as the same banks are rewarded by the federal government with lucrative deals like those we’ve seen during the Covidcrisis.
For example, back in 2008, JPMorgan was asked by the Fed to suck up Bear Stearns at fire-sale prices.
After some heat from the media, JP Morgan was strong-armed by the Fed to pay $10 per share, partially rescuing equity shareholders and bondholders. As part of the agreement with the Fed to raise the stakes to $10 per share, the U.S. taxpayers assumed most of the residual credit risk…. Bear Stearns real estate holdings alone were worth well in excess of the $10 per share price, not to mention many other valuable assets.
It was a sweetheart deal for JP Morgan as they got all of the upside. Not so much for the taxpayer who took all the risk. What was the reward for that assumed risk? Zero percent interest rates, languishing retirement fund returns, and a widening wealth inequality gap….
Later that year, as the financial fiasco gained steam and after the Lehman Brothers bankruptcy, the Fed directly lobbied Congress to provide $700 billion in taxpayer funds to bailout the United States banking system…. Rumor has it that Treasury Secretary Hank Paulsen literally got down on his knees to beg Nancy Pelosi to quickly advance the effort (no doubt after looking at the value of his Goldman Sachs stock).
Sorry taxpayers, the bailout which gave ex-Goldman Sachs CEO Hank Paulson full authority to distribute funds to banks and make purchase of bank’s securities was not allowed to be checked for fairness, indiscretion, or quid pro quo actions from Paulson and friends….Zero Hedge
That was, indeed, a sweetheart deal. Not even the courts could review how the $700-billion was handled … ever.
That status gave them unprecedented special privileges unlike those any other company before had ever enjoyed. EVER. They were feeding at the trough of U.S. taxpayer generosity with a sense of arrogance and entitlement….
That pattern of corporate favoritism, dare we say welfare, took on a new monstrous form during the financial crisis and has stayed in place throughout the entire decade that followed.
As the course of bailouts laid out in 2008/2009 continues to roll on like a train to nowhere more than a decade later, there is nothing like a true global, economic collapse all over again to make banks richer with new plans that allow them to launder all their stale debts in ways forever unseen by the eyes of ordinary citizens.
But, hey, at least it all trickles down:
Let’s remember where all of these bad debts came from on which the U.S. taxpayer is now going to eat the losses. These multinational corporations and multinational banks issued debt in order to buy back trillions of dollars of their own shares to inflate their profits so that their CEOs and other top executives could claim great stock performance and get paid 200 to 400 times what their average workers were getting paid. According to the Economic Policy Institute, CEO compensation has grown 940 percent since 1978 while the typical worker’s compensation has risen by just 12 percent during that span of time.Wall Street on Parade
Well, the losses all trickle down, not the compensation benefits. In terms of compensation trickling down, we better put a little more emphasis on the word “trickle,” represented by that 12% improvement in real dollars for the working class since 1978!
Trump trumps his own tax cuts
Trump is about to trickle on you with some more truly special golden showers for the likes of Goldman Sachs and sons.
As if these bodacious bailouts were not insult enough, Trump started talking a week or so ago about lowering the already cut-rate 20% capital gains tax even more to attempt to pump up his badge of pride, the US stock market, to new heights. How fortunate we are to have someone who understands the plight of the common man to look out for the rich so they can look out for us!
God forbid those who have joined the Trillion-Dollar Dozen get only a slight tax break on their stock gains compared to what the rest of us have to pay on ordinary income! Working so less strenuously to make money off stock gains and being so much more at ease about their financial situations than the average guy, surely their finger-tip-computer-button stock gains should get an even lower tax rate than the already lower rate they pay as compared to people who live hand-to-mouth, month-to-month by the sweat of their brow!
Do you think the Republicans will complain about Trump’s obscene new tax cut, or will they praise him with the same tired mantra about doing what needs to be done to save the economy and create jobs? Never mind that NONE of these savings has gone into CAPEX to build companies stronger or into creating new factories in America, though the cuts have made CEOs 320 times richer than the average worker. It all just gets recycled into the next round of stock purchases and buybacks to create a spiraling rise of stock prices that enrich the rich more than the rest.
I suspect even Republican paupers laid off at factories will praise Trump for the next round of tax cuts, claiming they will surely trickle down this time to make their situation better at last! After all, they saved a couple thousand with the 2018 Trump Tax Cuts!
What do they say about “fool us once” and then “fool us twice?” How about thrice … and now a proposed fourth time with trickle-down / supply-side tax cuts? How long will the American public keep buying the propaganda that the rich need saving the most in order to save the rest of us? Let’s make sure they get a Trumpian-sized share of the benefits because that will be good for all of us, never mind they already pay a lower tax on their gains than the middle class pays on ordinary income. Help the rich save the rest!