Politicians may have found a new issue to battle Wall Street on: stock buybacks.
And while Goldman Sachs economist Alec Phillips doubts that any new regulations are soon to come, he expects the issue to heat up even more and become a big part of the 2016 election.
Stock buybacks are being announced at a record pace. Last year saw $US553 billion worth of stocks repurchased, second only to the year 2007. Plus, announced buybacks are already up 50% so far this year, compared to the same period in 2014.
But not everyone is on board with the frenzy.
Last week, Goldman’s David Kostin called the buybacks “a questionable use of cash,” and a couple of months ago BlackRock CEO Larry Fink wrote a letter to S&P 500 CEO’s, urging them to curb the practice.
In addition to the Street’s concerns about the short-term strategy, some in Congress are critical of the practice for another reason: They believe buybacks have lead to sluggish wages and limited business investment.
“Stock buybacks create a sugar high for the corporations,” Senator Elizabeth Warren told The Boston Globe last week. “It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that.”
Warren added: “These buybacks were treated as stock manipulation for decades because that is exactly what they are.”
Warren here was referring to the “safe harbour” rule adopted by the SEC in 1982, which promised companies completing large stock repurchases they would avoid charges of stock manipulation if they met certain criteria.
A few months ago, Senator Tammy Baldwin wrote a letter to the SEC, requesting an analysis on the impact of the rule change and a move to more heavily regulate stock buybacks.
“In the past, this money went to productive investments in the form of higher wages, research and development, training, or new equipment,” Baldwin wrote to Chair Mary Jo White. “Today, cash is being extracted by companies and placed on the sidelines.”
In a note to Goldman’s clients Wednesday, Phillips acknowledged that, given Goldman’s estimation of $US600 billion in buybacks this year, repurchasing will continue to draw political attention, and could likely become a hot-button issue for the 2016 presidential election.
He added that among the controversies surrounding the practice is the fact that buybacks are often funded by debt issued with tax-deductible interest, as well as the link to tax-deductible stock-option compensation.
Phillips says this is a matter of contention that will soon be thrust into the spotlight, writing:
[T]he political focus on the issue seems likely to increase further, for three reasons. First…buybacks continue to grow. This has raised concerns not just among progressive lawmakers but also among some investors and analysts who suggest that the funds might be better put to other uses. Second, the White House is expected to nominate two SEC commissioners, one Republican and one Democrat, to replace two departing members. It seems likely that the nominees will be pressed on this issue among many others. Third, as the 2016 presidential election campaign gets into full swing later this year, candidates will come under pressure to take positions on a number of financial regulatory issues, and this may be among them.
Still, Phillips doubts that Washington will enact more regulations.
“It is unlikely in our view that such efforts will get very far this year or next,” he wrote. “Tax-related changes would seem to face the highest hurdle, since any significant tax change would require legislation, which seems unlikely to pass in a Republican-controlled Congress.”
Phillips also added that the SEC hasn’t made any indication that addressing buybacks is a priority for them.
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