Bank Dividends ?
Interesting dinner last with Martin Barnes of BCA, Scott Frew of Rockingham Capital, and Chris Whalen of Institutional Risk Analytics.
Its an interesting crew: Frew has been bearish for a long time, Barnes is a recent convert to the Bear camp, and Whalen has been unapologetic about forecasting a large number of bank failures. I was the lone bull at the table, thought Frew is longer than shor these days.
I see Frew and Whalen pretty often, but not together — We don’t do this often enough, and its a fun group — we should do this more often.
One of the things we each discussed was "What is unknown by the bulk of Investors/Traders/Public."
The most interesting of the four of us was Whalen’s comments: "Read the fine print — The $250 billion bank recapitalization effectively ends divdiends. If they took the cash — and they all needed it — there are no divvies paid until the money is paid back. No common dividends, no preferred either (though they will accumulate)."
I had no idea . . .
~~~
UPDATE: October 24, 2008 5:45pm
Scott writes in:
Go to this link — http://www.ustreas.gov/press/releases/hp1207.htm
— at the bottom the Public Term Sheet.
Here’s the relevant section of the term sheet, Restrictions on Dividends:
Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.
So no dividends may be declared or paid on junior preferred, preferred ranking pari passu with the Senior Preferred, or common shares. … unless (i) in the case of cumulative Senior Preferred all past dividends are fully paid, or (ii) in the dase of the non-cumulative Senior Preferred etc etc.
Note no (iii) in the case of the common.
Pretty cut and dried. Chris is dead on here, and for the record, I knew this from Joanie’s (McCullough) work. Just so you have the full story, the next paragraph addresses common dividends, and reads as follows:
Common dividends: The UST’s consent shall be required for any increase in common dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties.
But Joanie’s take on this, with which I concur, is that it’s misdirection, an attempt to hide what’s in plain sight in the paragraph above.
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October 24th, 2008 at 8:15 am
Is their any link that confirms this…I was under the impression that the US plan was different than the European plan in this regard.
October 24th, 2008 at 8:25 am
That is simply untrue. The plan says that the U.S. preferred must be paid in order for the other dividends to be paid. As long as the gov’t is getting their dividends, everyone else can get theirs too. The plan had an “exception” section that explained that.
October 24th, 2008 at 8:28 am
Barry R U Sure (100%) on the Divvies ,, I thought they were frozen at current levels and could not be raised….. this NOT paid at all in cash and accrued is news to me!
October 24th, 2008 at 8:30 am
Simply untrue and this was gone over by Steve Liesman who specifically asked treasury sources about this. They confirmed that dividends can still be paid. It is only if the companies fail to make the dividend payments to the feds that other dividends would be impacted.
October 24th, 2008 at 8:34 am
The only thing I heard from Congress is that they can not use the gov’t money to pay dividends.
There is nothing I know of that says after gov’t dividends are paid common dividends can’t be paid after that.
October 24th, 2008 at 8:45 am
Anyone know what the limit down is for a single Nasdaq or NYSE stock before it gets halted?
October 24th, 2008 at 8:48 am
Barry, is filled with Typo’s this morning, Sounds like he is a little nervous.
We have Created the “Great Depression” MEME. Time to live with it.
good luck everyone.
Why buy till it’s priced in, we need to De-leverage all these hedge funds treating the market like It’s Las Vegas. It’s not a sustainable model.
We have sorted out most the Ibanks, And they have finally started Laying people off. Time to make the Hedgies as Scarce as Spotted Owls. “Who wants to be on WallStreet. It’s filled with losers with no ability to risk manage.”
“Hedge fund”? What is that? They are Twice as useless as I-Banks.
Hedgies need to start sounding like the I-Banks “We didn’t understand that the Business cycle applied to us”
Who needs to pay 2% to lose money like this..I’d say 2 and 20… but…. LOL.
Then we can pull everyone’s credit cards Repossess some Cars and ATV’s and finally this can be over.
October 24th, 2008 at 8:53 am
No limit on any NYSE or NASDAQ stock…
October 24th, 2008 at 8:54 am
“May you live in interesting times” Did a banker say that?–LOL
October 24th, 2008 at 8:55 am
Is this irrelevent because there wont be profits for a long time?
October 24th, 2008 at 9:01 am
Read the fine print…Treasury consent is required for any increase in common dividends per share…see public term sheet:
http://www.ustreas.gov/press/releases/reports/document5hp1207.pdf
October 24th, 2008 at 9:41 am
I WISH it was true.
Lets face it, if a bank has capital issues, there is NO reason for it to have a dividend at all.
No increase in dividend without treasury approval is not the same.
October 24th, 2008 at 9:44 am
Limit downs? Circuit breakers? What the hell are you Communists talking about? CNBC is talking to a guy with a bow tie about good BUYING opportunities. The Asian and European markets were down 8- 9 percent, but we Americans are superior. No need ever to look at economic data or pay attention to basic economic theory, the guy with the bow tie said BUYING opportunity.
