Tickers in this Article: C, WFC, BAC, PNC, JPM, SUSQ, FINN
Stock buybacks are usually touted as a method of creating shareholder value. Idle cash is used to purchase some of a company's outstanding shares, which boosts earnings per share for remaining shareholders without affecting the company's balance sheet.

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It Was the Worst of Times
This may work out fine while times are good, but during recessions, many companies likely wish they had kept these billions in idle cash on balance sheets to cope with the trough of the business cycle.

Another goal of stock buybacks not talked about very often is the need for companies to offset the dilution associated with executive stock option issuance.

The banking industry is no different than any other, and the managements of many banks indulged in an excess of stocks buybacks in the years before the recession and financial crisis hit. The five largest U.S. banks left standing today bought back close to $100 billion in stock from 2003-2007.

Comparing Buybacks
Bank of America Corporation (NYSE:BAC) bought back $40 billion of its stock from 2003-2007, an amount equal to 38% of its tangible common equity at the end of the third quarter of 2009. This is almost as much as the $45 billion the bank received from the government under the Troubled Asset Relief Plan (TARP).

JPMorgan Chase (NYSE:JPM) was the least acquisitive of the larger banks, buying back $16.2 billion of its stock from 2003-2007. This amount equals 16% of its tangible common equity as of the third quarter of 2009.

Citigroup (NYSE:C) bought back $23.6 billion of its stock in the same period, a sum that certainly would have come in handy during the last two years.

Wells Fargo & Company (NYSE:WFC) and PNC Financial Services Group, Inc. (NYSE:PNC) rounds out the top five list, with stock buybacks of $16.2 billion and $2.5 billion, respectively.

Even worse for these serial buyers, the shares were purchased at large multiples of tangible book value, which is where most of these banks traded at from 2003-2007.

Credit should also be given to those banks that kept capital and did not buy back any stock, including First National of Nebraska, Inc. (NYSE:FINN) and Susquehanna Bancshares, Inc. (Nasdaq:SUSQ).

The Bottom Line
The investment community usually cheers when large stock buybacks are announced, but this short-term method of increasing earnings per share has a dark side that only comes to light when the cycle turns down. We would all do well to remember this for next time. (To learn more about how stock buybacks affect shareholders, take a look at A Breakdown Of Stock Buybacks.)

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