Michael Olenick: Update Confirms That Share Buybacks Are Still Corporate Suicide

Naked Capitalism has published the article Michael Olenick: Update Confirms That Share Buybacks Are Still Corporate Suicide. Here is an excerpt of an excerpt from the article.

Corporate executives and directors are apparently bereft of ideas and the confidence to make long-term investments. Rather than using record profits, and record amounts of borrowed money, to invest in new plants and equipment, develop new products, improve service, lower prices or raise the wages and skills of their employees, they are “returning” that money to shareholders. Corporate America, in effect, has transformed itself into one giant leveraged buyout….

If you want to get an idea of the long-term consequences of Trump’s recent corporate tax cuts, this article ought to scare the pants off you.

I have written many posts about the harm that vulture capitalists do with their leveraged buyouts and taking publicly traded companies private. Turns out, CEOs of publicly traded companies have figured out how to do this without having to take the company private.

In simple terms, they strip the assets of the company, put the company into huge debt, pay themselves more than handsomely, then walk away to let someone else try to pick up the pieces.


Executive Coaching Achieves Miracle Success, and Self-Parody, at Nortel

New Economic Perspectives has the article Executive Coaching Achieves Miracle Success, and Self-Parody, at Nortel, by William K. Black.

As I have explained in prior posts, the creation of ‘modern executive compensation’ has proven catastrophic, principally because of its perverse effects on CEO behavior. Modern executive compensation created both a criminogenic environment encouraging CEOs to use their seemingly legitimate firms as ‘weapons’ to defraud and predate on customers and the government, but also created powerful, perverse incentives to run the firm in a manner harmful to its long term viability.

For anybody who still harbors dreams of the benefits of the capitalist system as now practiced in the USA, here is an article for you. I am not accusing capitalism of having an inherent flaw. My main complaint is how it has been perverted by extremist capitalist ideologues.


Ocasio-Cortez understands a key feature of the economy in a way most politicians miss — and it could be a huge asset for Democrats

Business Insider has the article Ocasio-Cortez understands a key feature of the economy in a way most politicians miss — and it could be a huge asset for Democrats.

“The idea that we’re going to austerity ourselves into prosperity is so mistaken,” Ocasio told In These Times. “Honestly I feel like one of the big problems we have is that, because Democrats don’t have a deep understanding of or degrees in economics.”

Who knew they teach real economics at Boston University?

Ocasio-Cortez, who has an economics degree from Boston University, says the US economy needs another New Deal like the one implemented by President Franklin Delano Roosevelt in response to the Great Depression.

She seems to be able to explain this far better than Bernie Sanders ever has.

This is her key insight: Despite quack economists’ insistence to the contrary, the US government is nothing like a household. It is not “burdened” by debt. It can borrow indefinitely, as long as that borrowing does not spur inflation. What matters, really, is the quality of the spending, not the size of the deficit.

Well, in reality, the USA government doesn’t even have to borrow by any law of economics. The USA government creates USA money at will. It is only the Federal Reserve act of 1913 that insists on a circuitous route where the Federal Reserve Bank can only buy US Treasury debt from the open market after the US Treasury has sold the debt to the public. Without this requirement, the Federal Reserve Bank could just buy worthless paper from the Treasury the way they did with the Quantitative Easing that they did for the private banks.


Rigged: Post #2   Recently updated !

I have previously posted about the book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer by Dean Baler. In that post, I had just begun to read the book, and it looked very promising. It is generally an excellent book about the rents extracted from the economy by the rich,

I am reading Chapter 6 Out of Control at the Top: CEO Pay in the Private and Public Sectors which is also generally good, until I came to this startling excerpt.

A study that has attracted considerable attention, Cronqvist and Fahlenbrach (2012), is an analysis of CEO pay at companies that transition from public ownership to ownership by private equity. The rationale for focusing on these companies is that with private equity ownership there isno separation between ownership and control, and so if the problem of CEO pay is one of a corporate board that does not act in the interest of shareholders, then a takeover by private equity should remove this obstacle. The private equity company stands directly to gain by minimizing CEO pay, insofar as the pay is consistent with maintaining the performance of the CEO. From this perspective, if CEOs of publicly held companies are drawing rents, then they should see sharp cuts when private equity owners take over. But Cronqvist and Fahlenbrach found little reduction in non-performance-based pay, such as straight salary and benefits, and a large rise in incentive pay. This outcome is often taken as evidence against the claim that CEO pay involves a substantial rent component.

While Cronqvist and Fahlenbrach have performed an interesting analysis of the issue, their findings are far from conclusive on the question of rents in CEO pay. A major problem with using companies held by private equity as a comparison is that, almost by definition, the private equity firm is expecting the company it takes over to undergo major transitions. This is the point of the takeover. The private equity firm hopes that by restructuring the company, it can increase profitability. Its plan is to bring its takeover back on the market and resell it as a public company in three to 10 years.

The astounding naivete of this section was beyond belief to me. Compare the above description with an excerpt from another previous post Private equity bosses took $200m out of Toys R Us and crashed the company, lifetime employees got $0 in severance.

Private equity’s favorite shell game is to take over profitable businesses, sell off their assets, con banks into loaning them hundreds of millions of dollars, cash out in the form of bonuses and dividends, then let the businesses fail and default on their debts.

