Corporate Execs throw caution to the wind

Reading time: 2 – 4 minutes

During the DotCom Bubble of the 1990s, Jeff Skilling was invited to that temple of moral relativism, the Harvard Business School, to implant eager young minds with his lessons for success.

Will there be Judgment Day?

I wonder who now has taken his place, at the height of the Great Buyback Bubble and whether they will suffer the same fate as Mr. Skilling, when the market comes tumbling down?

Corporate executives have thrown caution to the wind, touting buybacks as ‘good for investors’ without regard for the truth or laws against securities fraud.

Even when borrowing heavily to finance buybacks, lowering credit ratings of company bonds, mortgaging the future of companies at ever higher cost, these executives don’t seem to care.

However, reckless arguments supporting today’s buybacks will carry little weight in the vindictive climate of a post bubble bust.

Perhaps, in the back offices of law offices specializing in class action torts, modern Madame DeFarges are quietly knitting the names of the buyback artists … preparing for the day, after the crash, when the tumbrils will again roll through Wall Street, carrying today’s wrong doers to the justice of the mob.

Is there a Madame DeFarge knitting the names of culprits?

Borrowing to Finance Buybacks

According to Federal Reserve flow of funds accounts, a large portion of today’s stock buybacks are financed by borrowing heavily and dipping into depreciation reserves.

Nevertheless, corporate executives continue to justify buybacks as “just another form of dividends”, bringing the supposed benefit of “increased earnings per share”.

Even the slowest of minds should be able to grasp the fact that borrowing to finance buybacks results in interest costs that will reduce, not improve future profits.

Furthermore, when the rating agencies view the practice negatively, the cost of all borrowing by the company goes up, not only the cost of loans taken to finance buybacks.

But, as is the rule in Great Bubbles, not only the slowest thinkers, but even the best and the brightest, don’t seem to get it.

It will taken a drastic reduction in book wealth for the truth to sink in.

And then, perhaps, Madame DeFarge will be ready, with her knitted list of wrong doers, ready to feed the inevitable thirst for mob vengeance.

Stay tuned …