Record year for stock buy-backs, at the expense of future growth

[fskimospy]

That wont work, and here is why.

Part of the problem with the collapse in 2008 was not that 1 bank failed. The reason is that the toxic assets were split and spread all over the industry. Everyone was attached to everyone else. So when 1 bank failed the other would have to as well. This caused a cascade effect.

Overnight lending seemed like a safe bet, because the banks thought they could just get their money back the next day. The problem is that the banks were using the loans to buy other loans. When those loans failed, they could not pay back their overnight lending.

The banks that gave out the money would then fail. So you had 2 banks failed to buy the same loan.

The way you stop TBTF is to not promote large interdependent banks and structures.

Why would his leverage ratio not mitigate that risk?

 

[realibrad]

Because the loans they were buying were considered assets that had a value. So a bank would get a loan for $200,000 to buy a house at the inflated bubble price of $200,000, so that when the market price fell, so did the asset. This meant that the leverage ratio went up, even though nothing changed.

The equity of the home was supposed to offset the debt the bank had. The second the equity was washed away by 20%, the .5 ratio jumped to .4

Establishing ratio means nothing, because the banks still knew they could be bailed out, so they kept going. You need to make the bankers feel unsafe, so they make themselves safer.

 

[ElFenix]

When the buybacks end, the stock price will fall, & insiders will buy it back at that lower price if they want.

wat

 

[Fern]

-snip-
They're artificially holding stock prices high so that insiders can cash in, pay LTCG rates rather than earned income rates on dividends that would otherwise be paid.

Nope.

The dividends would be taxed at LTCG rates.

When the buybacks end, the stock price will fall, & insiders will buy it back at that lower price if they want.

First, I'm not sure that ceasing stock buyback programs will mean stock prices automatically fall. IMO, too many other factors in play.

Second, the falling stock prices would decimate qualified stock options and hammer exec pay.

I'm not clearly seeing the benefit here to insiders.

Fern