Raising the bar on buybacks
When the Biden administration unveils its annual budget today, it will propose new ways to raise money from big companies and wealthy executives. One of these ideas could rewrite a fundamental practice in corporate America: stock buybacks.
Companies in the S&P 500 repurchased a record $882 billion of their own shares last year. This year is off to an even stronger start, with analysts at Goldman Sachs forecasting that buybacks will set another record, reaching $1 trillion.
The White House plans to propose new restrictions on buybacks, DealBook has learned. This could have further-reaching implications than its plan for a minimum tax for billionaires thatâ€™s also expected to be announced today. The buyback proposal goes beyond the 1 percent tax on share repurchases that was part of the administrationâ€™s ill-fated $2.2 trillion climate and social spending bill last year, which was meant to raise around $124 billion in tax revenue.
The proposal will call for a three-year freeze on corporate executives selling their shares after a buyback. To support this move, the administration is likely to cite academic research that found company executives tend to sell far more stock in days following a buyback announcement than at any other time. Other research shows that buybacks have accounted for an increasingly large share of corporate profits (often more than 50 percent of net income) over the years. Apple has spent more than $420 billion buying back its shares over the past decade.
The move is sure to revive debate about the merits of buybacks. Supporters say buybacks can be a shrewd use of cash when there are no better alternatives, and give money back to shareholders to reinvest where they see fit. Critics, including prominent Democratic lawmakers, say that they pad executivesâ€™ stock-based pay packages by artificially raising stock prices and divert funds from R.&D., hiring additional employees or raising workersâ€™ pay.
The restrictions could do more to deter buybacks than previous proposals. Hitting executives in their wallets by limiting their trades may make buybacks less attractive than just imposing a 1 percent tax, which would be paid by the company. Reversing the trend of ever-rising buybacks could drastically reshape Wall Street: It would diminish a key tool to bolster stock prices.
Some major players in corporate America have already distanced themselves from buybacks. In 2017, Larry Fink of BlackRock admonished companies against buybacks that seem designed only to support stock prices. More recently, shortly after Pat Gelsinger became Intelâ€™s C.E.O. last year, he said that the chip maker â€” which spent over $80 billion on buybacks in the previous decade â€” would focus less on repurchases and more on investments in its operations, like building new factories.
Does the buyback proposal have a chance in Congress? In the narrowly divided Senate, itâ€™s unclear whether the two Democratic moderates, Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, would support the move, or whether the proposal would survive legal challenges.
HEREâ€™S WHATâ€™S HAPPENING
Shanghai begins a strict pandemic lockdown. Local authorities today imposed restrictions on the eastern half of Chinaâ€™s financial center until April 1 to conduct mass coronavirus testing; its western half will then be locked down until April 5. Financial firms called employees into the office ahead of the start of restrictions, urging them to sleep at their workplaces.
Search crews recover both flight recorders from the China Eastern Airlines crash. The discovery of the second device could help explain what caused the Boeing 737 to crash. Chinese authorities confirmed that none of the 132 people on board survived.
Part of the U.S. yield curve inverts for the first time in 16 years. Yields on five-year Treasury bonds rose to 2.63 percent, above those for 30-year notes. Itâ€™s a sign that investors believe the Fed may raise interest rates so high that it leads to a recession.
States begin suspending gas taxes. Connecticut, Georgia and Maryland are among those that have stopped collecting taxes on gasoline to help consumers weather rising prices. Economists say that such a move may have only a limited effect on blunting the effects of overall inflation.
Apple TV+ is the first streaming service to win a Best Picture Oscar. â€œCODA,â€ which Apple bought at the Sundance Film Festival for $25 million, won three Academy Awards last night, including the top award. But the Oscars may be most remembered for Will Smith hitting Chris Rock onstage.
The latest on the Russia-Ukraine war
President Bidenâ€™s ad-lib that Vladimir Putin â€œcannot remain in powerâ€ sent ripple effects throughout the world, with White House officials scrambling to emphasize that regime change is not part of their policy.
President Volodymyr Zelensky of Ukraine urged Qatar and other energy producers to increase gas exports to Europe, reducing the continentâ€™s reliance on Russia. Russian oil exports are plunging, and some tankers are reportedly concealing their movements by switching off their identification systems, Bloomberg reports.
The latest companies to pull out of Russia include Spotify, which cited new laws restricting free expression, and Heineken, which previously said it would pause investments but now will sell its business there. Some Western firms still operating in Russia arenâ€™t sure whether they are legally allowed to pay rent on their offices.
â€œThe Making of Vladimir Putin,â€ a highly recommended article by The Timesâ€™s Roger Cohen, traces the presidentâ€™s 22-year slide from statesman to tyrant.
Should Uncle Sam mint electronic cash?
A national debate over the idea of a digital dollar has heated up since President Biden recently issued an executive order mandating that the Treasury Department study the merits of a central bank digital currency, or C.B.D.C.
