Banks Spend Cash On Dividends, Not Loans

Senator Charles Schumer (D-NY) and others are raising alarm bells at reports that banks are spending more than half of their bailout money on paying dividends to shareholders, rather than lending money to borrowers.

According to today’s Washington Post

The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.

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.

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.

“The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions,” Treasury spokeswoman Michele Davis said.

The 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.

The Treasury Department defends the practice, claiming that otherwise banks would be dissuaded from applying for bailout funds in the first place.

For their part, the banks are claiming that the dividends are coming from an entirely different stash of money, presumably the one that they have kept hidden from anyone as they pleaded for government support.