From Pine View Farm

Stocks of iStocks 3

Ken Eisold tries to explain how Apple (and other companies) came to have such cash reserves stashed in off-shore tax shelters. It’s all wrapped up in the opinion that the stock market is the be-all and end all of economic value (emphasis added).

In the old days of traditional capitalism, new businesses sold shares to investors who thus became owners. In return, the shareholder-owners would get dividends, and with luck and good management the shares might also increase in value. That concept became obsolete when investors got interested in the far greater returns that could be gotten from flipping the shares. Companies then got interested in driving up the value of their shares, less interested in providing a reasonable and secure rate of return. The profitability of a company became less important than its ability to “increase shareholder value,” as that strategy became known — and in fact many companies stopped bothering to pay dividends at all. They wanted to raise “value.”

That’s how Apple’s ballooning nest egg of $145 billion came about. But then their shares did not continue to go up. What were they going to do with all that money? And how could they stimulate an increase in share prices? The ingenious solution was to borrow money to pay dividends. The problem with just paying out the money they already had was that then they’d have to pay taxes on it first. And the borrowed money could be used to buy back shares, and that too would bolster their price.

Apple, swimming in money, would rather borrow to pay dividends than pay them with money they already have.

It’s not as if they were borrowing money to invest in R&D or a new factory (they lease their manufacturing to low-wage off-shore employers). It was just more Wall Street three-card monte.

I’m still trying to wrap my mind around this one.



  1. George Smith

    May 31, 2013 at 11:11 am

    It’s become obvious that Apple has transformed into corporate group evil. There is some irony in the reality that Bill Gates was the man who saved Steve Jobs and Apple years ago. What would have taken up the hole left by Apple if it had been allowed to die? Obviously, someone would have been making equivalents to iJunk, it’s not that the conceptions are novel. Ah, for the days when Microsoft was considered the Borg and the conspiracy belief that “Windows/DOS ain’t done until Lotus won’t run.”

  2. Frank

    May 31, 2013 at 1:36 pm

    Nothing seems to overcome a vision of freedom for others as quickly as a vision of wealth for oneself.

  3. From Pine View Farm » Blog's archive » Locked Doors and Walled Gardens

    June 1, 2013 at 8:49 am

    […] (This post arose from George Smith’s comment here.) […]