I’ve been meaning to write about this. This nytimes editorial is worth a minute – This Bailout Doesn’t Pay Dividends:
…Although there are many things to like about the government’s plan, the failure to suspend dividends is not one of them. These dividends, if they are paid at current levels, will redirect more than $25 billion of the $125 billion to shareholders in the next year alone. Taxpayers have been told that their money is required because of an urgent need to rebuild bank capital, yet a significant fraction of this money will wind up in shareholders’ pockets — and thus be unavailable to plug the large capital hole on the banks’ balance sheets.
Moreover, given their own equity stakes, the officers and directors of the nine banks will be among the leading beneficiaries of the dividend payout. We estimate that their personal take of the dividends will amount to approximately $250 million in the first year…
So why would the banks want to maintain large dividend payouts when they’ve had such a hard time borrowing, are starved of cash, and the credit markets believe that they run a significant risk of defaulting? Shouldn’t these distressed banks be marshalling all of the financial resources available to them to ensure their viability?
Although dividends should be a matter of near indifference to shareholders of healthy companies, when companies are financially distressed there is a conflict of interest between shareholders and bondholders that leads shareholders to prefer immediate payouts….
If the government is unwilling to take this step, then the boards of the banks should take it upon themselves to do the right thing. They may even have a legal obligation to do so, because courts have ruled that directors of financially distressed firms have a fiduciary duty to creditors as well as to shareholders.
The creditors of the banks include not just those who have already lent them money, but also American taxpayers who put their money on the line by guaranteeing the banks’ debts. From the perspective of this broader set of stakeholders, it is best to end dividend payments until the banks have returned to health.
We know from basic finance theory that, when there is no bankruptcy short-term dividends do not matter. You don’t care if you get paid $1 a day or $7 at the end of the week (plus risk-adjusted interest) – provided you get paid. Since there is a risk of bankruptcy (banks failing), shareholders want to get as many dividend payments as they can. Bondholders (which includes American citizens now) want no dividends, because it makes it more likely there will be a default. Since the whole point of this exercise is to keep banks afloat, doing measures that have no net economic effect (if the banks stay afloat, see theory link) on value is the first place to go.
Also there’s a prisoner’s dilemma here. Any one bank wants to not pay dividends (unless the board wants to turn the taxpayer’s money into their own money while f***ing over the bondholders, which includes the USA – which is a seperate reason to go after this) – however the first bank to do so is going to get creamed by the market. The government forcing this move allows all banks to benefit.
The fact that this hasn’t gone in makes me have serious doubts about the interests of many of the people carrying this out.
