Posted by: Matthew Goldstein on January 15, 2009
Bank of America reportedly needs billions of dollars in additional federal money to help it complete its acquisition of Merrill Lynch. But before Treasury hands over a single penny, shouldn’t the giant lender be forced to eliminate the hefty dividend it’s still paying shareholders?
There’s no dispute that the nation’s banks are still hurting and need government help. The mess at Citigroup is proof positive that the financial system remains in a state of distress. But the big criticism with the initial $350 billion the Treasury doled out to the banks under the Troubled Asset Relief Program is that there few strings attached to the money. The Treasury handed out money to dozens of banks, including a $25 billion payment to BofA, without demanding much of anything from the banks.
But going forward isn’t it only fair to demand that the nation’s bankers take whatever steps they can to cut cost and preserve precious capital before getting any more government help?
There’s a growing debate now whether the federal government should simply nationalize Citigroup, as opposed to spending any more money to either guarantee or purchase the Citi’s mountain of rotting mortgage-backed securities and ailing consumer loans. In taking over Citi and winding down its operations, the federal government would take possession of all those toxic assets without having to expend much money—allowing the government to direct more money to banks with healthier balance sheets.
So when it comes to BofA, why shouldn’t it be forced to cut its outlays to the bone first? After all, analysts are saying even banks with relatively healthy balance sheets, like Wells Fargo, may have to trim their dividends. As of right now, BofA, even after cutting its dividend in half in October, still boasts a hefty payout of 32 cents a share. Even at that reduced amount, the dividend is equal to the sum the bank was paying shareholders in 2003. When the bank slashed the dividend in October, it said the move would save it about $1.4 billion a quarter in badly-needed capital. By that math, eliminating the dividend altogether would say about $2.8 billion in capital a quarter. The bank declined to comment.
News that BofA may need more government, combined with fear on Wall Street that the dividend could be in jeopardy caused the bank’s stock to plunge in morning trading. The stock, as of 10 a.m. ET, was down 20% to $8. Other bank stocks fell in sympathy.
And while BofA is slashing its dividend to ordinary stockholders, what about preferred shareholders? On Jan. 5, the bank announced the payment of dividends of various classes of preferred stock—a class of stock that takes priority over common stockholders when it comes to dividend payouts. What’s a bit disturbing about BofA’s move is that it apparently came at the same time management was asking Treasury for more money to help it digest the Merrill transaction. In other words, at the same time Bofa CEO Ken Lewis was going to the federal government with his hand out, he was reaching into the bank’s coffers and recommending a payout to preferred stockholders. Of course, this action also raises questions for BofA’s board, which approved the dividend payout.
If the federal government really wants to get tough with the banks, it could even demand that bondholders start feeling some pain. If workers across the country are being asked to take unpaid vacations to save their jobs, why shouldn’t bank bondholders take some haircuts on their investments to help save these institutions? The Big Three auto manufacturers were forced to make concessions before receiving some $14 billion in government aid. So Treasury should demand that the banks go to their bondholders and ask for concessions on interest payments—at least until the financial crisis passes.
None of this is to say that the federal government shouldn’t help the banks. But it would appear that a lot more sacrifice is needed from the nation’s banks before they get any more money. After all, the taxpayers are being forced to bailout the banks from a problem that’s largely of their own making.