The AIG – Lehman – Merrill Lynch Link

3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months.


AIG

March 2, 2007

BOSTON (MarketWatch) — Shares of American International Group Inc. got an early lift Friday, gaining as the company reported higher fourth-quarter net income and said its board has approved a major stock-repurchase plan.

Merrill Lynch

May 1, 2007The investment bank Merrill Lynch said yesterday that it would buy back as much as $6 billion of its common stock over time, as the firm looks to return capital that is building up on its balance sheet to investors.

Merrill Lynch has generated strong earnings in recent quarters, helped by areas like trading and private equity.

Those results have allowed Merrill to return more money to investors. In February 2006, Merrill Lynch announced a $6 billion share buyback authorization, and in October of last year, a $5 billion authorization.

As of the end of the first quarter, Merrill Lynch had $1.2 billion still outstanding on the October authorization, the company said early this month.

Merrill Lynch has been buying back more than $2 billion of shares a quarter since the beginning of 2006. Before that, it was buying closer to $1 billion of shares a quarter.

Based on Friday’s close of $90.11, the most recent $6 billion authorization could buy back about 66.6 million shares, or nearly 8 percent of the average basic number of shares listed in its most recent quarterly results.


Lehman Brothers

NEW YORK, Jan 29 2008 (Reuters) – Lehman Brothers Holdings Inc, the Wall Street investment bank, on Tuesday raised its common stock dividend 13 percent and said its board of directors authorized the buyback of up to 100 million shares.

New York-based Lehman said the buyback program covers nearly 19 percent of its 530.6 million shares outstanding at year end, and supersedes a prior authorization.

The shares covered by the new program are worth about $6.25 billion, based on Lehman’s Tuesday closing price. Lehman shares rose $1.90, or 3.1 percent, on Tuesday to close at $62.53 on the New York Stock Exchange.


Can anyone say “financial engineering” ? think all 3 companies could have used that cash they spent trying to pump up their stock prices ? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.

Again, there is no risk to CEOs for playing these financial engineering games. All it does it pump up the stock. They sell into the rise and put money in the bank.

One last point, has the irony of 3 of largest companies in the country who make their money giving financial and insurance advice to companies and individuals, are facing ruin from the advice they gave themselves ? If this isnt a lesson to every individual who is taking advice from an investment firm, i dont know what is.

38 thoughts on “The AIG – Lehman – Merrill Lynch Link

  1. internesting Billions and Billions and Billions in share buybacks over the last 18 months.

    Comment by Bulgaristan -

  2. http://www.kepenkmarket.com :)

    Comment by kepenkler -

  3. The car companies did the same thing, but not with share buybacks. The car companies spent their billions on employee buyouts of $70,000 – $120,000 each.

    Comment by VR -

  4. Investors in India already worry on the newses on the collapse of major US financial firms, Merrill and AIG (American International Group Inc.) put them to utter panic on lose of there money invested through DSP Merrill Lynch Mutual funds and Tata-AIG. Still most of them doesn’t have any idea about the future of there investments. Here is the exact story on how these collapses impact Indian investors.
    To cool the mind of all Indian investors invested through DSP Merrill Lynch and AIG, “Your investments are very safe”.
    Banking circles says the Lehman-Merrill Lynch effect will be minimal for the banking sector in India.
    DSP Merrill Lynch investors are no need to worry because, DSP Merrill Lynch has very little to do with Merrill Lynch because, they have sold there share to BalckRock’s, an another eminent financial firm, US arm by January 2008. It clearly saying that the money invested in the DSP Merrill Lynch has no link with Merrill Lynch’s global company.

