The Great Debate

In April, U.S. banks dusted off the dividend again, a trick they’d mostly abandoned during the financial crisis. JPMorgan Chase plans an 8-cent-per-share hike. Wells Fargo’s will be 5 cents. Same for Morgan Stanley. Bank of America will raise its dividend a penny. Some might celebrate the move: The banks are back! But there’s more to it. In this fairly anemic economy, dividends are yet another strategic, if counterintuitive, hedge that won’t get our loved and loathed financial institutions lending again anytime soon.

Although good news for shareholders, the payouts don’t mask the reality that banks are still unstable. Executives are scared of looming regulatory schemes, such as the Brown-Vitter bill in the Senate, that could raise equity requirements to cushion the excessive debt of borrowing-prone banks. While earnings are up, balance sheets are deceptive. The big banks still rely heavily on income from the stock market, which overall has been stronger, and take in about $83 billion in subsidies. Their equity and cash reserves are a tiny fraction of their debt.

The banking sector certainly seemed more robust in the first quarter. Take JPMorgan Chase. It was solid enough to purchase $2.6 billion in stocks and $6 billion in buybacks, but its $25.12 billion in revenue was weaker than expected. The bank crowed that is the nation’s No. 1 Small Business Association lender, with a 10 percent increase from the same period last year. But commercial loan growth overall slowed to 1.2 percent in the first quarter compared with 3.6 percent in the first quarter, while consumer loans declined 4.2 percent from the same quarter a year earlier. Mortgage revenue was down 31 percent. According to one estimate, the bank’s $440 million annual subsidy paid 40 percent of its last dividend, which was about $1.1 billion.

That’s where dividends come in handy. As even a novice stock trader knows, they project an aura of confidence and stability. When shareholders are rewarded with swag, the banks signal confidence that operations are back to normal. Like clockwork, shortly after the banks’ announcements, analysts recommended that investors buy JPMorgan, Wells Fargo and other financial stocks.

Dividends help counter news reports of a system in transition. Sure, Citigroup may have sold off liabilities, and it’s still strong enough to spend $1 billion in share repurchases. Credit Suisse might have slimmed down, but it’s strong enough to consider issuing a dividend and is still a worthy competitor to UBS, which is downsizing its fixed income unit as it focuses on private banking. One analyst recently described the end of one-stop “financial supermarkets” that would make these big institutions “un-investable.”

Banking integrity has become an oxymoron. Top bankers need to change this and take responsibility for tackling ethical issues. For this to happen, every part of the organization – from senior management to human resources managers to those on the trading floor and beyond – should be assessed according to the contribution it makes to promoting ethical values, not just the bottom line.

The investigations into the LIBOR rate-rigging scandal showed how commonplace bribery among dealers had become. For example, between September 2008 and August 2009 a single trader at the Royal Bank of Scotland had made corrupt payments to interbank brokers on 30 occasions, by means of risk-free transactions known as “wash trades.”

While the likes of Barclays and RBS have acknowledged wrongdoings and vowed to change course, it’s no longer enough to mollify critics with soothing words, apologies and empty gestures.

– James Saft is a Reuters columnist. The opinions expressed are his own –

The U.S. policy of keeping zombie financial institutions alive is so clearly failing that it is now attracting attack from inside policymakers’ circle of covered wagons.

The most interesting intervention in the banking debate in the past few weeks was an extraordinary attack by Kansas City Federal Reserve President Thomas Hoenig on what he termed a policy of “piecemeal” nationalization which leaves discredited management in place, repels new capital from the banking system and allows bad assets to fester rather than be cleared.