Pluralistic: Stock buybacks are stock swindles (06 Sep 2025)


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Stock buybacks are stock swindles (permalink)

Trump's doing a lot of oligarch shit, and while some of it is very visible and obvious, other moves, like throwing the door open to "stock buybacks" are technical and obscure. But it's worth paying attention to this, because this form of stock swindle stands to make billionaires a lot richer (and thus more powerful).

American companies are headed for the stock buying-backest year on record, having already pissed away $1.1 trillion in 2025:

https://www.baystreet.ca/stockstowatch/21522/Stock-Buybacks-Surpass-1-Trillion

So what's a stock buyback, then? On the surface, it's pretty straightforward: during a stock buyback, the company uses its cash reserves to buy its own stock. When they do this, the supply of shares goes down, so the price per share goes up.

Say a company has issued 1,000 shares, and they're selling at $1,000 per share. That company has a "market cap" of $1,000,000 (1,000 x 1,000). Now the company takes $500,000 out of its bank account and buys half of those shares. Now you have a million-dollar company with only 500 shares, so each of those shares is now worth $2,000 (1,000,000/500 = 2,000).

Why is this so bad?

Let's start with what capitalism's advocates claim about the power of markets. Markets, they say, are a kind of alchemist's crucible, a vessel that transforms self-interest to a public good. Capitalism's theory is that if we let people pursue their own profit, they will chase efficiency, because anything that lowers costs will leave more profit for capitalists to reap. But as those capitalists discover better, more productive ways to get goods and services to market, they face competitors, who force them to accept lower profits, which makes everything cheaper and more abundant for us. That means that even the greediest capitalists have to find new ways to increase efficiency in order to recapture their profits. Lather, rinse, repeat, and capitalism can make more material abundance available that we can dream of.

This isn't just what capitalists say – it's also the thesis of Chapter One of The Communist Manifesto:

https://www.nytimes.com/2022/10/31/books/review/a-spectre-haunting-china-mieville.html?unlocked_article_code=1.j08.a1xP.KLkhosG_PxkP&smid=url-share

Marx and Engels were seriously impressed by the productive power of capitalism, but they had a prescient suspicion that capitalists hate capitalism, and would do whatever they could to interrupt this process. After all, if you can prevent competitors from entering the market, you can innovate just once, find a new way to make something that's cheaper and better, and never share those profits with your customers or workers, because you won't have to outbid your competitors. The alchemical reaction is halted at the point where capitalists are rewarded for their efficiency, and they are never forced to repeat that performance.

Monopoly isn't the only way that capitalists can thwart this transformation of greed into abundance. The finance sector is awash in illegal scams that let capitalists get rich without increasing efficiency or making anyone except for themselves better off.

Take "wash-trading": this is when a seller buys their own products, sometimes using an alias, other times using a shill. The idea is to trick people into thinking that something is valuable and liquid (that is, that you can easily find buyers for it), when it is really worthless and undesirable. Remember all those multi-million-dollar NFT sales? Almost every one was a wash trade, a way to pump and dump.

The problem here isn't just that the buyer is getting defrauded. It's also that the seller is being "allocated capital" (getting money) that gives them power – power to decide what else should be bought and sold in our society.

Remember the alchemy theory of markets: if you're a productive capital allocator (if you make things that lots of people desire), you are given more capital to allocate further. This is the market's "invisible hand": elevating the people with proven track records to positions of power over their neighbors and their society, on the basis that they have shown themselves capable of enriching us all, because (the theory goes), capitalism rewards people whose greed translates into a common benefit. As Adam Smith wrote:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Wash trading creates misallocations of capital. It makes stupid people rich, and lets them allocate capital to projects that make us all worse off. The whole theory of markets – the reason we're all supposed to leave money that we could all use to make ourselves better off in the hands of the wealthy – is that wealth is the payoff for efficiency, and we are all better off when the most efficient allocators make investment decisions.

Modern theorists of capitalism tell us that this isn't alchemy, it's computing. The market is a giant "information-processing" system that incorporates trillions of "price signals" (how much we are willing to spend and how much we are willing to accept, for goods, services and labor). The market processes all these signals to direct allocation and production, ensuring that shortages are met with increases in supply, and that overproduction is tamped down by falling prices, and that inefficiencies provoke investment in process improvements.