    Reference: http://www.ampminsure.org

    Comment by AmPminsure -

  5. The Merrill people will make out like bandits-just heard that financial planners with Merrill will be looking at a 300-400k bonus in November to stay on with Merrill/Bof A to keep the investors. Really… a bonus that big when everyone else is losing their shirts. I bet the investors that employ the financial planners would love to know that their planner is taking a huge bonus while their portfolios are in the tank!!! Apparently the robbery on Wall Street continues

    Comment by Lindsay -

  6. Keep up the good work sir!

    Comment by film izle -

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  8. Good stuff Mark, you obviously have an excellent understanding in this area. My question is this; when these companies are ramping up their balance sheets with loads of debts from consumers that we can reasonably assume are not going to make good on these debts, shouldn’t it be time to take your equity position out of said company as well? I would be hard pressed to think that a good deal of people didn’t expect this little house of cards to come down at some point. There are tons of excellent financial institutions that one could own that have taken on far less of a debt load in relation to the US housing boom, I would think that they would make far wiser investments. But I suppose hindsight is 20/20.

    Keep up the good work sir!

    Comment by Jaret Walker, C.G.A. -

  9. Mark,

    Financial education has gone from something that was a good to have
    to a pressing need. I think our high school curricula ought to have
    at least a year of financial education and planning. Main street
    folks have no idea of what they are getting into with investment firms,
    mutual funds, insurances, and all that. Plus, no one has a clue
    to how to manage their money in their limited time frame, and what to
    expect from it… Many are getting fleeced by their own greed and
    opportunists…
    Some people I know took a second mortgage in their home to put money
    into risky mutual funds, or even investment advice from Lehman. Are they
    greedy people? Maybe. But for sure, our government has said that “we
    have to make our own money”, so I am not sure how morally wrong these
    people were… On the other hand they were stupid, because they were
    not aware at the delicate complexities of the financial markets.

    Comment by Ram -

  10. James Dimon(CEO JPMORGAN) and Richard Fuld(Lehman CEO) both sit on the board of the Federal Reserve. If this is not a conflict of interest I do not know what is. http://www.webofdebt.com/articles/lehman_brothers.php
    Rumor has it that JPM was actually running insolvent so they purchased assets of Bears at a bargain price. This situation reminds me of how Putin nationalizes businesses in Russia and has made over 54 Billion. Pray for electronic money.

    This video sums it all up.

    Clayton Williams
    18 yrs old

    Comment by Clayton Williams -

  11. I know I will sound like a conspiracy theorist but…

    It appears everything that happens in the financial world is preordained and by design. The stock market bubble of late 1999, early 2000 corresponded with everybody-and-their-brother finding easy online access to stock trading and investment accounts. The markets were ‘pumped’ then ‘dumped’ and Average Joe was left holding the bag (and huge losses).

    Fast forward to the housing boom. Same pump and dump, but this time with real estate. Average Joe & Jane were offered too-good-to-be-true deals. No down payment… adjustable rates …interest only payments. Buy your dream house! Then the rug was yanked.

    What’s next? Invest in oil? Invest in gold? Buy the top and lose again. Joe Average is a sucker because the game is rigged. Failure is inevitable. And it was all by design.

    Comment by Jim Parham -

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  13. I couldn’t agree more. I hate buybacks. I have a stock that only has 6 million in cash and is buying back stock. That money can be used in so many better ways.

    Comment by Jeff -

  14. The last time the Democrats had control of all three houses in Washington the Jimmy Carter administration was in charge. That was a time of economic and stock market malaise. However, when Washington was divided — as was the case when Ronald Reagan and Bill Clinton were in the White House — the economy and the stock market took off.

    With Obama, Pelosi and Reid there’s no limit to the taxes you will be paying soon. Its a prescription for turning America into France, which is exactly what the Democrats want to do if they get all three houses.

    No one party should control all three houses, its a recipe for disaster, the current mess reflects bad leadership at all levels of government.

    One last thing to note….Obama’s Global Poverty Act (S.2433) will surrender the United States of America sovereignty to the United Nations !!

    Comment by Mike -

  15. “One last point, has the irony of 3 of largest companies in the country who make their money giving financial and insurance advice to companies and individuals, are facing ruin from the advice they gave themselves ? If this isnt a lesson to every individual who is taking advice from an investment firm, i dont know what is.”