Itâ€™s about to get more complex, because today Representative Stephen Lynch, the Massachusetts Democrat who is chairman of the House financial services committeeâ€™s fintech task force, is introducing legislation on â€œelectronic cash,â€ which DealBook is first to report. The bill, called the ECASH Act, injects a new idea into the mix ahead of congressional hearings on C.B.D.C.s.
The ECASH Act is different, said Rohan Grey of Willamette University law school, an expert in currency design and regulation who worked on the bill. Unlike C.B.D.C.s, these e-dollars wouldnâ€™t be issued by the central bank or rely on blockchain technology. It would address privacy and financial inclusion issues that a Fed-issued digital dollar alone cannot, he added. The law would â€œinform, complement, and advance ongoing effortsâ€ to design and deploy a digital dollar, Lynch said in a statement.
Cash has its advantages: Itâ€™s private by design and can be spent without the need for an intermediary, like a bank. The electronic cash proposed in the new bill would work in the same way, with the Treasury building security into the hardware instead of relying on a transaction-recording blockchain, the distributed ledger underlying cryptocurrencies (and C.B.D.C.s). Grey said there have been â€œproductive talksâ€ with both progressive and conservative lawmakers and advocacy groups. A spokesman for the Treasury declined to comment on the bill.
A Guide to Cryptocurrency
â€œWe should treat sophisticated surveillance technology in the same way we treat sophisticated missile or drone technology.â€
â€” Representative Tom Malinowski, Democrat of New Jersey, on Western companies selling advanced technologies in authoritarian countries. The conflict in Ukraine has upended the idea that these products and services are agnostic, as Russia uses these tools to crack down on dissent against the war.
A new investigation by The Times, drawing on more than 75,000 documents, found that Nokia knew it was enabling a surveillance system in Russia, where it had become a top supplier of equipment and services. Nokia said this month that it would stop its sales in Russia.
When health and antitrust conflict
A biotech deal challenged by the F.T.C. is drawing the ire of an unusually varied group of lawmakers who say the agencyâ€™s antitrust zeal is endangering lives. Last year, the genomics company Illumina announced the acquisition of Grail, a cancer-testing company it spun off in 2016 that now screens for 50 types of the disease. The F.T.C. sued to block the deal because Illumina is the only gene sequencer for these kinds of tests, arguing that the takeover would diminish the screening market, deterring companies that compete with Grail.
Republicans say that the F.T.C. is prioritizing â€œspeculative economist theory over public health.â€ This claim was made in a letter by nine Republican lawmakers, including several physicians, sent last week to the commission chairwoman Lina Khan. The letter, which DealBook is first to report, argued that the Illumina-Grail deal canâ€™t be anticompetitive because no similar cancer-screening test exists in the market.
Democrats are critical of the F.T.C.â€™s approach, too. In recent letters to the Biden administration, Democratic lawmakers, including cancer survivors, expressed concerns about antitrust policy conflicting with President Bidenâ€™s â€œCancer Moonshotâ€ initiative aiming to cure the disease. And in December, members of the Congressional Black, Hispanic and Asian Pacific American caucuses wrote to the administration about barriers to access, saying: â€œOur communities do not have the luxury of waiting for economic theories to be debated while we die preventable deaths.â€
Resolution probably wonâ€™t be swift, which could irk impatient lawmakers even more. The administrative law judge just closed the case record and ordered post-trial briefs, but barring a settlement a decision isnâ€™t expected until late summer (and may be appealed in federal court). Meanwhile, Illumina is in talks with antitrust regulators in Europe about a settlement there, which could be rendered moot by a jurisdictional challenge.
THE SPEED READ
Only 22 companies have gone public via I.P.O. so far this year, though bankers expect the pace to pick up. (WSJ)
A federal investigation into block trades at Morgan Stanley has set off a wave of schadenfreude across Wall Street. (Bloomberg)
Two failed deals illustrate what critics say is disastrous indecision at the social network Pinterest. (The Information)
The chemicals maker Huntsman successfully rebuffed a board challenge by the activist investor Starboard Value. (Reuters)
â€œHow Joe Manchin Aided Coal, and Earned Millionsâ€ (NYT)
A former Microsoft executive accused the tech giant of firing him for trying to expose what he said were violations of federal antibribery laws. (Protocol)
Politically conservative activists have filed a record number of shareholder proposals at companies this year. (FT)
Best of the rest
The riskiest E.T.F.s are attracting the most traders. (WSJ)
Chris Wallace, who is starting a new show at CNN, said that life at Fox News, where he worked for 18 years, had become â€œunsustainable.â€ (NYT)
Institutional investors are buying mobile home parks and pricing out residents. (NYT)
Exxon Mobil is mining Bitcoin in North Dakota as part of its plan to reduce emissions. (CNBC)
â€œVanguard Stumbles In Pivot From Cult of Jack Bogleâ€ (Bloomberg)
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