Corporate execs are putting the corporation’s money into financial engineering schemes instead of CAPEX (investment in factories and jobs). This props up the stock’s value while ignoring expenditures needed to keep the corporation operating.
Interest rates are at an all-time low – almost nil – hence the enticement for execs to buy back the corporation’s shares with “free” money. Although this boosts the share price in the short term, the result is soaring debt for the companies with big stock repurchase programs.
Further, share buybacks are part of a financial engineering scheme that transfers vast fortunes from corporations and their shareholders to the executives. Here’s how it works:
- Executives buy the corporation’s shares at a discount by exercising their options (privileges).
- Executives sell those shares to the public at full price.
- The corporation buys back those shares from the public, also at full price.
- The corporation borrows money to buy back their shares and accumulates mounting debt.
- At some point, the corporation may not have enough revenue to make the payments on its debt and go into bankruptcy.
- When the news hits the market, the share value plunges and the debt is subject to demand for immediate repayment.
- The corporation is decimated, its assets sold off, and employees laid off.
- The execs, however, walk away with the profits, having looted the corporation.
This is how execs are looting corporations and hence, crippling the economy.
Based on the articles, http://dollarcollapse.com/equity-markets/the-end-is-near-part-2-corporations-are-the-ultimate-dumb-money/ and http://wolfstreet.com/2015/10/08/how-corporate-execs-monsanto-strip-mine-america-with-stock-buybacks-while-we-sleep/