In this episode of the My First Million podcast, host Sam Parr and guest Shaan Puri explore the origins, evolution, and modern consequences of corporate stock buybacks. They trace the practice back to the Great Depression, when companies first used buybacks to prop up share prices by reducing supply. After a 1934 ban, buybacks were re‑legalized in 1982 under Reagan, coinciding with a shift in CEO compensation toward stock‑price‑linked bonuses. The duo highlight how buybacks exploded from virtually none of corporate profits to as much as 77% in 2008 and around 65% today, diverting cash away from wages and growth investments. They discuss the 2017 corporate tax cut, noting that despite a modest 1.2% wage increase, companies announced $1 trillion in buybacks. Using airline firms (United, Southwest, Delta) as case studies, they argue that massive buybacks left these companies cash‑poor, making them vulnerable during economic downturns and prompting potential government bailouts. Throughout, Shaan and Sam adopt a conversational, critical tone, questioning the fairness of rewarding firms that depleted cash to enrich executives, and they predict that bailouts will likely follow.
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Hey, why are we going to bail out the airline companies when they're doing all these stock buybacks?
Yeah, Moise said that.
And so I was— yeah, Moise Ali was saying that, and I said, what's up with these stock buybacks? And so I went pretty deep on understanding, you know, what, what are these buybacks? Because I only knew at a surface level. Pretty interesting to me. So let me talk a little bit about what's going on here. So, um, stock buybacks started basically at the Great Depression. So 1928, uh, the Depression happened, stock prices start crashing for a bunch of the companies, and the companies realize, hey, normally when we want our stock price to go up, we got to generate more revenue, more customers, more profits. But with the Great Depression happening, those are going down, so our stock is dropping. And then the way that our stock is measured— revenue, profits, etc.— is going to get worse, and it's just going to cause a cycle where we're just going to keep, keep crashing. So somebody very smart decided, oh, I know what I can do. If I want the demand for my stock to go up, I should just limit the supply. How do I do that? Well, what if I just use the cash we have, and rather than investing it in our business to, you know, grow or do more marketing or whatever, I'm going to, um, just buy back shares? So they started buying back shares, and they bought back shares, and then all of a sudden the, the there's less shares available on the market, and the price started to buffer. The price started to go up. And so this became like immediately the sort of silver bullet solution that companies were using to sort of survive in the Great Depression.
Now— This is actually a technique that Joseph Kennedy did with— there used to be a cab company called Hertz, which is now the car company. And this is exactly what he did, the founder of Hertz. Said, Joe, I need you to lock your— he was young, and he goes, he was willing to break the rules. He goes, I need you to lock yourself in this hotel room up in New York, and I need you to do a lot of these buybacks so it appears as though we are a lot bigger than we are. And then once people start buying them back, sell them our stuff, and you're going to save us.
Right, exactly. And, uh, you— they just need to reverse the momentum and the appearance that, hey, this company's doing well in spite of everything else. And so when there's a, uh, you know, when the economy is crashing, people fly towards safety. So there's a flight to safe havens. And so if your stock is going up, people will view that as a safe haven. And so anyways, this happens for a few years, happens for 6 years, and then they put a stop to it. So the government comes out, says, hey, wait, this is sort of an artificial way to pump your stock price, and we don't like it, we don't think it's a good thing. You're just buying— they were basically buying the management stock itself. So the management would sell the stock using the company's own money, so the executive management would get rich and the stock price would go up, and so the executive management keeps their jobs. So it was a double win. So 1934, this stops, and it stops for about, I don't know, 50 years. 50 years, there's basically no stock buybacks in the stock market. Now 1982 comes around, you have Reagan as the president, and there's this guy John Shad, and I don't know exactly what his deal was, but they decided that, hey, you know what, we should— they changed, they wrote a new law which allowed stock buybacks back, back into play. Companies should be able to do this. And the theory was, hey, here's what will happen when a company buys back its shares. They can use, you know, they can use some of that. Let me step back. A company could use its cash to do 3 things at any given time. It can give it to the employees and raise their wages. They can invest in growth, hire new employees, or invest in machines and whatnot. Or they can issue a dividend to investors. And that's the sort of buyback route. And so what ended up happening was Reagan writes this law into pass. So 1982, buybacks are back after 50 years. And the second change that happened was that CEOs started getting compensated not on salary, but also based off of bonuses for the share price. So now the CEO is also incentivized to buffer the sale, the stock price. And so you go from in 1982, 0.5% of profits were spent on buybacks before this law. 2008, 77% of profits are used for stock buybacks. Even now it's 65%. So 65% of profits not going to employee wages, not going into investing for growth, just announcing stock buybacks. And you can see that the CEO compensation is sort of skyrocketed as well. So it went from the CEO used to make 15 times more than the average employee at their company. Now it's 220 times more because they're compensated on the stock price and the stock buyback is the easiest way to buffer the stock price. And so this has been getting worse and worse and worse. 2008 was sort of the peak worst time because when the financial crash happened in 2008, companies, they pulled their favorite lever to keep their stock price high or from plummeting further. And so recently Trump cut the corporate tax from 37% to 21%. And the idea again was like, All right, great. If we don't tax the companies, they'll use that money to give higher wages, to reinvest in the business. And they did a study, they saw that it's been a year and a half since that tax cut, and wages have gone up 1.2% only. But there's been $1 trillion of stock buybacks announced since then. And so clearly the, the reason the companies asked for the tax cut is not why they did this.
And, um, what do you think's going What's gonna happen?
So I think what's gonna happen is, now there's a problem, right? So these companies, like the airline industry, right? So I have this graph that we can show on the screen for people who watch this on Instagram or on the YouTube channel for The Hustle, which by the way, for some reason, nobody watches on YouTube, even though it's much better. We cut the clips of just the good parts, and you see the video, you see the graphs, so I don't know why nobody's watching, but they should. The podcast gets way more listens than that. But anyways, there's this graph that shows, okay, If you look at like international companies outside the US where, you know, like Volkswagen or whatever, they'll have like 0% stock buybacks. If you look at in the US, some of the corporations like United, 80% of profits went to, uh, to stock buybacks. Southwest, 66%. Delta, 50% of profits being used on this. So now these companies, they don't have cash anymore because they bought back their own worthless shares. So they, they ran out of cash because they were buying back their shares to pump their price. And now they can't do it because the whole economy is crashing. So now they can't get their way out of that and they don't have the cash to withstand this. So they're going to go to the government and say, hey, we're all out of cash, don't let us fail. But should we reward that? Because you used all your cash to buy back stock to make yourself rich for the last 5 years.
Which, by the way, we know how this is going to end.
Yeah, you're going to get bailed out and they're going to do the same thing, sadly. It's—
yeah, this is— I didn't know about a lot of that. So there's our clip.
