Cash is King Trash: The Sewage of Ivy League Management Philosophy and Other Thoughts

Wednesday, October 1, 2008
Posted in category Uncategorized
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With the current financial mess pervading every aspect of our lives, lately, I can’t help but revive the brilliant prescience of this LRC article by Eric Englund: Stock Buybacks Are A Scam. We have had the conversation about this topic many times, which is why I especially love this article now. In his article, Eric lists some companies that went bonkers on stock buybacks, and he explains why this is done, and how it enriches corporate insiders at the expense of the company’s balance sheet and its shareholders. Here are some companies he hammered, in his July 2008 article, for their flagrant mismanagement and personal enrichment concerning massive stock buybacks, along with their current status: Lehman Brothers [bankrupt], Merrill Lynch [emergency acquisition by Bank of America], Morgan Stanley [sold a 21% interest to Mitsubishi], Wachovia [sold most of its assets to Citigroup], and Washington Mutual [seized by the FDIC in the face of smaller bank runs and a looming, gargantuan bank run]. These companies are all toast, with executive management raping the balance sheets for personal gain, in the Wall Street-Ivy league MBA-Neoclassical Finance tradition. Financial institutions are now running like hell toward the cash machine, after years and years of treating cash as trash, leveraging their companies to the gills, and turning their balance sheets into useless schlock. Some, like Lehman, had a heart attack well short of an ATM. Merrill Lynch and Morgan Stanley — they needed cash because the company’s executives blew through the cash like an alcoholic binging on free Budweiser. All of the aforementioned companies went on a cash bender and bought stock and retired it to the treasury – to the tune of billions of dollars. Eric even points out that Warren Buffett negatively refers to this mania in his 2005 annual report/letter to the shareholders.

Anyone who knows anything at all about finance understands that a robust balance sheet is a company’s sign of strength and longevity, its bulletproof vest, and it even provides a peek into the soul and ethos of its executives. Cash and equity are essential for a company’s survival, especially in bad times, which is why you see all of the devil-may-care financial institutions falling by the wayside. Cash and equity (I repeat: a healthy balance sheet) can also cover bad management decisions in terms of business operations. Guido Hulsmann, an economist, professor, and Mises Institute scholar, correctly referred to a healthy equity position as being similar to having a “shock absorber” to ride the company through rough times.

I have long been tired of the neoclassical finance and Ivy League MBA types speaking of the glory of leverage, leverage, and more leverage, along with stock buybacks, as being some divine path to company (and therefore shareholder) enrichment. Pshaw! A solid, coherent reason for massive and hyper-aggressive stock buybacks is never, ever given. It’s just what they know, what they’ve been taught. “Cash is trash” is the common phrase learned at your average Wall Street-worshipping, anti-free market, anti-fiscal conservative university. Back in the day, when I decided to go to Walsh College, a, small, private, CPA & Finance college in Michigan, I was already self-taught in free-market business theory and the Austrian school of economics. I went to Walsh because I first walked into the bookstore of Detroit’s Wayne State University and spied books on marxism, class envy, hatred of wealth and entrepreneurial freedom, and business philosophy written from the viewpoint of “state control is all to the glory.” I walked through the Walsh bookstore, and I saw Mises’s Human Action, Rothbard books galore, Hutt, Hazlitt, Benjamin Anderson, and Wilhelm Ropke, etc., etc. The Chair of the Econ & Finance Dept. has brought Lew Rockwell to speak at the college, more than once. In my very first finance class, Finance 301, an intro/primer class, the professor, a longtime CEO of a commercial real estate company (real-world practitioner), said, as he blasted it on the chalkboard, “Cash is King here, folks.” I was thrilled.

I, along eith Eric, wrote about General Motors, a company that cannot, will not survive – because of its hideous and irresponsibly-managed balance sheet … unless (until) it is bailed out by the US government. Both Ford and GM are on their knees, begging for government cash to prop up their balance sheets, which were turned into ineffectual rubbish by their relentless “cash is trash” philosophy. Meanwhile, Toyota, a company with a bulletproof balance sheet – pardon my geekery – is poised to sustain and survive, in spite of that company’s downturn in sales and profits. You don’t see Toyota in a negative-equity position, or begging for dollars at the loser’s trough.

Lastly, let me mention that just today, you heard that General Electric went begging to Warren Buffett, for …. what? Cash. Jack Welch, a man who has been sold to the propagandized public as a pop culture icon, helped bring about the leverage disease for GE, and since then the gross mismanagement continues. The company needs $3 billion from Buffett and $12 billion more from a secondary public offering because … the company needs cash. What has been GE’s philosophy on stock buybacks? GE repurchased $12.319 billion of stock in 2007, $8.554 billion in 2006, and $4.844 billion in 2005, for a total of $26 billion in three years. GE execs destroyed the company’s balance sheet for personal gain and quarter-to-quarter, short-term profit potential, and now GE is on its knees, looking up to the one man who understands the significance of a well-fortified balance sheet, Warren Buffett.

‘Nuff said.

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