    I love this quote. I own a personal finance education (not investment) company and I love when people tell me where they get their advice and that they don’t NEED my services. I tell them, do you consider the lexus dealer a good provider of “car advice”, because my bet is he is going to sell you the LEXUS that makes him the most money, not tell you what is appropriate for your driving needs. Glorified, overpaid car salespeople. No offense to car salespeople.

    http://www.daseducation.com

    Comment by Nicole McInerney -

  16. Bush asked to establish an oversight committee in 2003 to look in to
    the Freddy and Fanny mess, McCain co-sponsored a bill to form an
    over-site committee in 2005 to look at bad accounting practices…
    in both cases the Congress PO-PO the charges saying it would be
    detrimental to Americans getting loans…I guess nobody told Congress
    who was insuring those loans.

    Comment by John R -

  17. @M – Yes, you’re missing a little something called debt. It sits on the right side of the balance sheet, just above equity.

    Comment by Graham -

  18. The crazy thing about it Thomason is, I don’t think we’ve seen the
    end of it. There are going to be more banks going belly up.
    I saw today how WAMU put itself “up for sale”. There they go again
    thinking the public is dumb. The translation for “up for sale” is
    “PLEASE COME SAVE US”.

    Comment by Obama Jefferson -

  19. At this rate, this President will have our country owning more private industries than Italy.
    When the administration pronounced its desire to ‘privatize’ the Social Security funds, I guess no one took that to mean a Gov’t takeover of Wall Street firms.

    Comment by Thomason -

  20. I just read the post before this and it’s excellent.
    I totally agree with what your saying Mark in regards to the
    risk and reward for CEO’s on Wall Street. However, everything in
    this country is a cycle. I wasn’t around for the Depression but
    it’s all coming full circle.
    The gas prices will go down…..
    The mortgage crises will settle down in a year or so….
    The price of food will go back to normal….
    Everything is a cycle.
    This is not the first time the economy has been in shambles and
    it certainly won’t be the last.
    If you remember correctly the last time we had a meltdown of the
    economy, a republican was in charge of the White House.
    Surprise, surprise…..a republican is in charge again while
    our economy is in a tail spin.
    The last democrat we had in the White House resulted in
    employment at a high. We also had a surplus that Bush just
    completely destroyed.
    I’m not old enough to remember all these things personally, I had to
    study them as I’m only 30 years old.
    When’s the next post Cuban?

    Comment by Obama Jefferson -

  21. What I don’t get in all of this is how a company with $1 trillion in assets gives an 80% ownership stake for $85 billion in capital. Am I missing something?

    Comment by M -

  22. What the F’ is the government doing bailing out a private company???

    Keeping dead things on life support only delays the natural process and makes things worse in the end. I don’t need my money paying for the f’up of a bunch of dumb ass CEOs. Instead of accountibility like Mark is advocating, now .gov is giving these guys more reason to take asinine risks.

    BS, dangerous BS

    Comment by Shane K -

  23. Mark still love your blog. I think everyone gets greedy…..and wants money money money
    I worked for a company that messed with their numbers to try and look good for buyout and in the end it cost them as well.

    Crazy

    Comment by Mark The Marketing Guy -

  24. Oh and just so you guys are aware.

    You know who’s going to end up paying for the bailout right?

    That’s right….WE WILL!!!

    Comment by Obama Jefferson -

  25. I’m guessing everybody here heard about the incredible
    $85,000,000,000 bail out. Funny how the government said
    they weren’t going to do this anymore but when it really
    hits the fan I guess they had no choice. They can’t let
    AIG go belly up because it would effect to many things
    WORLDWIDE!!! Not just in the US.
    Now if they can investigate and find out the TRUE REASOSN
    why this happened, then we can get somewhere.
    I have to agree with others that say this isn’t the first
    time this has happened and it certainly won’t be the last.

    Comment by Obama Jefferson -

  26. The connection is that they were all over-levered to crummy MBS securities that plunged in value…

    Comment by no-limp -

  27. Hey Mark, I would be curious to know what the C.E.O. of each company made last year. Interesting to say the least. One word comes to mind when I see this sort of thing. Karma. Watch that Karma baby,its a bitch. Most of these companys are just getting whats deserved of them for years of gouging.Thanks for the thoughts.

