Comments on: Why the bank dividends are a bad idea

By: FrankRicard

FrankRicard — Mon, 01 Oct 2012 02:36:06 +0000

Interesting article. I’m trying to educate myself on these issues and had a couple followup questions:
1. “If banks do not want to invest the profits, they can use them to pay down some of their debts.” At what leverage ratio would be acceptable for a bank to distribute profits to shareholders through buybacks or dividends?

2. “When JPMorgan Chase paid almost $1 billion in dividends in November 2011, out of more than $11 billion it paid out in the last year, its debt were at $2.1 trillion, while its entire equity was worth less than $110 billion, about 5 percent of the debt.” I’m looking at the J.P. Morgan 2011 10K and it looks like the company had book equity of $183M. Can you help me reconcile your equity number of $110M?

3. “The creditors of any normal company would have not allowed shareholders to take out cash under such conditions.” J.P. Morgan funds the majority of its assets through a combination of deposits, long-term debt, federal funds and accounts payable. Why don’t the long-term debt holders and trading partners have covenants that restrict J.P. Morgan from paying out dividends when its capital ratio goes below a certain threshold? Doesn’t the FDIC impose rules on banks that prevent it from paying out dividends?

4. Based on my understanding, here’s why banks argue that higher capital ratios will hurt the economy. If banks have to hold more capital, all else equal, they will have a lower return on equity (ROE). Banks have to compete for capital against other industries based on their ROE. If they cannot achieve competitive ROE with leverage, then they have to earn a higher return on assets (ROA x leverage = ROE). To increase their ROA, won’t banks have to increase the spread between their cost of funding and rate on loans? Wouldn’t this effectively be an increase in interest rates to end consumers and businesses? Wouldn’t this have the same impact as the Fed raising interest rates?

Thanks for your article and look forward to hearing your feedback.

By: BlairAMiller

BlairAMiller — Tue, 20 Mar 2012 19:16:47 +0000

The statement ” About half of the money the government invested in banks during the crisis, when credit markets froze, was paid out to shareholders and not used for lending or to pay creditors” is not correct. The banks paid back the government in full with dividends and a nice profit including the payment on options. A false statement like this makes the rest of the article worthless.

By: FranciscoV

FranciscoV — Mon, 19 Mar 2012 20:49:55 +0000

Great article, addresses some of the key issues regarding bank regulation that are the root cause of the current financial crisis but remained unchanged and overlooked. Totally agree that even Basel III falls short of what is needed. Capital regulation needs to improve, but also regulation of the business models, the originate to sell strategies and the large and critical conflicts of interest that still remain unresolved across the financial services value chain.

By: JLWR

JLWR — Thu, 15 Mar 2012 18:01:37 +0000

You are not guaranteed dividends when you invest. You are gambling for an investment. Bankers should pay creditors first, employees second, and then dividends with what is left (if any). Taxpayers should never have to bail out bankers who pay dividends – not ever!!!!! Investors have to suck it up and so should upper management. Of course just the opposite is happening. So, for those who do not invest (me) we get shafted by having to bail out those who got the investment monies paid to them. Completely unfair and fraudulent!!

By: snopro247

snopro247 — Thu, 15 Mar 2012 14:48:19 +0000

Excellent article. Very well written!

By: PerKurowski

PerKurowski — Thu, 15 Mar 2012 13:26:32 +0000

Of course it is a bad idea. The banks are required to have about 8 percent in equity when lending to small businesses and entrepreneurs, the citizens… and basically zero equity when lending to the government.

Would the regulators diminish that odious and really communistic like discrimination, the banks would not be able to pay dividends for a long long time. http://bit.ly/dFRiMs

By: Robertla

Robertla — Thu, 15 Mar 2012 02:32:05 +0000

thank you. great article

By: txgadfly

txgadfly — Wed, 14 Mar 2012 21:05:25 +0000

Bonuses, by any name whatsoever, should not be permitted by Federally Insured institutions, period. Experience has shown that the plundering of money from financial institutions has not been by equity holders but by managers totally unfettered by American style corporate “governance”. Not a single top “big bank” executive has spent a single day in prison despite the clear wrongdoing and the plundering of tax money via “Insurance” schemes intended to protect common depositors but maneuvered to line the pockets of millionaires and billionaires.