Share buybacks by companies in the S&P 500 Index in the fourth quarter 2019, before the Coronavirus was even a factor, fell 18% from a year earlier, to $181.6 billion, after falling 13% and 14% year-over-year in the prior two quarters, from the blistering tax-cut records set in 2018, according to S&P Dow Jones Indices today. For the full year, buybacks fell 9.6% from the tax-cut record in 2018, to $729 billion in 2019, the second highest annual total ever.

Since the beginning of 2012, these companies have bought back $4.6 trillion with a T of their own shares. To provide a comparison of how big this T-number really is: It blows past the magnitude of Germany’s annual GDP.

Share buybacks were considered illegal market manipulation until 1982, when the SEC issued Rule 10b-18 which provided corporations a “safe harbor” to buy back their own shares. The only thing that share buybacks are supposed to accomplish is to manipulate up share prices.The four biggest US banks were among the 10 biggest share buyback queens in terms of the amount of capital they wasted on share buybacks in Q4 2019. Combined they incinerated $95 billion in capital last year, and $275 billion over the past five years (if your smartphone clips the 6-column table, slide the table to the left)

But now, Financial Crisis 2 has kicked in, and the share buybacks of these four banks along with the share buybacks of other banks have dropped to zero, along with many other companies that are now facing a liquidity crisis.

The banks could have used those funds to shore up their capital, which would have been useful now as the bubbles in corporate debt and commercial real estate, that the Fed was so worried about, are coming unglued.

Will We Allow the Coronapocalypse to Bail Out the Failure of Socialism?

But aside from generating fees for Wall Street, share buybacks do zero for the economy. What would have happened in the US economy if that $4.6 trillion in capital that companies incinerated by buying back their own shares since 2012 would have been invested in equipment, structures, expansion projects, and people, or would have been used to reduce debt so that companies, such as Boeing and the airlines, wouldn’t be in such a precarious situation today?

By Wolf Richter