Yep, We'e Screwed!!

March 30, 2011

They’ve Got to Fix Their Priorities

The banks may have weathered the financial crisis, but the rest of the country hasn’t. Taxpayers are still on the hook for federally guaranteed bank debt. Homeowners’ equity continues to erode. Small businesses still have trouble getting loans, and savers are still getting hammered by near zero interest rates. Joblessness remains high. State budgets are ravaged.

So whom have Washington policy makers singled out for help? Bank shareholders, including bank executives who are invariably big holders of stock in their banks.

The Federal Reserve recently gave the all-clear for several banks to increase dividends and expand share buybacks, among them JPMorgan Chase, Wells Fargo, Citigroup and Goldman Sachs. That’s good news, at least in the short run for bank investors, but it is a dubious development for everyone else.

The dividend-boosting banks that were too big to fail before the crisis are even bigger now, while reforms to rein them in are under political attack even before they have been implemented. Sheer size and inadequate regulation — the combination that led to the crisis — argue for banks to use their earnings to build bigger capital cushions, not to pay dividends and repurchase shares.

Yet Fed officials have concluded that many banks are safe and sound enough to pay out cash and still withstand a severe shock should one occur again. It’s hard to share their confidence. Before it approved new dividends, the Fed required banks to test their crisis-readiness against several criteria, like elevated unemployment, but it did not release detailed results of the tests. Public data do not inspire confidence either. There is much debate over whether banks are valuing their mortgage assets correctly, and, by extension, whether they are adequately capitalized.

What is known is that recent bank profits have been boosted not by increasing revenues, but by downward revisions to expected future losses. With house prices falling anew, further reducing the value of mortgage assets, how reasonable is that?

Even if banks were ready for anything, more dividends and buybacks still would be premature. Big banks that plan to increase payouts still hold nearly $120 billion in government-backed debt under a crisis-era program from the Federal Deposit Insurance Corporation. The subsidized bonds come due between now and the end of 2012. Paying shareholders before the bonds are retired puts bank investors before taxpayers — talk about skewed priorities. Banks also face potentially huge fines in court cases and in settlement talks with government officials over mortgage and foreclosure practices that have harmed both homeowners and mortgage investors. It is irresponsible for the Fed to allow bolstered dividends before the penalties are known and paid. It is also a disturbing omen. Regulators are part of the settlement talks over the banks’ wrongful practices. Are they assuming that banks can afford both stiff penalties and bolstered dividends? Or are they assuming that the penalties will be weak?

When it comes to redress and reward, bank shareholders should be at the back of the line, behind taxpayers who stand behind too-big-to-fail banks and behind homeowners who are bearing the brunt of a housing debacle for which banks bear considerable responsibility. For the Fed to allow new dividends and bigger buybacks before these issues are settled is a display of the same type of “banks first” favoritism that got us into this mess to start.