The sun sets on the Boeing 737 Max.
The sun sets on the Boeing 737 Max. Getty Images
If you examine the articles by Seattle Times' aviation reporter Dominic Gates and its business section over the past seven years, you find something that is truly astonishing. At the time that Boeing was subjecting large sections of its labor force to continuous layoffs, or the psychological stress of pending layoffs, it never made or even suggested a connection between these cost cuts and the enormous sums of money that the executives in Chicago were devoting to stock buybacks. Reading Seattle Times, you will have the impression that the one, layoffs, and the other, buying back shares, existed on two different planets, that nothing existed between them but the vacuum of space. And yet, you read that execs are offered on the regular shares as a considerable part of their pay packages. The value of these shares is in the millions.

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Now, why is this all odd? You will not find in this and other articles about executive packages a mention of the aggressive buyback program that Boeing initiated in 2013. Meaning, the executives in Chicago own shares in the company, and, at the same time, they are allocating company cash to purchasing company shares to raise the value of these shares. This is what a buyback is all about. It manipulates share prices by reducing the number of shares available on the market.

As to why this is not illegal is another matter for another post. As to why Seattle Times consistently failed to make any connection between this practice (which has alarmed even members of the GOP), the hunger for cash, the layoffs that many attribute as a prime cause of the Max crisis (Fortune, by the way, is not a socialist website), and the skyrocketing price of the planemaker's shares (from $70 to $400 in the space of six years) can only be explained by two things: Dominic Gates and the reporters in ST's business office are as thick as two bricks, two planks of wood, two stones, two bones (meaning, they are very stupid) or they have a commitment to self-willed ignorance that borders on the criminal.


But why are buybacks bad? The executives at Boeing will claim that it signals to the market the confidence they have in the company. A company buys its own shares during the good times. It is the responsibility of executives, in this view of things, to communicate this confidence because it increases transparency and helps erase some of the line that results in the old principal/agent problem. It also—and get this—makes the corporation more efficient by mopping up extra capital. The idea is that, after the company has spent on its needs, and finds some cash lying around, then it should send it to "investors" (in reality, speculators).

The so honorable Harvard Business Review put it this way:

The claim that the need to buy back stock forces firms to cut investment puts the cart before the horse. A more plausible view goes like this: First, firms allocate funds to investment based on the opportunities that are available. If they have spare cash left over after taking all value-creating investment opportunities then they may use it for buybacks.
Now if the folks at Harvard say its cool, it must be, right? Wrong! When you are in the process of a major product development (in Boeing's case, 737 Max), and you are laying off mechanics, engineers, and tech workers in the thousands, how does this indicate that there is surplus cash all over the place? It seems you are desperately looking for nickels and dimes. Boeing is doing some serious couch-cushion lifting. Boeing must really be cutting costs for basic operational needs. That sort of thing. But wait a moment. We must ask: Why are you reducing production costs when you have rewarded surplus cash to shareholders? Sadly Dominic Gates never even asked a question as dumb as this.

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Nor did Paul Roberts, an ST business reporter. After the crash, and Max mess was spreading, he finally brought up this bad buyback business but, sadly, not in a way that questions it but only justifies it. Please, read it for yourself:

In normal years, the company returns most of its free cash flow to investors via dividends or share buybacks. But this year, analysts say, Boeing will probably suspend share buybacks to conserve cash — though the company is expected to borrow around $1 billion in order to pay dividends, according to Bloomberg.

Let's look at these "normal years." Anirudha Bhagat, of Market Realist, described them in this way:

Boeing first initiated its share repurchase program in 2013. Since then, it has repurchased ~$43 billion worth of its common stock. On December 17, the aircraft manufacturer raised its share buyback authorization limit by $2 billion to $20 billion. In 2018, Boeing repurchased $9 billion worth of its common stock. In the first quarter of 2019, it bought back shares valued at $2.3 billion.
Dominic Gates makes no mention of these buybacks in all of his reporting. The Seattle Times' only mentioned them by way of articles by Bloomberg's Julie Johnsson. All other major business journals took buybacks seriously. But not Gates or the Seattle Times' business reporters. It was maybe too airy-fairy for them. And now planes have fallen out of the sky.

But as the economist Mariana Mazzucato explained in her 2012 book The Entrepreneurial State: Debunking Public vs. Private Myths in Risk and Innovation, buybacks redirect money for important things like product development (R&D) to the pockets of shareholders (many of whom then send it to tax shelters). I explained all of this in 2013, the year Boeing execs committed the company to a long-term plan to make short-term profits by cutting costs and inflating the price of shares, in this way:

And what is it that corporations do these days, if they are not really investing in new products? Share buybacks is where their money goes. Now Mazzucato's lecture provided a fact that much improved my image of Steve Jobs: Apparently Apple had to wait for his death to begin this sad business of reallocating money from projects that develop new things to a scheme that increases the value of shares...

But greed-driven schemes that fuck up the quality of smartphones is one thing. Those that fuck up airplanes is another.

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