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Banks to Continue Paying Dividends
Bailout Money Is for Lending, Critics Say

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, October 30, 2008

U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.

The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.

"The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program," said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.

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 first nine participants were major banks, some running short on capital, that were told by Treasury officials earlier this month to sign on to the program for the good of the country. Their major shareholders are primarily institutional investors, such as pension funds and mutual funds, although a few wealthy individuals hold large stakes, such as Warren Buffett in Wells Fargo and Prince Alwaleed bin Talal in Citigroup.

Several banks are on pace to pay more in dividends than they get from the government. The Bank of New York Mellon got $3 billion from the government on Tuesday. It will pay out $275 million to shareholders this quarter, and a projected $3.3 billion over the next three years. A spokesman declined to comment.

At least a few banks have committed to reduce dividend payments at the same time they accepted government investments. SunTrust of Atlanta, which accepted $3.5 billion from the government, cut its quarterly dividend payments to about $188 million each quarter from about $272 million. The company described the cut in a statement as "the responsible thing to do."

Zions Bancorp, which accepted $1.4 billion from the government, reduced its dividends by about 26 percent to $34 million.

"This modification to our dividend will allow us to further strengthen our capital base," said chief executive Harris Simmons.

Other banks participating in the government program said that they will not use the Treasury's money to pay dividends. They said dividends will be paid from other capital, primarily from their new profits in each quarter.

Washington Federal, a Seattle thrift, accepted $200 million from the government. The company will pay its shareholders about $18 million in dividends this quarter, which puts it on pace for $216 million over the next three years.

Chief executive Roy Whitehead said the company pays dividends from its quarterly profits, rather than its capital reserves. He said there was only one exception in the past three decades. Last quarter, he said, the company used $11 million in capital to maintain a consistent dividend payment.

Still, Whitehead said "categorically" that the company would not use the government's investment to make dividend payments.

Some experts questioned the distinction drawn by Whitehead between profits and capital.

"Thinking of them as separate things is kind of a spurious argument. It's all capital," said David Scharfstein, a finance professor at the Harvard Business School who has called for the government to require banks to suspend dividend payments. "Money that goes out the door is money that isn't available to shore up the banks' balance sheet."

Scharfstein and others said that many banks clearly need to buttress their balance sheets. Large losses on mortgage-related investments have drained capital, and investors no longer have much interest in giving more money to banks. But several of the institutions accepting government money have continued to pay dividends in recent quarters even as they post large losses.

Scharfstein said many banks should suspend dividend payments voluntarily. Some industry analysts, however, say that cutting dividends will make it even harder for banks to find new investors.

Capital is basically the money a company keeps in its vaults. A dividend is a distribution of some of that money to shareholders. Companies typically pay dividends four times each year.

The stability of dividend payments is important to investors. Some treat dividends as a source of regular income, others as a barometer of corporate health. As a result, companies generally try to match or raise their dividends each quarter. Some banks entered the current crisis with unblemished dividend histories dating back 30 years and more.

The resistance to dividend cuts in part reflects the reality that the Treasury program is serving at least two purposes. In some cases, the money is going to companies that need help to survive. In other cases, the government is helping healthy companies to expand.

Ed Yingling, chief executive of the American Bankers Association, said he was increasingly hearing from banking executives who feel they should not be forced to accept money with so many strings attached. He said these banks don't need the money, but they are willing to use it to increase lending, so long as they are not punished for doing so.

"The government really needs to make up its mind what this program is," Yingling said.

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