An interesting article for those who beat the drum for the Board to purchase shares on the open market from the WSJ:
Bank of America: Can a $15 Billion Problem Be Solved by Buying 513,000 Shares?
Posted by Heidi N. Moore
Wednesday, Bank of America said CEO Ken Lewis and members of the bank’s board had bought BofA shares to show confidence in the bank’s future in the wake of revelations that write-downs at Merrill were more than $15 billion in the fourth quarter alone.
Well, that should do it.
Lewis and his compatriots purchased more than 513,000 shares of common stock Tuesday, as The Wall Street Journal’s Dan Fitzpatrick reported. BofA’s shares rose 31% Wednesday, fueled by a wider rally that also lifted Citigroup, J.P. Morgan Chase and other financial stocks.
Lewis and company were taking a dog-eared page from the playbook of many beleaguered chief executives who want to signal confidence in their company’s future. Unfortunately, the history of such strategic stock acquisitions–or sales–in the credit crisis that began in mid-2007 is a failed one. The markets don’t want signs of confidence. They want actual confidence in a bank’s concrete ability to make good on its promises.
If, to paraphrase F. Scott Fitzgerald, credibility is a series of small, successful gestures, bank executives must see that their gestures are being read by the markets as empty ones. Instead, insider buying now telegraphs executive overconfidence in a market that is almost limitlessly pessimistic.
Let’s look at just a few, brief examples. Last November Citigroup Chief Executive Vikram Pandit and his deputies bought 1.3 million Citigroup shares after the stock had fallen below $9. Pandit alone spent $8.4 million. But that didn’t prevent a deeper rout in the stock nor the need of an additional $301 billion in government backstops for Citi’s toxic debt. Oh, and the stock closed Wednesday at $3.67, and that’s after rising 31% on the day.
Directors at Wachovia snapped up hundreds of thousands of shares in October and early November, only weeks before the bank was shoved into an arranged marriage, first with Citigroup and then Wells Fargo. At Washington Mutual, the bank’s decline was presaged by a months-long buying spree by directors and officers–none of which persuaded investors or depositors of WaMu’s viability long enough to forestall an FDIC near-seizure and fire sale to J.P. Morgan.
Then there are the granddaddies of crossed market signals: Bear Stearns and Lehman Brothers Holdings.
Billionaire Joe Lewis bought an extra $31 million of Bear shares to show faith in its future–just hours before the bank collapsed. And Bear itself planned two $2.25 billion bond offerings within weeks of each other and agreed to pay a rich interest rate of 7.05%, 2.45 points more than five-year Treasurys, not because it needed to but to show the market that it could raise money. It soon was forced into the arms of J.P. Morgan.
And Lehman bought back batches of its stock last summer even though regulators were urging Lehman to keep more money on hand to shore up its capital base. The showy buyback was designed to show the markets that the brokerage house was well-capitalized. But investors instead wanted proof of Lehman’s exposure to troubled assets and a plan to reduce them. By mid-September, Lehman was filing for bankruptcy.
The lesson? That investors believe that no one, including executives, know enough about the market these days to confidently predict all the factors that could affect the future of any company.
AI