Which brings me back to stock buybacks. Stock buybacks are a way to make a company's shares more valuable, even as the company itself becomes less valuable.

Think of it this way: imagine you've got a company with 1,000 shares, worth $1,000 each, and this company has $500,000 in the bank. The company is valued at $1,000,000 (1,000 x $1,000), and half of that valuation is based on its cash reserves ($500,000 in the bank), which means the other half must be reflected in the company's physical plant and "intangibles" (knowledge, contracts, efficient team structures, copyrights, patents, etc).

The company announces a stock buyback: they will withdraw the $500,000 from its bank account and buy half the shares. The company is now $500,000 poorer, which means that its shares should go down in value. After all, that $500,000 is capital that could have been mobilized to make the company more profitable: it could have been spent to hire new people, do R&D, or buy machines that lower the price of making the company's products. That $500,000 represented the company's future growth potential, and the company has just pissed away that potential.

This is a company whose future growth has gotten much more expensive, because it will have to borrow in order to fund any expansion. Its shares should be worth less than before. By zeroing out its cash reserves, the company has actually reduced its value by more than the value of those reserves, because it is now stuck in place, forced to fund expansion with debt rather than capital. It is at risk from "shocks" like higher rents or higher energy prices. It's a brittle, hollow vessel for the intangibles that made up the other $500,000 in valuation before the buyback. It will be worse at turning those intangibles into profits in the future.

But the buyback hasn't reduced the price of the company's shares: it has doubled that price. The company has made its shares more valuable while making itself less valuable. If you think that markets are a computer that calculates efficient allocation based on prices, this should freak you the fuck out, because as we all know, the iron law of computing is "garbage in, garbage out." The company is feeding an objectively – and grossly – false price signal into the computer's input hopper.

That's why stock buybacks were illegal until 1982, when Ronald Reagan's SEC changed its Rule 10-b to legitimize this form of stock manipulation and turn stock swindlers into billionaires:

https://pluralistic.net/2024/09/09/low-wage-100/#executive-excess

At root, stock buybacks are just wash-trading, the company buying its own shares to move their price, without doing anything to justify that price movement. Before Reagan legalized stock buybacks, companies returned capital to their investors through dividends. Why would companies prefer buybacks to dividends? Because corporate executives hold tons of shares in their employer's company, and it's much better for them to push those share prices higher even as they gut the company's ability to function.

So why should you care about this? After all, statistically you own either very little or no stock. The richest 10% of US households own more than 87% of all stocks held by Americans:

https://inequality.org/article/stock-ownership-concentration/

Your 401(k) account might see a small boost from this stock swindle, but again, statistically, that 401(k) is unmeasurably infinitesimal compared to the holdings of America's oligarchs.

Stock buybacks are a way of making the stock owning class much richer, by swindling everyday investors – who don't understand that companies who drain their cash reserves are less valuable – into buying shares in the companies they loot.

And that's why you should care: in the first 8 months of 2025, Trump has allowed America's oligarchs to get $1.1 trillion richer. That's money that you don't have – you won't get the lower prices and higher wages and superior goods that $1.1t would have paid for if companies had spent it on process improvements. It's money they have, which they can spend on things that make you worse off – buying everything from Twitter to the presidency.

There's a lot to be furious about right now, like the masked fascist goons kidnapping our neighbors off the street, and the upside-down health system that is reviving the vaccine-controlled deadly pandemics of yesteryear. But the reason those fascist goons and antivaxers are able to decide how we all live our lives is that a very small number of very rich people converted their stolen wealth to illegitimate power, which they wield over us.

Anyone who lived through the 2008 crisis knows that finance is a deadly weapon. Let the finance sector run your economy and they will steal everything and leave you jobless, homeless and hungry. Trump is a casino guy, and he knows that the only guy making money in a casino is the owner, who gets to set the odds at the machines and tables. By opening the floodgates to trillions in stock buybacks, Trump is turning us all into the suckers at the table, and turning his oligarch investors into little autocrats, with the power to degrade our lives and steal our future.

Hey look at this (permalink)


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Object permanence (permalink)

#20yrsago Interview with mom who won’t pay off the RIAA shakedown https://web.archive.org/web/20051204021157/https://p2pnet.net/story/6134

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#1yrago Marshmallow Longtermism https://pluralistic.net/2024/09/04/deferred-gratification/#selective-foresight

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