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Banks gave $152 B to shareholders with little to show for it

In sum, banks, gave away $152.2 billion, mostly to people who wanted nothing to do with their banks (sold their stock back to the banks) and the banks received nothing in return. Bank managements argue that this is not so. They state, universally, that their returns on equity rose as a result of the stock buybacks. This argument is almost a farce.

Return on equity is just a number on a piece of paper that has nothing to do with cash. To calculate this number a bank divides its net income by its common equity. In the past, if the bank had a high return on equity one would argue that the bank’s growth rate would be high and its price earnings multiple should grow.

These arguments make no sense today. The reason is because the banks are, basically, not reinvesting any of the money they earned back into their businesses. Repeating out of $154.6 billion in earnings they reinvested $2.4 billion in their businesses. This plowback of earnings into the businesses was 0.2 percent.

Source : CNBC

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