Satyajit Das Warns Financial Engineering “Has Masked The Global Economy’s Precarious Health”

Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.
Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital.
Mergers and acquisitions as well as various types of corporate restructurings (such as spin-offs and carve-outs) have been used to create ‘value.’ Given the indifferent results of many such transactions, the major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.
Share buybacks and capital returns, sometimes funded by debt, have been used to support share prices. In January 2008, prior to the global financial crisis, U. S. companies were using almost 40% of their cashflow to repurchase their own shares. Ominously, that position is similar today.
Tax arbitrage, especially by international companies operating in multiple jurisdictions, has increased post tax earnings. The use by many companies of special vehicles in low tax jurisdictions, like Ireland, evidences this trend.

This post was published at Zero Hedge on Feb 21, 2017.