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Wall Street + Stock Buy Backs => Cookies of the Apocalypse

Greed has consequences.  The definition of success also has consequences.  When people judge their success in life by how much money they are making instead of what they contribute to the well being of the society they live in, they can have unintended consequences for other people who they don’t even know in fields they couldn’t care less about.

Let’s follow this trail, shall we?

Matt Taibbi writes another scathing critique on the lack of character on Wall Street.  This is where the worldview is developed and the flawed value system starts.  In this little snippet about John Paulsen and his incredible haul of obscene gobs of cash, we are to feel sympathy for the pain he has suffered for all the gobs of cash he lost on bets that didn’t pan out last year:

Look, the financial services industry should be boring. It should be quaint. Let’s take the municipal debt business. For ages, it was a simple, dull, low-margin sort of industry, in which banks arranged municipal bond issues and made small but dependable profits as cities and towns financed improvements and construction projects.

That system worked seamlessly for decades, until people like Sherman’s interview subjects suddenly decided to make the business exciting. You know what happens when you make municipal debt exciting? Jefferson County, Alabama happens. Or, on a macro level, Greece happens.

When making a few points on mere bond issues stops being enough, and you have to cook up crazy swap schemes and indices to bet against those schemes, ingenious scams allowing politicians to borrow billions of dollars that they will never in a million years be able to pay back, you might end up getting a few parks, schools, and subways in New York.

But what you get everywhere else is a giant clusterfuck that costs the rest of us years and even more billions of tax dollars to remedy.

This is what the protests are all about – it’s anger that Wall Street has been profiting from an imaginary economy that leaves bankers overpaid, but creates damage everywhere else. Sherman doesn’t get this. He seems to subscribe to the well-worn straw-man position that protesters are simply upset that bankers and financiers make a lot of money. Take for example his view on John Paulson, the hedge fund titan who was involved in Goldman’s infamous Abacus deal:

In October, a thousand protesters stood outside John Paulson’s Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement …. The truth was, Paulson was furious that the protesters had singled him out. Last year, he lost billions of dollars on bad bets on gold and the banking sector. One of his funds posted a 52 percent loss. “The ironic thing is John lost a lot of money this year,” a person close to Paulson told me. “The fact that John got roped into this debate highlights their misunderstanding.”

Hey, asshole: nobody misunderstands anything about John Paulson. They’re not mad that he made billions the year before, and they’re not happy that he lost money this year. They’re mad that the way he made his money in previous years – which involved putting together a born-to-lose portfolio of toxic mortgage bonds and then using Goldman Sachs to dump them on a pair of European banks, who in turn had no idea that Paulson was betting against them.

Matt Taibbi is using harsh curse words.  How declasse.  The fundies react with shock and horror.  Is there no civility on the internet?  Paulsen is rich.  Surely this man deserves respect.

Moving on.

Derek Lowe at In the Pipeline wrote a rather longish post for him about the pharmaceutical companies buying back stock in what looks like a desperate attempt to push up the stock price and keep more for the executives.  Lovely.  And this is made easier by assuring investors that they have cracked down on research costs, by golly.  We’ll have none of that wasteful spending here:

He has some figures from our own industry: From 1997 to 2009 “Amgen did
repurchases equal to 99 percent of R&D expenditures, Pfizer 67 percent, Merck 62
percent, and Johnson & Johnson 57 percent.” It could be worse – companies in the IT sector have often managed to spend even more than their R&D budgets on repurchases, partly because they increased the number of shares outstanding so hugely during the dot-com boom years.

One complication with the market-manipulation view is that stock buybacks don’t correlate very well with total stock returns. If anything, the correlation is negative: companies (and sectors) that spend the most on repurchases have lower returns. Of course, there’s a correlation/causation problem here – perhaps those returns would have been even lower without the buybacks. But there’s clearly no slam-dunk financial case to be made for repurchases.

Except one: that they’re often the easiest and least controversial use of the money. Companies get criticized if they sit on cash reserves, and they get criticized for missing earnings-per-share numbers. Why not try to address both at the same time? And without having to actually think very hard about what to invest in? I think that Pfizer’s Ian Read is being truthful when he says things like this:

Pfizer declined to make an executive available to discuss its policy. But in a statement, the company said it “remains committed to returning capital to shareholders through share buybacks and dividend payments.”

As for the cut in research spending in February, Pfizer said it has “accelerated our research strategy and made important changes to concentrate our efforts to deliver the greatest medical and commercial impact.”

