How The SEC Engineered Every Stock Market Bubble Since 1982

Tyler Durden's picture

Submitted by Daniel Drew via,

Many Americans have discovered that those entrusted to protect us often become the most dangerous threats. Whether it's corrupt cops, bogus journalists, or even Ponzi-scheming church elders, it's not difficult to understand why trusting authorities has seemed like a risky proposition. Now, another institution deserves extra scrutiny. A closer look at the Securities and Exchange Commission reveals a single moment in time when the future of the country was transferred from the middle class to the uber-rich.

The story of the SEC begins with power and corruption. Joseph Kennedy became the first chairman of the SEC in 1934. Before joining the SEC, he was a manager at Hayden, Stone and Company. Kennedy left the company to trade his own account and made his fortune by manipulating the stock market. After becoming SEC chairman, he outlawed the manipulative tactics that made him rich.

Joseph Kennedy

In 1981, President Ronald Reagan appointed John Shad chairman of the SEC. He was the first Wall Street executive to lead the SEC since Joseph Kennedy. Previously, he was vice chairman at E. F. Hutton & Company.

John Shad

John Shad was the father of stock buybacks. William Lazonick, a professor of economics at the University of Massachusetts, explained this pivotal moment in financial history,

Shad, like the Chicago economists who influenced him, believed that a deregulated stock market was good for the economy. In November 1982 the very government agency that is supposed to regulate the stock market adopted Rule 10b-18, which instead encourages corporations to manipulate stock prices through open-market repurchases.

Instead of reinvesting profits in their businesses, management uses stock buybacks to inflate their earnings per share so they can reap windfalls with their stock options. Rather than invest in real innovation, they choose to loot the company for their own benefit, underpay their workers, and deprive consumers of true value. Recently, buybacks even exceeded operating income, which means CEOs are pillaging reserves to pay themselves. This is pirate capitalism at its finest.

We previously discussed how the stock market is disappearing in one giant leveraged buyout, but many readers were skeptical. How could the entire stock market disappear? Mathematically, it is possible, especially at the current rate of stock repurchases. In Economics 101, we are all taught that the stock market is a capital-fundraising mechanism for businesses. We assume this to be true, even in the absence of evidence. However, this hasn't been true since the SEC rigged the market in 1982.

Lazonick explains,

Since the mid-1980s, in aggregate, corporations have funded the stock market rather than vice versa (as is conventionally assumed). Over the decade 2005-2014 net equity issues of nonfinancial corporations averaged minus $399 billion per year.

Stock Buybacks

Net Equity Issues

One glance at the S&P 500 Buyback Index shows how manipulated the market really is. The index contains 100 stocks in the S&P 500 that have the highest buyback ratios, which is buybacks divided by the market capitalization. The Buyback Index, which is accessible via ETF, trounced the S&P 500.

S&P 500 Buyback Index

Since 1982, the entire market has been nothing but one massive slow-motion leveraged buyout. This places the SEC right up there with the Federal Reserve in market manipulation credentials.

Lazonick said buybacks are a disaster for the economy,

Buybacks bear a considerable part of the responsibility for a damaged U.S. economy. This mode of resource allocation serves to concentrate income and wealth at the top of the distribution and comes at the expense of investment in the types of stable, remunerative career employment opportunities that support a broad-based middle class. When the most profitable corporations are in a downsize-and-distribute mode, sustainable prosperity in the U.S. economy becomes an impossible goal.

As the market goes higher in the manipulated buyback frenzy, workers continue to be left in the dust.

Wages As Percentage of GDP

And you can always count on the manipulators to bail out at the last minute. After igniting a buyback-fueled bubble, John Shad left the SEC just four months before the 1987 stock market crash to become Ambassador to the Netherlands. Two years later, the Justice Department asked him to become chairman of Drexel Burnham Lambert. The revolving door is open for business.

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falak pema's picture

so the SEC was to Ronnie what Kay Summersby was to IKE ! 

TeamDepends's picture

How about we give good ol'-fashioned free market capitalism a try, huh?

SafelyGraze's picture

joseph kennedy. 

and this was the father of president john kennedy?!


did not know that.

makes him kinda like that great patriot john adams. 

his son was a president also.

it makes you think!

best regards,
the texas land commission

(scroll down that dadgum page!)

James_Cole's picture

How the SEC engineered every stock bubble since ’82 removing its own regulations which had previously barred corps from engaging in behaviour possibly constituting fraud.

So, the takeaway is that when the SEC was regulating this behaviour things were much better?

The headline argument would also suggest that allowing behaviour is the same as engineering it. Slippery slope there!

Shad, like the Chicago economists who influenced him, believed that a deregulated stock market was good for the economy. In November 1982 the very government agency that is supposed to regulate the stock market adopted Rule 10b-18, which instead encourages corporations to manipulate stock prices through open-market repurchases.

An SEC rule that provides a "safe harbor" for companies and their affiliated purchasers when the company or affiliates repurchase the company's sharesof common stock (i.e., they will not be deemed to have violated anti-fraud provisions of the Securities Exchange Act of 1934).

max2205's picture

Just get rid of the laws if you're going to let everyone break them without recourse 


For fucks sake

armageddon addahere's picture

Lots of interesting things to learn about Joe Kennedy. Like how he was one of the biggest stock manipulators and pool operators of the twenties, and the biggest bootlegger in Boston. How he was just as ambitious in politics as he was greedy in business, until he made the mistake of backing Hitler when he was US ambassador to England.

This put an end to his own political career so he bought the nomination for the Presidency (Harry Truman's words)  for his son.

Once John was in power the old man wasted no time carrying out a vendetta against his old bootlegging enemies in the guise of fighting organized crime, through the Justic Department which was run by his other son Robert.

