SEC Admits It Has Given Up Entirely On Policing Corporate Market-Rigging
As a result of a recent Democratic inquiry, the SEC has admitted that it is unable to enforce rules intended to curtail the controversial and disastrous practice of stock buybacks by corporations.
Buybacks are a form of market manipulation in which corporations use their earnings to buy their own stock, driving the price up in the short-term and giving more money to executives. The practice of buybacks has exploded in recent decades, and is popular with many major companies, including Apple and General Motors.
Economics professor William Lazonick writes that between 2003 and 2012, companies in the S&P 500 index “used 54% of their earnings – a total of $2.4 trillion – to buy back their own stock, almost all through purchases on the open markets. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher income for employees.”
The SEC inquiry was led by Senator Tammy Baldwin (D-WI), who writes:
“There is mounting evidence to suggest that buybacks have a negative effect on jobs, wages, and investment, which in turn have negative impacts on innovation and long-term national economic growth, competitiveness, and security.”
Democrats, including Elizabeth Warren and presidential candidates Hillary Clinton and Bernie Sanders, have recently been launching vocal attacks on the practice of buybacks.
Buybacks were considered stock manipulation, and hence avoided, until 1982, when SEC Chair John S. R. Shad, appointed by Reagan, introduced “safe harbor” from prosecution for companies who engaged in buybacks subject to some minor conditions. This led to a surge in buybacks, which Warren and others argue must be stopped. “These buybacks were treated as stock manipulation for decades because that is exactly what they are,” said Warren in a recent interview with the Boston Globe.
The safe harbor rules state that corporations may engage in purchases of their own stock if they do so at market price, and limit their volume to 25% of the average daily trading volume. Although these conditions are already very relaxed, SEC Chair Mary Jo White acknowledged in response to the Baldwin inquiry that the SEC does not collect the data necessary to enforce them!
Democratic presidential candidates have called for an end to this gross oversight, which drains the economy and hurts the middle class. Clinton has taken on the lack of transparency and the failure of the SEC to enforce its regulations, promising to “shed light on excessive buybacks.” “Investors and regulators alike need more information about these transactions. Capital markets work best when information is promptly and widely available to all.”
Bernie Sanders has also taken a public stance against buybacks:
Instead of putting resources into innovative ways to build their businesses or hire new employees, corporations are pumping their record-breaking profits into buying back their own stock and increasing dividends to benefit their executives and wealthy shareholders at the expense of their workers. It is a major reason why CEOs are now making nearly 300 times what the typical worker makes. We must demand an end to stock buybacks.
Despite the fact that the economy is still a major issue amongst voters in this election cycle, it was barely addressed at the Republican debate last week. What little attention it did receive was used to stoke xenophobic fears and blame immigrants for “threatening” American prosperity . Meanwhile, the Democrats are fighting to end the real threat to our economy- which is manipulation and an astonishing lack of Wall Street oversight. Stock manipulation and these buybacks are the antithesis of the “free market” that Wall Street and the right-wing claims to champion so fiercely. This is just more evidence that the hoarding of wealth, rather than investment into the economy or stimulating growth, is the ultimate aim of the game. If we let them continue in this manner, we’ll find ourselves back in a recession sooner than you think.