In a conference call with analysts this month, Pfizer’s chief executive, Ian C. Read, said his company would “continually look” for acquisitions that would increase revenue growth. But in deciding how to use the proceeds from recent asset sales, he said “the case to beat is share repurchase.”

And that, truly, is a shame.

Oh, well, it’s not like the executives are going to stick around to see what a shame it is.  As the following animation suggests, they will be sitting on a beach in the Cayman Islands ideating and leaving the company to hobble toward some finish line on its own:

{{catching breath, wiping eyes, clearing throat}}  Ahem, geek humor and all that.  Too funny, or it would be if so many of us “ancient ones” weren’t out of work.

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7 Responses

  1. HaHaHa! Thanks to you, I actually could follow this video and appreciate it’s humor!

    I Only wish there was something funny about your post too….

    Gambling on the collapse of countries seems so wrong.

    • The cookie with 20gms of compound was hysterical. That really is the definition of inert. Too, too funny. I love the Timmeh character. This zombie dude has a future in comedy, which is good, because his chemistry career is probably over.

  2. In October, a thousand protesters stood outside John Paulson’s Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement

    If only they’d thought to burn the place down, with him in it. Maybe next time…

  3. There’s a great documentary that reveals the origins of, and thinking operating behind, the current financial services industry.

    All Watched Over by Machines of Loving Grace

    The first part “Love and Power” deals with financial services. The other two parts deal with other issues, and are also interesting in their own right.

  4. Too funny, or it would be if so many of us “ancient ones” weren’t out of work.

    In terms of the big picture, what I think you’re seeing is the gradual replacement of the vertically integrated drug company as a business model in the U.S. with the “virtual drug company” business model. In the extreme case, most of the traditional functions of the company are out-sourced, and the now virtual drug company just coordinates the flow of materials and information between the various firms the work was out-sourced to. The transitional period is often very traumatic for the employees of the drug company, as the functions of one department after another are out-sourced, and the employees permanently laid off.

    Unfortunately, I don’t see any clear way to interrupt this process, barring something like political imposition of capital controls by the Federal government, using nationalist arguments as a basis. Given the difficulty of achieving that any time soon, keeping chemists employed for drug development work in the U.S. may require consideration of new business models for drug companies, such as cooperatives.

    • I don’t deny that that is what you are seeing. However, I don’t think it’s workable. If you’re not in the pharma business, that’s a concept that seems weirdly unAmerican and anti-business. It’s not that at all. It’s just reality. The drug business is extremely expensive. What corporations have done is break up labs that benefit from an economy of scale. Now, each department of the corporate lab has to fight for capital to buy equipment, resources, and reagents. Each department must also devote a lot of time and energy to negotiating for services and materials from other lab entities. Before, they could just walk down the hall to ask a question or get a sample tested. Now, they have to contract with each other. This requires the input and payment of lawyers and other business personnel. In a weird way, breaking up the labs has increased the job security of business majors because they will be doing the paperwork so that the real business can happen in the lab.
      Even I will have a hard time free lancing as a designer. My job is pretty valuable to analysing high throughput data and interpreting protein structure and designing libraries of new compounds to make. Even if I don’t do it myself, I can show chemists how to do this. But the licenses I need to use the software I need is extremely expensive. In fact, I can’t afford any of it. So, I have to set up collaborations with academic labs and sign a lot of my intellectual property away. Consequently, I will have eventually have to charge my clients pretty hefty fees to do what I do and to new labs and academic labs working with soft money, this is going to be very hard.
      I think the idea that many different little independent labs are going to spring forth like mushrooms to make up the gap left by the hollowing out of corporate labs is a fantasy. There may be some small companies who do it successfully but the American Chemical Society says that up to 80% of these ventures fail and when you’re not making a whole lot of money while you’re working your ass off, an 80% failure rate is really too much to ask of people with families. So, expect a lot of young people to do it and bounce from one failing company to the next without job security or benefits.
      The rest of us will probably just end up changing professions. Some of my friends are exploring teaching. Some are going back to school for six sigma type stuff or going into regulatory affairs. But I think it will be the corporate CEOs who will end up the most disappointed. They are counting on a thousand little labs that they can pick and choose and swoop down on and in-license new drug compounds from and I don’t think it’s going to happen. There’s no incentive for scientists in this world. The work is too hard, the concepts too complex and the rewards too few.

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