Corporate borrowing and stock buybacks reach the point of diminishing returns

Over the past two years, corporations in the U.S. have been manipulating their EPS (Earnings per share) by focusing on the number of share’s side of the equation, rather than increasing sales and revenue.  And while the new normal on Wall Street has been to exceed analyst’s estimated earnings per share, more often than not they have failed in beating Wall Street’s quarterly forecasts for overall earnings.

However, like the Federal Reserve finally reaching their own point of diminishing returns, where it now takes approximately $14 in newly printed dollars to create $1 of real GDP, the consequences for corporations borrowing extensively to buy back their own stock has now reached the point where default, bankruptcy, or even worse, a corporate takeover is a real possibility for a growing number of companies.

Years of low interest rates and a boom in mergers and acquisitions (M&A) have made American companies spend without looking back. This has resulted in the highest corporate debt in a decade, close to $1 trillion, according to a report by Goldman Sachs.

“Companies in the United States have taken advantage of low interest rates to issue record levels of debt over the past few years to fund buybacks and M&A. This has driven the total amount of debt on balance sheets to more than double pre-crisis levels,” Goldman Sachs analysts headed by Robert Boroujerdi wrote in the note, acquired by Bloomberg.

According to the bank, since the global crisis of 2008, almost $1 trillion of goodwill, a type of intangible asset that occurs when one company pays premium for another, has been added to corporate balance sheets due to the US merger and acquisition boom. This led Goldman analysts to conclude that American companies have been unable to make efficient investments. - Russia Today

The central bank, along with most multi-national corporations, have had little intention following 2008 to rebuild the general economy and attempt to restart manufacturing and industry in the U.S..  In fact, with more than 80% of all jobs created in the past seven years having been ones of low wage and primarily in the hospitality sectors, the motivations for companies to do little more than cannibalize their own futures for a short-term pillaging of wealth validates that 2008 was a true death event for the American economy, and that fortifying the share value for investors is a much higher priority than job creation and real growth.

Just as the fall of Enron was a major red flag for the entire U.S. financial system prior to the Credit Crisis of 2008, so too are the cracks in corporate America’s balance sheets sure to make the last financial event look like a drop in the ocean.  And with Wall Street barometers like IBM, McDonalds, and Walmart declining in growth for several years now, when you add in the amount of debt being held by many of their corporate brothers it will only take a small black swan to push many off the edge and into insolvency.

Kenneth Schortgen Jr is a writer for,, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.

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