End Stock Manipulation

CEOs and their Wall Street partners should not be permitted to enrich themselves by using corporate funds to buy back their own shares in order to artificially raise share prices. This important protection was repealed in 1982 and should be reinstated.

From Runaway Inequality: An Activist's Guide to Economic Justice

Ever since our political leaders began deregulating the financial industry back in the late 1970s, people on Wall Street have gotten richer, while regular Americans have fallen further and further behind. This is not a coincidence: Income and wealth are in fact being transferred from us to Wall Street. How did the CEO/ worker pay gap jump from 45 to one in 1970 to a whopping 829 to one by 2013? And what does deregulation have to do with it?

The new CEO incentive The CEO’s new top goal is to raise the stock price, so they’re eager to plow the firm’s revenues into buying up as many of the company’s own shares as possible. And if profits are slim, they borrow more money to buy even more shares. As Chart 4.2 shows, buying back your own stock became the new corporate way of life. (Many thanks to Professor Lazonick for providing the raw data.)

Let’s go over this chart carefully. Before around 1980, when Wall Street was still tightly regulated, there were virtually no stock buy-backs. Corporations didn’t do that kind of thing because CEOs were not paid in stock options. Instead, they relied on salaries –really good ones that paid 20 to 40 times what the average worker earned. Instead of buying back shares, CEOs generally invested corporate earnings in their workers’ skills and wages, hoping to retain a productive workforce that would make their business prosper over the long haul.

But as deregulation set in, the corporate raiders began snatching up companies and changing their corporate culture. They didn’t care about the long haul, they just wanted to drive up the value of their new companies as quickly as possible. The more CEOs were paid through stock options, the more corporate revenues were diverted to buy back shares.

As the chart shows, by the time of the 2008 Wall Street crash, CEOs were using 75 percent of their companies’ revenues to buy back their own stocks. At the same time, CEOs piled up loans to buy up even more stock. After buying the stock and paying off the loans, only a trickle of corporate revenue was left for reinvesting in the company. (The loan payments and fees, of course, went to Wall Street banks and investment firms.)

Leopold, Les. Runaway Inequality: An Activist’s Guide to Economic Justice (pp. 47-48). Labor Institute Press. Kindle Edition.