
The SEC Rule That Destroyed the Universe - jonbaer
https://taibbi.substack.com/p/the-sec-rule-that-destroyed-the-universe
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bearjaws
I don't think most American citizens are claiming that corporations should
provide zero value to their investors.

I am of the belief that the federal government having to make up programs on a
whim in a very short time span is not preferable to corporations having a
rainy day fund of at least a couple months.

Federal regulations should be placed on all traded corporations to have
savings to cover themselves in the event of a disaster, to the order of being
able to weather two months of zero income. When these funds get exhausted it
is time to consider a federal level program to help everyone out.

The only alternative I see to this kind of measure is to let companies fail
and then hold the leadership of those organizations accountable for their
failure. This will literally never happen in our crony capitalism government.

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seibelj
Pensions are relying on guaranteed ~8% returns. If a company doesn't think it
can spend its profits wisely, and it chooses to buy back its own stock and
enhance the stock price, it indeed helps retirees, sovereign wealth funds,
etc.

It is quite rich that companies load up on debt so hard that the slightest
blip and they collapse. But IMO the problem is not with that situation - it's
that the government doesn't simply let these businesses fail. Bankruptcy can
wipe out the shareholders while letting the business be purchased, re-
capitalized, and brought back with more prudent owners. The government has
trained the private sector to expect to be bailed out when a black swan event
occurs, so they no longer worry about black swan events.

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shawnz
> The government has trained the private sector to expect to be bailed out
> when a black swan event occurs, so they no longer worry about black swan
> events.

Why should they? How are bailouts any better or worse than having companies
leverage less and therefore having less growth?

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chillacy
Even if the two turned out exactly the same in the long run, the slow path has
lower volatility than cycles of bubbles and bust.

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shawnz
Why is it good to have lower volatility? Doesn't that usually mean lower
expected returns?

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chillacy
Volatility and returns are not the same thing, but you're correct that people
are usually willing to pay a premium to reduce volatility (for instance
consider that Vegas Roulette has high volatility and negative returns, so
plenty of people leave the table winning money).

A lot goes into the price of a stock. At a minimum it includes some sort of
fundamental value (price of all assets) plus some discounted expectation of
future earnings.

These two things don't actually change that quickly, so any wild price swings
on top of that are probably not connected to the fundamentals.

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chris_va
Technically, a stock that never issues a dividend or buyback (direct or via
aquisition) has no intrinsic value to the shareholder.

I'm not sure the alarmism here is justifiable. An argument that the boards of
these companies are incompetent might be supported, if they go bankrupt as a
result, but capital is still very cheap so it's hard to follow the logic.

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dragonwriter
> Technically, a stock that never issues a dividend or buyback (direct or via
> aquisition) has no intrinsic value to the shareholder.

False, the intrinsic value of the share is the claim on assets of the
corporation in the event of dissolution. Dividends and buybacks are different
ways on which a firm performs a limited dissolution while remaining a going
concern (chartering a corporation for a closed-ended purpose and dissolving it
when that purpose is complete is also a way for investors to realize value,
and it's still done, though mostly with LLCs rather than corporations in the
narrow sense these days, and even moreso not with _publicly traded_
corporations though there is no legal reason why it couldn't be.)

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solus_christus
A lot of heat and very little light in this article. Share buybacks are just
like dividends—a way of returning capital to stockholders. Whether companies
issue $2 trillion in dividends or repurchase $2 trillion in shares makes no
difference. It used to matter more to individual shareholders because
dividends were taxed more than capital gains, but that tax-differential has
diminished. If shareholders can’t get a cash return, corporations will just
turn into giant non-profits run by and for the government—which may be the
ultimate aim of the anti-buyback crusaders.

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sonofaplum
I think this article is interesting, but I think it is mistaken on focusing on
the mechanism (stock buybacks) vs the attitude, which is a general focus on
value extraction rather than value creation.

I think that in this era of American business, companies are so efficient at
extracting value that they've basically forgotten how to innovate. Innovation
is delegated to startups, and incumbents focus on financial engineering and
extraction. It's foolish to think that one rule change caused this attitude
shift and that one rule change will change it back.

~~~
cameldrv
This. Additionally though, we are in a very low interest rate environment. One
way to look at this is that there is intense demand for corporate debt
relative to equity. Issuing bonds and then doing a buyback or a dividend is
really just changing how the company is financed, debt vs. equity.

However, equity prices have also been quite high, so this points to the fact
that in general, people want money later rather than money now, and the high
asset prices/low rates of return are saying that the market does not know how
to provide a good rate of return. The only way you get a high real rate of
return in the economy is to innovate.

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naveen99
Leverage fragile enough to go bankrupt, is enabled by limited liability, and
is kind of the whole point of corporations. Limited support of risky endeavors
shouldn't bankrupt limited partners.

Going after limited partners sets you on a slippery path to to go after
philanthropists for donating to risky altruistic causes.

stock buy backs are irrelevant.

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r00fus
Stock buybacks are even more dangerous when combined with leveraged buy-outs.

So a venture capital/private equity firm buys a successful company & brand,
loads it up with debt, buys back the stock and pays itself "management fees"
equal to the payout, while hollowing out the company itself.

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defertoreptar
The problem is with CEO compensation incentives, not buybacks. Buybacks do not
increase a company's market cap, just ownership per share.

If a company compensated management based on future market cap and did not
compensate with a fixed number of shares, then this would not be an issue.

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ymolodtsov
Is there an issue with leveraging high-interest loans for stock buybacks to
show higher performance and potentially get bonuses as management? Yes.

Are stock buybacks back? No, it’s a just a form of dividend with a different
tax treatment and anyone disputing this is insane.

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bpodgursky
Buybacks are tax-efficient dividends. They aren't exotic financial transfers.

If you'd prefer that corporations keep billions in rainy-day funds, invested
in low-rate federal bonds instead of being reinvested, or paid out for others
to reinvest, that's an opinion, but don't claim the criticism is "buybacks",
you're complaining about the entire concept of cash return on investment.

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mnm1
Stock buybacks are blatant market manipulation. There is not even the pretense
of anything else. The CEOs are making themselves richer at the expense of the
company and its customers. Companies that have engaged in such activity
deserve to go bankrupt. Anything else, like the current bailout, is just
feeding criminals more money so they can continue pillaging. Regular people
will pay for American oligarchs to get rich while many are unemployed and
about to become homeless. Same story as in 2008: fuck the poor (80-90% of
America) for the benefit of the < 1% super rich who already fucked the poor at
every turn they got and now need a bailout because they are too greedy and
therefore irresponsible to run their businesses properly.

> "The Commission has recognized that issuer repurchase programs are seldom
> undertaken with improper intent… any rule in this area must not be overly
> intrusive."

Ah, so the creators of this rule knew it would be abused, were ok with it, and
let it happen. The alternative explanation is that they were so stupid they
knew nothing about human nature and actually believed the bullshit they wrote:
impossible.

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dmckeon
The core issue seems to be that executives who are effectively “paid in stock”
are directly incentivized to maximize the market value of the stock before
they sell, whether that is good for the long-term health of the company or its
other shareholders, or not.

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zaroth
What drivel. I love seeing the vilification of companies returning capital to
shareholders, and the armchair economists claiming companies should have cash
reserves to independently weather the most disruptive financial calamity in
human history.

States needs the Federal government to buy their masks for them, but airlines
legally barred from flying customers just shouldn’t have been “so greedy”.

Aren’t these narratives tiring to most people?

