There's nothing like a bull run to make Wall Street forget its troubles. And, as stocks soar, some analysts and investors are even hoping for a repeat of what must be one of the worst trades in financial history.

More than a dozen of the biggest US financial institutions spent about $150 billion buying back stock from 2004 to 2008, only to be woefully short of capital when the financial crisis hit. Lehman Brothers Holdings Inc., for example, spent almost $10 billion on buy-backs before collapsing a year ago.

Now, focused on the possibility of an economic rebound, investors hope financial firms will soon start repurchasing shares again. That would be a mistake, and any regulatory overhaul of the financial system should prevent banks from repeating their earlier blunder.

Granted, buy-backs don't seem to be such a big issue at the moment. In the second quarter, the $24.2 billion of share repurchases by companies in the Standard & Poor's 500 Index was the lowest since 1998 and 86 percent less than the peak of $172 billion in the third quarter of 2007, according to S&P.

Still, investors are enamored with stock buy-backs because they supposedly boost share prices. Analysts are already anticipating them.

On Monday, an analyst at Atlantic Equities suggested Goldman Sachs Group Inc. would be able to repurchase $20 billion of stock over the next two years. Analysts at Morgan Stanley said in a note late last week that US banks may tentatively resume buybacks next year and step up their volume in 2011.

This talk followed other hopeful notes this summer from analysts at firms such as Credit Suisse Group AG and Citigroup Inc. as second-quarter results suggested that banks were finding their footing. Even when results failed to impress, analysts were nosing around the possibility of buybacks.

On Morgan Stanley's second-quarter earnings call Chief Financial Officer Colm Kelleher was asked about plans the firm might have to return capital to shareholders. Kelleher thankfully replied, "Any talk about repaying, buying back shares or increasing dividends at this stage are premature."

Investors won't be put off for long, though. That's too bad, since share repurchasing is a game of smoke and mirrors.

Buybacks ostensibly distribute excess capital by reducing a company's number of shares outstanding. In theory, this should help boost future earnings per share because fewer shares will divide the profit pie.

Unlike dividends, though, investors don't actually see the cash and then decide whether to reinvest. Instead, the company makes that decision for them.

And the share-count-reduction effect of buybacks can be a mirage: companies often buy back stock to counter the shares they issue to employees and executives.

Not to mention that corporate executives - even those at Wall Street's biggest banks - often are terrible investors. Note that the small number of buybacks during the second quarter came after markets slumped, normally the time to buy.

Yet the four biggest banks in the US - JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and Citigroup, - along with Goldman and Morgan Stanley were buying when markets were soaring. The six firms spent $114 billion buying back stock between 2004 and 2008, according to Bloomberg data. At the end of 2006, a year in which the six firms spent a total of $45 billion buying back stock, they had a combined market value of about $966 billion. Today, they are worth 30 percent less.

$145 Billion

These same six firms also sucked down $145 billion from the government's Troubled Asset Relief Programme (TARP). And even after JPMorgan, Goldman and Morgan have paid back TARP funds, the other three still have $115 billion in TARP outstanding.

So if these institutions hadn't squandered capital on buybacks, taxpayers may have had to shell out less to keep them and the financial system afloat.

To be fair, not all the buybacks in the 2004 to 2008 period have lost money, at least on an individual-year basis. And JPMorgan didn't really take part in the craziness, repurchasing just $1 billion during these years.

Still, buy-backs haven't necessarily worked that well for even strong firms like Goldman Sachs. Although Goldman's combined buy-backs from 2004 to 2008 would show a $4.6 billion profit based on a current share price of about $175, the firm had to raise money aside from the government through the sale of $5 billion of preferred stock and warrants to Warren Buffett's Berkshire Hathaway Inc.

And buybacks left weak players like Citigroup swimming in losses. Citigroup's $25 billion or so in share repurchases for that period would be in the red by about $19 billion based on a current price of about $4.50 a share.

Given this experience, it's not enough to hope that bank executives will be able to withstand future calls from investors to get back on the buyback roller coaster. Regulators need to help them stop any future madness.

Because the crisis has made clear that when banks buy their own stock high and sell it low, taxpayers end up footing the bill.

David Reilly is a Bloomberg News columnist. The opinions expressed are his own.