UNIQUE ‘PANIC’ ATTACK

WITH the stock mar ket down every day this month, much is being made of the comparisons between the Panic of 2008 and the Crash of 1987 – and no wonder.

In the first seven days of October, the Dow Jones industrial average lost 21 percent of its value, just shy of the 22 percent decline on Black Monday ’87. But that is where the similarities end.

That’s because so far the panic of ’08 has been remarkable for the total lack of buying interest even on the sharpest of dips. That wasn’t the case in 1987 – or in the recent market breaks of 1997 and 1998.

In those instances, even when small-fry investors headed for the hills, corporations, ready with cash, would rush in to buy their own battered shares. It happened in earnest on Tuesday, Oct. 20, 1987, as dozens of major blue-chip companies, like GE and IBM, helped to shore up the market with aggressive share repurchases.

This time around, despite a 40 percent decline in the S&P 500, there is no talk of such buybacks. Instead, markets are whipsawed whenever a cash-strapped company like Bank of America or MetLife is forced to sell even more stock at fire-sale prices than they did last week.

How corporate America got into this position will prove to be another scandalous chapter when the book on this market meltdown is eventually written. But here’s a preview: Defying the most basic rule of investing, in recent years corporate America – especially the financial sector – chose to buy high, imperiling the health of our entire system in the process.

The numbers tell the story. Since 2001, six troubled financial institutions – Citigroup, Merrill Lynch, Wachovia, Morgan Stanley, Washington Mutual and Lehman Brothers – shelled out more than $110 billion in cold, hard cash to buy back their stock at many times current market prices.

Morgan Stanley, for example, spent almost $15 billion buying up stock north of $40 a share – cash it could sorely use right now with its shares languishing in the single digits. Citigroup was the biggest offender – spending $32 billion to buy its overpriced shares in recent years at $40 to $50 a pop. That $32 billion, by the way, is now half of the entire market value of the company.

What motivated the irrational buybacks? My hunch is that it was greed on the part of company management, but don’t take my word for it – just ask Warren Buffett. For years, the Oracle of Omaha has been railing against share buybacks, noting that they play into the self-interest of greedy CEOs looking to juice up their compensation. The math is simple, if there are fewer shares outstanding, earnings per share go up, as does the value of the stock and stock options. That is, until the companies start to run out of cash.

Unfortunately for investors, this scheme also helped prop up stock prices in recent years, reducing the supply of stock on the market during a bull market in which there was plenty of demand. Now that the tide has turned, corporate America finds itself out of cash, out of luck and out of the market for their own shares.

For the rest of us, it means the turnaround is going to take a lot longer than it has in years gone by.

TERRY KEENANis anchor of Cashin’ In, an investing program that appears on Fox News Channel on Saturday mornings at 11:30. E-mail [email protected].