Stock Buyback: Unveiling the Wall Street Deception

Stock Buyback: Unveiling the Wall Street Deception

Better a diamond with a flaw than a pebble without one.
-Chinese Proverb

Stock Buyback: Unmasking the Wall Street Trickery

Updated Dec 2020

Wall Street has a new hobby that uses good money to create the illusion that all is well; only unlike most hobbies, the intent is to distort reality and reward lazy insiders for doing next to nothing.  Gone are the days of trying to improve the bottom line by improving efficiency, finding new markets, etc.; now, the idea is simply to cut the supply of outstanding shares, thereby magically boosting the EPS. Why are executives doing this with such impunity?  The “safe harbour” rule passed in 1982 essentially allows corporations to repurchase shares without having to face charges of manipulating the price of their shares.  Before the passage of this rule, stock repurchases were next to zero. Senators Elizabeth Warren and Tammy Baldwin agree that stock buybacks should be forbidden by the SEC because they are a form of market manipulation.

Senator Baldwin issued the following statement with share buybacks:

In 1982, buybacks were near zero when the Securities and Exchange Commission (SEC) issued a rule to provide a ‘safe harbour’ from manipulation liability. Last year, over $500 billion was spent on share repurchases.

Senator Warren also shares a similar sentiment.

“The SEC needs to acknowledge that these buybacks have been treated as stock manipulation for many years because that is precisely what they are,” she asserted.

However, the SEC does not recognise this fact, as they have admitted to not actively monitoring stock buybacks to prevent manipulation. SEC Chair Mary White provided the following comments in response to a letter from Senator Baldwin:

“Conducting data analyses for issuer stock repurchases poses significant challenges,” White wrote, “due to the unavailability of detailed trading data regarding these repurchases.”

White further stated that “because Rule 10b-18 is a voluntary safe harbour, issuers cannot be found violating this rule.”

The SEC has yet to acknowledge the issue and take proactive measures to address it.

Many other leaders and experts view share buybacks in a negative light

Druckenmiller told CNBC in March that he is extremely concerned about the doubling in U.S. corporate debt to roughly $7 trillion, up from about $3.5 trillion in 2007. “Most of that mix has been in more highly leveraged stuff,” he said. “And if you look at what corporations have been using it for, it’s all financial engineering.”

Brian Reynolds, Chief Market Strategist at New Albion Partners:

“Pension funds are compelled to achieve a 7.5% return on their investments,” which leads them to invest in leveraged credit funds that resemble the strategies employed by Long-Term Capital Management in the 1990s. These funds, in turn, purchase substantial quantities of corporate bonds from companies, resulting in an influx of cash into their balance sheets. This cash is then utilised to artificially boost their stock prices through methods such as buybacks or engaging in mergers and acquisitions. This creates a cycle of financial engineering that is expected to amplify in the coming years.  

Stanley Druckenmiller:

“If you’re running a business for the long term, the last thing you should do is borrow money to buy back stock.”

Larry Fink, CEO of BlackRock

 “It is critical … to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners,” Fink wrote in the letter, dated March 31, 2015.

James Montier:

He labels share buybacks as the The World’s Dumbest Idea,”.  He states that shareholders are not providing capital to corporations but are extracting it and demonstrates that since 1980 public companies have repurchased more equity than they have issued.

In 2012, the top 500 executives mentioned in official statements of publicly traded US companies earned an average of £30.3 million each. Stock options accounted for 42% of their compensation, while stock awards comprised 41%. Open-market buybacks, by boosting the demand for a company’s shares, automatically raise its stock price, even if it is only temporary. Additionally, buybacks can help the company achieve its quarterly earnings per share (EPS) targets. Full Story

Manipulating Earnings: The Deceptive Game of Stock Buybacks

The bottom line, they can do what they want without worrying about repercussions. It’s like giving a prisoner the keys to the cell and telling him to make sure the door to the jail cell remains locked at all times.

Stock repurchases are a nefarious, albeit cunning, account trick to inflate a stock’s widely followed earning per share statistic.  The old way of increasing EPS was to increase profits, but the slick and grey method decreased the number of outstanding shares.  This simple trick can distinguish between demonstrating declining or rising earnings in the current environment of tough corporate profits.  In this ultra-low interest atmosphere, cash is cheap, and given the challenges most corporations face in improving the bottom line, taking the easy out makes sense.  Most executives see this as a win-win situation; they get paid handsomely for doing nothing.

Stock Buybacks Soaring: A Financial Trend on the Rise

According to a recent report by CNN Money, dividends and stock buybacks are set to reach a new high of $1 trillion in 2015. Goldman Sachs predicts that this number will increase by 7% in 2016, surpassing the one trillion mark.

Numerous companies have recently joined this trend to enhance their financial performance. Let’s take a look at some notable examples:

– Baidu, in its second share buyback program since July of this year, announced a $2 billion investment.
– General Electric and Microsoft announced significant share buybacks in 2015, with a combined value of $100 billion.
– Mastercard revealed plans to purchase $4 billion worth of its stock.
– Visa Inc and Google each announced share buybacks worth $5 billion.

These examples demonstrate the growing popularity of buybacks as an effective means to improve companies’ bottom lines. You can access the complete list here.

US: flows vs Issuance

This chart represents the supply of the outstanding number of shares has continued to drop while the demand has held.  Since 2009, corporations have spent over $2.4 trillion on share buybacks.  The above figure matches the Fed’s current balance sheet, which has soared to $2.4 trillion since the inception of QE.


Nothing will change on Wall Street despite all the noise, for greed overrules everything else.  Morales are meaningless in the land of lust and desire, and unless strict new laws are put in place or the safe harbour rule is repelled, nothing will change.  Why would executives take a significant pay cut when they can legally take this route, do next to nothing and walk away with a fortune?  Would you do things differently if the roles were reversed?  Maybe some of you would respond with a yes, but the vast majority would probably be only too glad to follow the same path.

As long as compensation is based on share performance, the outlook worsens.  The era of cheap money only adds fuel to an already raging fire. Against this backdrop of so-called wonderful growth, share prices have doubled over the past five years, and so has corporate debt. This party will not end well, but waiting for that day could mean financial loss for you. A vast chasm separates being right and being right at the right time.

Wall Street is full of Tombstones of people who were right but could not stay solvent long enough to benefit from their convictions.  We expect corporate debt to soar to heights that could make the current levels appear sane. In translation, stock prices could continue trending upward for far longer than most envision.


The first and worst of all frauds is to cheat one’s self. All sin is easy after that.
-Pearl Bailey

Other Stories of Interest

What’s making this stock Market bull So resilient? (Aug 22)

Mass Media Turns Bullish: Stock Market Correction Likely (Aug 19)

Crowd Control Market Manipulation & Pensioners Forced to Speculate (Aug 18)

China Following America’s Lead: Exports Bad Debt Globally (Aug 13)

Crude oil bottom likely to Propel Dow Industrials higher (Aug 12)

Wall Street Journal States that Russia Bombed US-Syrian Base  (Aug 9)

Why won’t this cursed Stock market bull market crash (Aug 8)

Investor Anxiety; Rocket Fuel for Unloved Stock Market Bull (Aug 6)

Most Unloved Stock Market Bull Destined To Roar Higher (Aug 5)

Student Debt Crisis Overblown & Due to Stupidity  (Aug 4)