Also Hovnanian, investment-banker licensing, HBO and Martin Shkreli.
People are worried about stock buybacks.
One strain of thinking that I see a lot of these days is a sort of crypto-gig-utopianism. The idea here is that some modern technologies—the internet, which allows people all over the world to come together to do stuff; smartphones, which allow you to access that stuff instantly wherever you are; blockchain and cryptocurrencies, which allow distributed coordination among independent agents without a central coordinator who owns the results—have reduced transaction costs to the point that traditional firms are unnecessary. You don’t need a big corporation with a chief executive officer and layers of middle management and a human-resources department and stock options and a permanent headquarters to centrally plan and coordinate projects. People who want a project to happen can form an ad hoc team to do the project, and raise money from people who want it done, and do it, and receive the rewards, and move on to the next thing. New coordination mechanisms—blockchains, tokens, smart contracts, crowdfunding, online clearinghouses for gig workers—will replace the stodgy old coordination mechanisms like having a job, doing what your boss tells you to, and using money from shareholders and lenders to do it.
Another strain of thinking that I see all the time these days is: Stock buybacks are bad because they take money that the corporation could invest in research and development and waste it on just giving it to shareholders instead.
Here is a front-page Wall Street Journal article about how stock buybacks are bad, etc.:
“The S&P 500 Buyback index, which tracks the share performance of the 100 biggest stock repurchasers, has gained just 1.3% this year, well underperforming the S&P 500.” And:
If your view of the corporation is that it is eternal and essential, then this is bad. If there are, like, 10 companies, and they are the only 10 companies that could ever be, and they decide to stop investing in finding new ideas and instead just give their money back to shareholders, and the shareholders use the money to purchase bonbons and yachts, then no one will invent anything new and the economy and the world will stagnate. Obviously this does not correspond to reality, though, so don’t worry about it.
If your view of the corporation is that companies are locked in an eternal Darwinian struggle to survive, then this is… what it is. If there are, like, 500 big public companies in the S&P 500, and some of them see limited growth opportunities and decide to scale back and return money to shareholders, and others invest heavily in new ideas and new capacity, and smaller private companies raise and spend mountains of private capital in a desperate attempt to disrupt and displace the big stodgy incumbents, then, yeah, you know, the scale-back-and-return-cash companies might underperform the fast-growing ones, and eventually some of the ambitious disruptors might replace them at the top of the heap. And some of those disruptors will then run out of steam and start returning capital, and there’ll be new disruptors, etc. circle of life.
This is I think a very standard and essentially correct view of the corporation, and should make you feel more or less fine about buybacks as a concept, though it might also worry you if you are a shareholder in all of those big repurchasers who are trailing the S&P 500. Are they buying back stock because they are out of ideas, and are they in danger of being disrupted by someone else with a better idea? Sure that’s possible why not!
But you don’t have to have that standard view of the corporation. Your view could be that the corporation is on the way out, that legal entities with perpetual lives and thousands of full-time employees will not be the way we organize economic activity in the future. Instead we’ll find ways to put money and people together to make a thing, and then the thing will be made, and then the money and people will disperse and go make other things. The organizing principle will be the making of the things, not the permanent entity with a name and a logo and a celebrity CEO who decides what things to make when. Central coordination and perpetual existence will be replaced by the coordination of the market and the internet. “We must permanently amass capital in this entity, because otherwise how will anyone make things,” will stop being a reasonable-sounding thing to say, to be replaced with “let’s raise some money to make this thing, and then give some of the profits of it back to the people who gave us the money so they can invest those profits in making new things.”
If that is your view, then stock buybacks—where companies that have used shareholder money to make a thing return the profits of making that thing to shareholders—are a small step toward a future where the perpetual corporation just doesn’t matter that much.
Obviously a lot about this sort of crypto-gig-utopianism is overstated or implausible; some of it is downright dystopian. But whenever I read about the people worrying about stock buybacks, I feel like it can’t come soon enough.
Hovnanian!
GSO Capital Partners, the credit unit of Blackstone Group LP, concocted a clever trade in which it (1) bought credit-default swaps on homebuilder Hovnanian Enterprises Inc., (2) offered Hovnanian attractive financing, (3) in exchange asked Hovnanian to agree to do a quickie default on a small amount of debt owned by its affiliate in order to trigger GSO’s CDS, and (4) also got Hovnanian to issue weird new bonds that would trade at low prices in order to maximize CDS recovery. GSO would get a windfall from its CDS, and could use some of that money to make Hovnanian’s financing more attractive. I thought this was pretty cute, and GSO obviously thought it was pretty cute, but Goldman Sachs, the pope and the Commodity Futures Trading Commission all disagreed, and eventually GSO backed away from the trade, settling with its CDS counterparties and letting Hovnanian drop its “manufactured default.” (Everyone on every side of the trade seems to have done fine on it?)
Here is the Wall Street Journal with a report on why GSO backed down, which is not because of Goldman or the pope, but because the CFTC told GSO to knock it off:
Here is how CFTC Director of Enforcement James McDonald put it:
One way of saying that is that most people who think they are violating the law try not to tell regulators about it. GSO, obviously, did not think it was violating the law. In favor of that position were, for instance, the facts that there was no actual law against what it was doing, and that a federal judge reviewed what it was doing and found no problem with it. On the other hand, against that position there was the fact—quite relevant as a matter of legal realism—that the CFTC didn’t like it.
Now, normally, when you do a thing that you think is legal and that a civil regulator thinks is illegal, the regulator sues you. Often, then, you settle: It is generally good to have good relationships with your regulators, which means that it can be sensible to apologize rather than dig in even if you think you are right. Plus if you go to trial, a jury will probably sympathize more with the CFTC than with a credit hedge fund run by the Blackstone Group that engineered a fake default. Still you sometimes go to trial, if you think you did nothing wrong and want to establish a precedent, or if the cost of settlement—in monetary penalties or in shame—is too high relative to the cost of fighting.
But here GSO hadn’t done the thing yet. (Well, it had, but not irrevocably.) Its choices weren’t “fight or settle with the regulators”; they were “fight or walk away.” When the CFTC came to it and said “if you do this thing we will go after you,” it would have been close to malpractice for GSO to say “we’re doing it, see you in court.” Saying “ugh, fine, never mind” is much easier. It’s easier and more pleasant—though less dramatic and reputation-enhancing—for the regulators too. Really more regulation should go like this, seeing people doing a thing and telling them to stop, rather than waiting for them to finish the thing and then trying to punish them for it.
Investment-banker qualification.
We talked on Friday about how Credit Suisse Group AG’s Asia investment-banking division hired the children of government officials as bankers in order to win favor with those officials. This is something that the U. S. government frowns upon, and Credit Suisse ended up paying $77 million in fines for doing it. I said that, while the government was obviously right that these job offers were just bribes, it was not so clearly right that the children were unqualified, since after all the children really did bring in deals.
