"The industry is a cyclical industry; not a growth industry. It needs capital at the bottom of cycles and does not need capital at the top. Thus, it buys in at the top and sells out at the bottom," Bove explained, a strategy that pays off for shareholders who sell out but is a bad idea for the companies themselves.
Bove argued that banks are essentially swapping their raw material (money for stock) which would be unheard of in any other industry.
Moreover, there is a tussle between what shareholders want and what regulators envision for the industry.
"Investors seeking stock buybacks are asking the banks to "run close to the wind" — i.e., drop their leverage ratios to points where an economic setback will require the sale of more stock," Bove said. "They are asking banks to do exactly what their regulators do not want them to do. To the degree that regulators understand this, the regulators are likely to keep hiking the demand for more capital to defeat investor demands for less capital."
JPMorgan Chase bought back shares worth $4.4 billion in the third quarter, fully exhausting the $8 billion in capital authorized for buybacks in 2011. But with shares trading much lower towards the quarter-end, CEO Jamie Dimon said it would have been "wiser to wait" and apologized during the conference call.
Goldman Sachs spent $2.2 billion on buybacks in the third quarter after spending $1.5 billion each in the prior quarters. The management remained open to the idea of further repurchases though there was no express announcement of further buybacks.
"We sit here today it's a very stressed environment which causes us to want to conserve capital but we look at our stock price and we're pretty convinced that looking back we're going to wish we bought back a whole lot of shares at this price," CFO David Viniar said in the analyst call.
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