Not Every Share-Buyback Shows Confidence

In an otherwise well-done article on Lehman Brothers (LEH Quote), The New York Times fell for a basic Wall Street ruse concerning stock-buybacks. The column, Lehman's Assurances Ring Hollow, portrayed a corporate buyback of stock as a definitive sign that a company is truly confident about its future.

First, let's differentiate between a sizable insider purchase and a company stock-buyback plan. When an individual company executive or board member buys a large amount of stock, the investment can be proof of confidence in the company's future. Sometimes it's misguided confidence, sure, but generally it's heartfelt. Why? Because that person is putting his own money on the line and, done at the right scale, that personal vote of confidence counts for something.

But when a company buys back its own stock with company money -- well, the reality, no matter what the scale of the buyback, is far more complicated.

They Just Don't Get Buybacks!

The Times article looked back over the assurances -- many of them now suspicious -- that Lehman Brothers gave on conference calls over time. The Times did an excellent job of organizing and exposing these assurances. But here's where the column went wrong.

When recounting a conference call last December during which Lehman's new CFO described the company as well-positioned for the downturn and ready to benefit from the stabilizing fixed-income market, The Times offered this take:

"Lehman was so confident that in January it stepped up its share repurchases, spending half a billion dollars in one month."

There you have it. According to the business media, a company that buys back its stock is a confident company. Simple as that. Corporate buybacks are proof of confidence.