Thursday, October 30, 2008

Your tax dollars at work: Banks to pay dividends... with bailout money

That's what the Washington Post reports today, in story by Binyamin Appelbaum. You'll recall the set-up: The government would invest up to $250 billion in a representative sampling of U.S. banks, acquiring an ownership stake in the process. When the money is repaid (we can only hope!) the government would release its interest. The money came with some strings (just obviously not enough). As Applebaum wrote:
Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.
This money was supposed to be lent out by the banks to get the economy moving again. But nobody thought to prohibit the banks from passing the government's money (our money!) directly to their shareholders. Says Applebaum, "The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term."

You read that right: More than half of the money printed up by the government to meet this crisis will be squandered on dividends.

Thank goodness we live under a conservative administration, eh? Who knows what those crazy liberals would have done.

It turns out that the Europeans, being more experienced at this Socialism stuff, knew enough to write more restrictive rules into their bailout plans. Says Applebaum:
The [U.S.] Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.

The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.
So even though individual stockholders will get dividend money from banks that received government money supposedly intended for loans to get the economy moving again, they won't get increased dividends. (There, don't you feel better about it now?)

Some of the participating banks have pretty significant stockholders, too. According to Applebaum's article, Obama economic adviser Warren Buffett owns a goodly chunk of Wells Fargo, while Saudi Prince Alwaleed bin Talal owns a big piece of Citigroup.

I hope that exposure of this story forces the banks and/or the government to stop this insanity. There may be a hopeful sign in this Reuters report this morning that the Federal Reserve has ordered a Wyoming bank holding company not to pay dividends. However, the State Holding Co. of Thermopolis, Wyoming operates only the two-branch Bank of Wyoming... hardly comparable to Wells Fargo or Citigroup. And the Reuters story does not make it clear that the ban has anything to do with the acceptance of bailout money. In fact, the article seems to indicate that this prohibition has more to do with the health of this one particular banking company and not with a nationwide prohibition about converting tax dollars into dividends for billionaires.

I promise to stop posting now.

I'm going to be too busy tearing out paving stones and building barricades.

1 comment:

Jean-Luc Picard said...

It sounds too complex to me.