Wall Street longs for days of wine and buyback

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Markets end week on a positive noteWorld stocks tumble on credit worries

: There’s nothing like a bull run to make Wall Street forget its troubles. And as stocks soar some analysts and investors are even hoping for a repeat of what must be one of the worst trades in financial history.

More than a dozen of the biggest U.S. financial institutions spent about $150 billion buying back stock from 2004 to 2008, only to be woefully short of capital when the financial crisis hit. Lehman Brothers Holdings Inc., for example, spent almost $10 billion on buybacks before collapsing a year ago.

Now, focused on the possibility of an economic rebound, investors hope financial firms will soon start repurchasing shares again. That would be a mistake, and any regulatory overhaul of the financial system should prevent banks from repeating their earlier blunder.

Granted, buybacks don’t seem to be such a big issue at the moment. In the second quarter, the $24.2 billion of share repurchases by companies in the Standard & Poor’s 500 Index was the lowest since 1998 and 86 percent less than the peak of $172 billion in the third quarter of 2007, according to S&P.

Still, investors are enamored with stock buybacks because they supposedly boost share prices. Analysts are already anticipating them.

On Monday, an analyst at Atlantic Equities suggested Goldman Sachs Group Inc. would be able to repurchase $20 billion of stock over the next two years. Analysts at Morgan Stanley said in a note late last week that US banks may tentatively resume buybacks next year and step up their volume in 2011.

Eager investors

This talk followed other hopeful notes this summer from analysts at firms such as Credit Suisse Group AG and Citigroup Inc. as second-quarter results suggested that banks were finding their footing. Even when results failed to impress, analysts were nosing around the possibility of buybacks.

On Morgan Stanley’s second-quarter earnings call Chief Financial Officer Colm Kelleher was asked about plans the firm might have to return capital to shareholders. Kelleher thankfully replied, “Any talk about repaying, buying back shares or increasing dividends at this stage are premature.”

Investors won’t be put off for long, though. That’s too bad, since share repurchasing is a game of smoke and mirrors.

Buybacks ostensibly distribute excess capital by reducing a company’s number of shares outstanding. In theory, this should help boost future earnings per share because fewer shares will divide the profit pie.

Mirage effect