Erin Burnett looked really nervous at the beginning, but the little buckaroo is chipper now that CNBC was able to find two people to utter the words “BUYING opportunity”.
Happy days are hear again…
October 24th, 2008 at 9:50 am
Yeah, this is simply untrue. I like IRA’s stuff, but if he can’t understand that very clear section of the term sheet (which KBW and other firms distributed widely in addition to it being posted on the Treasury website), that’s a bit disconcerting for his analyses.
October 24th, 2008 at 9:52 am
the gov’t dividend is the priority, then after that is paid, regular dividends may be paid with what’s left over. dividends may NOT BE INCREASED until after the Gov’t is paid back.
October 24th, 2008 at 9:58 am
Probably great bottom call by BR this morning by positing the circuit breaker points.
I’ve already bought positions. Not nearly as low as I figured but probably good enough.
I feel totally confident in my positions. GLW, GRMN and LOW
October 24th, 2008 at 10:04 am
Interesting crew indeed, but unaware of the facts. This is not true.
October 24th, 2008 at 10:07 am
As a shareholder of STT i am definitely not liking this comment. But then if STT stop paying out dividends ( which by the way are adequately covered per last quarter’s filing) I might have to sell :-(
Dividend Growth Investor
October 24th, 2008 at 10:11 am
Roubini sees a global train wreck dead ahead again. Now he is predicting market closures soon around the world for a week or so. Does anyone think such a closure would result in a rally on the reopen? Or would there be a rush to sell if people were unable to get their money out of equities for an entire week?
I am short via QID, SMN, EEV, DUG, and TWM, so I am trying to decide whether to hold through a closure or get out now before it happens.
TIA for any comments.
GLTA.
October 24th, 2008 at 10:15 am
BR Let’s talk about AIG. It seems to me that the government bailout of AIG has turned into a bailout of the CDS market. The 120 billion is almost all gone, gone to their CDS obligations. What’s going to be left, no much. Why not take AIG into receivership & split the company between regulated (insurance) & unregulated (everything else) & let the CDS world suffer.
October 24th, 2008 at 10:15 am
Money is fungible. They can’t very well tell the banks how to *spend* it.
State Street is using the money to pay bonuses.
October 24th, 2008 at 10:20 am
Barry, don’t leave this one out there without backing. That would be huge, huge, huge. I hope your friend is wrong, wrong, wrong.
By the way, what do you think about Bill Clinton for Treasury Secy.? Bob Rubin once told me that he was the only guy smarter than Summers.
October 24th, 2008 at 10:24 am
If you want some more perspective, read “An Unexpected Tale” at http://www.financialtales.com
October 24th, 2008 at 10:38 am
“What is unknown by the bulk of Investors/Traders/Public.”
How much of Obama’s insane ecomomic policies will be passed by congress.
October 24th, 2008 at 10:55 am
Man there seems to be great value selling puts today, I am selling GE november 15 puts at .95. I have no problem holding ge at a cost of 14.05..if I lose money on this trade we will have big problems. Man Mark Hanes is annoying..he is becoming more annoying than Cramer.
October 24th, 2008 at 10:58 am
Here’s a shout out to Tom K,
God bless you, sir.
What we need now is a double dose of supply-slide economic measures, some man-size deficits, and more tax cuts for the rich and famous.
A Moosehead in every fridge, and a state trooper under every thumb.
Exceptional idea for an exceptional country. Any other thinking is simply Un-American.
Love,
Miss McLaska, first runner up
October 24th, 2008 at 10:58 am
That’s wrong – they can pay divs, just need govt to ok an increase
October 24th, 2008 at 10:59 am
Let’s face it folks, lending will not return to “pre-crash” levels for many, many years. We are returning to the 1950′s or 60′s for some time. But some time in the future this will ALL be done AGAIN. Wall Street’s memories become faded after about 20 years ( give or take a few years + or -). Untill the consumer feels good again, and the banks “tummies” stop hurting from ingesting trash ( their creation) Its going to remain a “Credit Desert” for a long time.
October 24th, 2008 at 11:00 am
FROM THE SUBLIME TO THE RIDICULOUS:
I just saw that Citigroup advised PNC on their takeover of National City.
NOW LET’S THINK ABOUT THIS.
You are PNC. You need advice on taking over the troubled National City.
You go to Citigroup for advice? And you PAY THEM?
Let me add some more ?’s. ?????
Was Marx correct in the long run?
I think my new hero is that guy that liquidated that hedge fund after getting 10000% profit or something like that, called everybody else a bunch of morons, and decided to go the beach, or get high.
You know… I’m like that Kevin Spacey guy in American Beauty and that hedge fund guy is the pot-smoking teenager.
Whoever you are, you are my hero.
Because they ARE morons. The whole lot of them.