Does this real-life example sound anything like what Dean Baker is talking about in his book? So, finding that CEO pay does not go down after a company is taken private, does not at all prove that high CEO pay is worth it. The CEO’s of companies taken private are fiercer rent extractors than CEOs of publicly traded companies.

If a respected economist like Dean Baker writes a book about how the system is rigged, and yet can be this astoundingly blind to what vulture capitalists really do, then you have to go into reading this book with a large bag of salt. I wish he could rewrite this chapter because it destroys much of the authority of the rest of the book.

This is just another example of the reader having to know what parts of a book are credible and which parts fall far short.


Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer

Dean Baker has an interesting book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

There has been an enormous upward redistribution of income in the United States in the last four decades. In his most recent book, Baker shows that this upward redistribution was not the result of globalization and the natural workings of the market. Rather it was the result of conscious policies that were designed to put downward pressure on the wages of ordinary workers while protecting and enhancing the incomes of those at the top. Baker explains how rules on trade, patents, copyrights, corporate governance, and macroeconomic policy were rigged to make income flow upward.

I just started to read this free book. I am up to page 7 so far. It looks like it is going to be a fascinating book if you find economics fascinating. I am one of those crazy people who do think the subject is fascinating.


Former US Envoy to Moscow Calls Intelligence Report on Alleged Russian Interference ‘Politically Motivated’

Consortium News has the article Former US Envoy to Moscow Calls Intelligence Report on Alleged Russian Interference ‘Politically Motivated’,

Prominent journalists and politicians seized upon a shabby, politically motivated, “intelligence” report as proof of “Russian interference” in the U.S. election without the pretense of due diligence, argues Jack Matlock, a former U.S. ambassador in Moscow.

I have seen too many “progressives” lately seeming to jump on the anti-Russia propaganda bandwagon that is being promoted by the corporate media and the corporate Democrats. I wanted to have the link to this article handy as something to show to these people when they don’t seem to realize how they are being duped.


Bill Black: Fed Lets Goldman Sachs and Morgan Stanley Off Hook, Investors Profit Billions

Naked Capitalism has The Real News Network has the interview Bill Black: Fed Lets Goldman Sachs and Morgan Stanley Off Hook, Investors Profit Billions.

GREG WILPERT: So, first, what are the implications of the Fed allowing Morgan Stanley and Goldman Sachs to pass their stress test? That is, to pay investors even though they technically failed those tests, and should have kept most of these billions as assets to back them up.

BILL BLACK: OK. They didn’t technically fail the test. They actually failed the test. And what the new Fed, as you say, Trump appointees, have said, well, a failure isn’t going to be treated as a failure if you’re a really massive financial institution like Morgan Stanley and Goldman Sachs.


Ok, if you want to hate on the Federal Reserve Bank, here might be a perfectly valid reason to do so. Forget the fake news that the Fed is a private bank.


Private equity bosses took $200m out of Toys R Us and crashed the company, lifetime employees got $0 in severance

Boing Boing has the article Private equity bosses took $200m out of Toys R Us and crashed the company, lifetime employees got $0 in severance,

Private equity’s favorite shell game is to take over profitable businesses, sell off their assets, con banks into loaning them hundreds of millions of dollars, cash out in the form of bonuses and dividends, then let the businesses fail and default on their debts.

This is why I started to use the term vulture capitalists to describe these private equity types. It is good to have an article like this that I can point to. This has some details that I can use to explain why I call them vulture capitalists. When these people say the government should be run like a business, this is exactly what they mean. Their plan for government is to strip the assets, pay the money to themselves, and leave the rest of us to pay for the bankruptcy.


Anti-Trust Law Hollowed Out

New Economic Perspectives has the article Most Ignored and Most Far-Reaching Supreme Court Ruling Yet: Anti-Trust Law Hollowed Out.

A major Supreme Court ruling, Ohio vs American Express, was completely ignored by most media outlets, even though it will have potentially devastating repercussions for consumers in the so-called ‘platform economy’: Uber, Lyft, AirBnB, Facebook, etc. White collar criminologist Bill Black explains the consequences.


I have been postponing reading this for a day or so. Now that I finally got around to looking at this, I find that it about the most horrible economic thing that the Supreme Court could have done.

This is a legislative decision made by the Supreme Court that they have no right to be making. It will go a long way toward increasing income and wealth inequality.

Enforcement of anti-trust laws has been sadly lacking from the executive branch of the government. The solution to much of our income inequality is more stringent anti-trust enforcement. The Supreme Court has just banned this increased enforcement in a very large part of the economy.


Anthony Kennedy and Our Delayed Constitutional Crisis

Naked Capitalism has the article Anthony Kennedy and Our Delayed Constitutional Crisis.

With swing-vote status comes great responsibility, and in the most consequential — and wrongly decided — cases of this generation, O’Connor and Kennedy were the Court’s key enablers.

It’s enough to make you wonder if the Supreme Court was such a good idea from our founding ancestors. Many of you may not be old enough to remember how reviled the Warren Supreme Court was by the segregationists who were against the civil rights decisions. There are always going to be people who think the Supreme Court is horribly wrong. Enshrining them in black robes is not going to make them into wise and unbiased people that everyone can look up to in awed reverence..

In the end, it is always about politics and power.

I’ll say this for Trump. Without him we might have gone on for another 8 years thinking that Democratic President Hillary Clinton was going to solve our problems.