Overlawyered: Chronicling The High Cost Of Our Legal System

Banking and finance roundup

  • “Comparing the 2008 financial crisis to the COVID-19 market upheaval” [Stephen Bainbridge, with chart]
  • Fed has tried getting involved directly in smaller business lending before, and it hasn’t worked out well [George Selgin] “Evaluating Federal Reserve Moves amid Coronavirus Outbreak” [Cato Daily Podcast with George Selgin and Caleb Brown]
  • Liquidity for you, liquidity for me, but Washington crisis response might have overlooked liquidity for mortgage servicers [Diego Zuluaga, Cato]
  • “Coronavirus: An Update on Securities Suits and on Updating Company Disclosures” [Priya Cherian Huskins via Kevin LaCroix] “There are likely many more securities lawsuits to come.” [Jim Sams, Insurance Journal]
  • The flimsy critique of stock buybacks: “Would United be worse off if it had spent $3 billion on dividends instead of buybacks? In each case, United has $3 billion less, and shareholders have $3 billion more that they can invest in something else” [Ted Frank, Washington Examiner]
  • From before the crisis: George Selgin on Warren Mosler and the great American banking myth; Kevin LaCroix on mootness fees in securities class actions; James Pethokoukis on CEO pay; Diego Zuluaga on bank concentration; Jeffrey Miron on bank bailouts (“It is hard to think of [a solution] so long as people believe government can magically make bank lending safe.”)

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4 Comments

  • Ted Frank is technically correct when he says that stock buybacks are just another form of returning cash to shareholders as dividends. Warren Buffett makes the same argument in his annual reports, where he says that Berkshire is compensated when buybacks occur by giving him a larger share of a company that he has a position in. Assuming of course that the buyback occurs at a price below the company’s intrinsic value.

    The problem with this argument, though, is that companies consistently buy back stock when prices are high but are unable or unwilling to do so when their stock price goes down in bad times. Anyone here think United Airlines will be jumping in to buy back stock at its deeply depressed price, regardless of whatever language is in the laws passed this year?

    Buybacks are favored by management, partly because it’s easier to suspend buybacks with no publicity whereas cutting or ending dividends in bad times are done in public. In addition, dividends reduce the value of an individual share by the amount they are paid, while stock buybacks do not. In the theoretical world of libertarianism that Mr. Frank lives in, the market for executive compensation is so efficient that the price for stock options and restricted stock options that executives receive automatically adjust to how a corporation chooses to return cash to its owners.

    Fortunately for those of us who appreciate the work he does in fighting class action settlements that benefit the law firms who file cases and not the supposed beneficiaries, he does not apply the logic of perfectly efficient markets to that arena.

    • By PaulB

    • The problem with this argument, though, is that companies consistently buy back stock when prices are high but are unable or unwilling to do so when their stock price goes down in bad times.

      I don’t get why that’s a “problem”.

      • By David C

  • “Anyone here think United Airlines will be jumping in to buy back stock at its deeply depressed price”

    That’s a rhetorical question, to which a rhetorical response might be – why wouldn’t a company buy back its own stock when available at a big discount?

    Instead of asking a rhetorical question, why not look at what actually happens? Do companies tend only to buy back their own stock when prices are high, or when prices are low? I don’t have access to such data. Do you?