    Comment by Frankie from Lawnside -

  28. When the people who agree to be the smart guys in the room actually start believing it, these kinds of things happen. It’s amazing for a lot of reasons, but the biggest reason is that people were making money on things that didn’t really existing backed by things that really did and no one thought that there would be a problem. I mean, if you can’t assign a value, how would this have ever ended up better than it did?

    Seriously, I’m confused here because it doesn’t factor into my reality.

    Companies nowadays seem to make money three ways:
    1 – Buying other companies (See Hewlett Packard)
    2 – Differences in tax rates (See Google two quarters ago)
    3 – Making money for owning a % in another company (See Yahoo/Alibaba)

    No wonder they bought their own stock, they made money and didn’t know what to do with it and decided that paying themselves was the best idea. Imagine the thought of putting that money away and letting it collect interest (See Apple/Microsoft).

    If so many people’s 401(k)s weren’t tied up in this “market.” I’d say that they’d all be better off crashing and burning. These companies nowadays don’t hire people here in America, they don’t make their money selling products here in America, they only list their stocks here looking for people to get on the hook.

    It makes my blood boil.

    Comment by tvlampsn -

  29. C’mon, Mark. Are you really implying that share buybacks caused the failure or low stock prices and resulting takeover of these companies? Share buybacks are the only tax-free way to return earnings to shareholders under our tax laws (a separate discussion for another time) and are far more shareholder-friendly than management teams that hoard cash (earning 3%) to use for empire-building acquisitions. The return to shareholders is provided via the lower base of shares outstanding post-buyback and shareholders are left in the same position as with a dividend (without paying any taxes). If a shareholder desires cash, sell the shares!

    Comment by Graham -

  30. This is a big reason why the Federal Government refuses to step in. I think they need to do that with the housing market as well. The only way we are going to get out of this is by paying our debt off, but no politician in their right mind wants to take the fall for it. Which proves that nobody in politics is working for the best interest of the American people.

    I think our Government would better serve the people of the US of A by spending this money, not on stimulus packages; but toward vouchers so people can be educated on their finances, and debt resolution. They need to step in and kill the “Interest Only” home loans as well.

    I’m done, and off my soap box.

    On another note, I know there has been interest in buying the Cubs on your part. Have you thought about owning an NFL team? If so, give Al Davis a call, for the LOVE OF GOD! Help save the team I love in the NFL. :D

    Comment by Nate -

  31. First!? ;)

    I wonder why the government keeps bailing these guys out.. Too big to fail doesn’t seem like a valid reason to me. It seems like if my ‘mom and pop’ company ran itself into the ground, it’d be sayonara. Why don’t we let the losers die like they should? Lobby money would be my guess.

    Comment by scott -

  32. My brother is a private client guy for Merrill(BofA) and he got me out of all my equities last week. Not because he was interested in helping Merrill, but interested in helping me (and all of his clients). He said Merrill’s top economic advisor scared the crap out of them a few weeks ago with a speech he gave. I can barely spell my own name and I’m glad he was watching over my dough.

    Comment by Peter -

  33. With all the analyst and financial guru’s on tv, no one else noticed or mentioned this info. Is that because people weren’t aware or trying to hide the tactic??

    Comment by Michael M. -

  34. And then you have Exxon Mobile, buying $7b of stock back every single quarter! Scary.

    Comment by Scott Johnson -

  35. Definitely gets you to thinking. Great point about the perspective of CEO’s on this whole mess, they win either way.

    Comment by Brett -

  36. Look at our competitor, Lee Enterprises.
    I offered to hire them to provide news for my internet radio station. They couldn’t see us working together.
    So, I started a website to compete with the paper and hired a newsguy instead.
    Four motnhs later, we’ve beaten the (Selma, CA) Enterprise to every major story. With more indepth reporting too.
    Lee Enterprises sheds newspapers, employees, and granted a .19 a share dividend a couple of months ago. Their stock, which three years ago traded around $40, closed well below $3 yesterday.
    GO Lee Enterprises.

    Keep up the good work, Mark.

    Comment by Gary Alexander -

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