Quite a guy. If he was still around today he would be showing them. Today's politicians don't know what being crooked means.

BorisTheBlade's picture

Usury makes every productive person poor, what a surprise.

JustObserving's picture

Engineered wealth is the fastest way to prosperity

Who gives a fuck if it is legal or not?

BoPeople's picture
BoPeople (not verified) JustObserving Jul 10, 2015 2:32 PM

I do. But I care more if it is ethical.

Are you saying that you would gladly steal money and defraud your neighbor?

JustObserving's picture

You think the Fed gives a fuck about ethics?  Or the Chinese government?

Just create wealth by any means is their motto.

I would not work for the Fed or the Chinese government if they paid me $1 trillion a year. Not that they have offered to hire me at $10,000 a year.

centerline's picture

Talk about missing the mark here.  This article is a waste of time. 

Sophist Economicus's picture

I saw it was by Dumbbid and just skimmed. A one note idiot that somehow posts stuff on ZH. The Tylers are generous with their real estate.

centerline's picture

Smarter person than me.  I made the mistake of reading it.  Tylers must post this stuff just to see what comments are generated.

MortimerDuke's picture

It may have been a waste of time because this topic has been done ad nauseum on this website, but I'm not so sure it "missed the mark."  Help me out here; where is the mark that was missed?  Give me the answer key.

centerline's picture

It is about money.  Always is.  Businesses will seek out profits.  Buybacks dont expand business.  Profits for the "players" therein are derived as stated in the article.  Blaming it on the SEC is missing the mark.  The core issue that real "growth" is dead, and the era of financialization covering it up is coming to a rapid end.  What we are witnessing is economical cannabalism.  The death of Bretton Woods.  Might as well lump in the repeal of Glass-Steagall here too.  Confusing symptoms with the disease.

Downvoters here are just retards eating up everything the Tyler's spit out.  Hint for the retards:  not all articles are to be taken as gospel.

Kaiser Sousa's picture

and FUCK MARY "MO" WHITE....fuckimg cunt...

death to the MoneyChangers.

Goldilocks's picture

Score - Laughing Jack's Epic Pop Goes The Weasel - Original Composition (3:10)

coast's picture

Just saying hi to primerib and wino911..   :-)

dlfield's picture

SEC...!!  SEC...!!  SEC...!!



adr's picture

Which is why there is no real business anymore. Just a giant channel stuffed falsified sale steaming pile of horse shit.

fowlerja's picture

I guess we need to change the name of the SEC...Steal Everyone's  Cash...

who cares's picture

Stock buybacks will reach their limit, because companies will end up like Greece: you cannot borrow money forever....

Chuck Knoblauch's picture

PwC, Deloitte, E&Y, and KPMG helped too.

Mark-to-fantasy is bullshit accounting.

Sanity Bear's picture

There's a reason SEC veterans get cush jobs at the big banks

Fun Facts's picture

The SEC is a systemically corrupt organization.

They work for the central banks.

jimfcarroll's picture

"In Economics 101, we are all taught that the stock market is a capital-fundraising mechanism for businesses. We assume this to be true, even in the absence of evidence. However, this hasn't been true since the SEC rigged the market in 1982."

This has never been the case in general. Only in the small small case of purchases of IPOs.

While you're certainly right about buy-backs being a problem because the incentive it creates destroys public companies, how does this imply something essential changed in the nature of the market w.r.t. raising capital?

centerline's picture

The real shift was in de-regulation which legitimized casino behavior of banks and accelerated the financialization of, well, everything.  Prior to this, the behavior was still there as you said - and corporate leaders will ultimately seek profits for themselves however possible (including selling out... and screwing the employees).  Nothing new there.

jimfcarroll's picture

Well, I can't say I agree on the culprit. Deregulation isn't a problem unless it's accompanied with government policies that allow risks to be externalized.

ZH seems to have strayed pretty far from its roots. Anything Austrian economically related. I stand with the older ZH that still posts gems like the latest one that references Rothbard.

Unlike the Tyler that keeps posting worthless Raul posts, Rothbard would have been as critical of Greece as of the EU and would have been totally willing to remove even more regulation that was rolled back in the 80's as long as the ability of executives to offload their risk taking onto the public wasn't possible.

gcjohns1971's picture

You've got to be kidding.

This is what regulation is all about...  It is an object of capture to turn government against competitors.

The irony is that if you don't give businesses special privileges you don't need it.

If businesses don't have government-privileges, then they have less to gain by turning government to their uses.

Moreover... if all that is in government is law-enforcement and perp walks...then there is little incentive to manipulate government, and considerable risk.

Trying to control commerce beyond enforcing malum en se law is counter productive.

centerline's picture

Complex systems just fail.  Returning us to malun en se law worlds again and again.  Such works at a local level - communities.  On a larger scale, not so well.  Just another way of saying we repeat history again and again!  lol.  Cool post by the way... apro po in an era where moral hazard seems to just run amok with no consequences.

bid the soldiers shoot's picture

here's one Wall Street did all by themselves, with no help from the SEC.

The SEC engineered every stock bubble since ’82

I refer to the Tokyo Stock Exchange and the bubble which peaked or burst on December 29, 1989.  

This was during the peak of the Japanese asset price bubble, when it reached an intra-day high of 38,957.44

 Having grown sixfold during the decade. Subsequently, it lost nearly all these gains, closing at 7,054.98 on March 10, 2009—81.9% below its peak twenty years earlier.

Just 4 years before the Nikkei Index burst, you won't be surprised to learn, that 6 foreign companies became the first foreign members of the Tokyo Stock Exchange. And that on May 23, 1988 16 more foreign companies became members.

Or should I say, "Moved in for the kill?"

Just another mind-boggling coincidence involving Wall Street brokerages. 


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bid the soldiers shoot's picture

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