(Full disclosure: Currently 1.5% long, 98.5% cash but with some significant SPX long positions hedged with very, very deep in the money calls written to collect the VIX. If the strikes are triggered, I’m in at SPX 700. If not triggered, I collect 4% for one month. That’s a bit higher than Treasuries right now, so what the hey.)
October 24th, 2008 at 11:04 am
I second the many corrections above and add that many bank preffereds are non-cummulative. Some examples:
http://www.secinfo.com/dVut2.713tf.htm
http://www.citigroup.com/citi/press/
Dividends are needed to entice capital, they will be low on the common, but they will not be zeroed out. A banks success is a function of the confidence people have in them, zeroing dividends would said management wants to be replaced.
October 24th, 2008 at 11:10 am
Because everyone now is almost convinced of a L bottom over many years now I’ll take the other side and call for early 09 recovery.
The low prices of energy and other commodities will create a new boom.
October 24th, 2008 at 11:10 am
The only restriction on dividends imposed by the Treasury is that they can not be increased without Treasury’s consent. As per Term Sheet:
“The UST’s consent shall be required for any increase in common dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties.”
Read the Treasury’s entire Term Sheet on USLaw.com’s Bailout Report.
October 24th, 2008 at 11:25 am
Tom K on Oct 24, 2008 10:38:07 AM
“How much of Obama’s insane ecomomic policies will be passed by congress.”
One Democratic president with an election mandate + Two Democratic majorities Congress + The worst economic / financial crisis since the GD = 100% passage of whatever Obama wants.
This is the new America; love it or leave it.
Singapore may be more to your liking.
October 24th, 2008 at 11:25 am
Everytime these dips get bought I get more and more bullish..
The action in the market reminds me of the action at the top a year ago..
It was almost impossible to hold on to a short position because of the shakeouts even though you knew in the end the market was heading down.
The traders were just falling all over themselve trying to get a lead on a short poisition but the market didn’t really go down until the went up first.
Now I see the same thing except the mirror image on the bull side.
October 24th, 2008 at 11:27 am
“That’s a mighty big Mazza Ball you’ve got hangin’ out there.”
–Seinfeld
October 24th, 2008 at 11:36 am
“That is simply untrue. The plan says that the U.S. preferred must be paid in order for the other dividends to be paid. As long as the gov’t is getting their dividends, everyone else can get theirs too. The plan had an “exception” section that explained that.”
And the winner is… Chad Brand!!!
Thank you for clearing that up Mr Peridot, Jah knows we dont need any more negative news out there, especially false negative news.
-I-Man
October 24th, 2008 at 11:40 am
Funny that this is the same day in 1929 the markets crashed. Brought on by too many risky mortages. ponzi like financial schemes. and a president who did not get.
I still see no reason to be bullish, hell russia is trading like it is going to default!
October 24th, 2008 at 11:44 am
Uncle Sam is first in line, of course. If he doesn’t get paid, nobody gets paid nuthin’. If he gets paid in full then the Bank can do whatever it wants except increase dividends without consent.
Keep in mind that all these guys also issued tons of trust preferred bonds (hybrids) whose coupons fall under the heading of preferred dividends. Most were issued with relatively short “in the money” (at the time) call features. They supposedly had onerous steps to incent the Bank to call them. Well, it’s a new world and the sector is now in shambles. Don’t look there for future capital raises…
October 24th, 2008 at 11:45 am
I don’t see what the problem is with bank dividends. With the preferential rate for dividends on auto-expire and regular rates about to soar, who wants dividends?
October 24th, 2008 at 11:56 am
“This is the new America; love it or leave it.”
I’m sure thousands of businesses are taking note of that. Who is John Galt anyway?
Oops, I forgot. Government creates jobs. Enjoy your worthless government checks from Uncle Barack and Auntie Pelosi ;-)
October 24th, 2008 at 11:58 am
Tom K @ 10:38:07 AM
“How much of Obama’s insane economic policies will be passed by Congress?”
I have a feeling that Obama might be an economic conservative, compared to Nancy Pelosi.
October 24th, 2008 at 12:04 pm
i thought about subscribing to BCA about a year ago but wanted a trial period since it is quite costly. fortunately they started posting some ideas and thoughts for free on the their website. good lord was i fortunate enough to save the money. taking the opposite side of nearly 80% of their ideas would have let one retire to some far off secluded island maybe even buying the island. NOTHING BUT CONVENTIOANL WISDOM
October 24th, 2008 at 12:04 pm
Seriously AFRAID of DEMOCRATIC MAJORITY?
Your radical rethug ideology gets in the way of REALITY…. which the rethugs cannot “create” as they stated… unless they wanted a depression?
Get real.
Time for change.
—————————-
We can’t solve our problems, as Einstein said, at the level of thinking at which we created them.
October 24th, 2008 at 12:04 pm
If I were a wealthy investor in Obama’s crosshairs (after January 20th), I would want corporations to stop paying dividends altogether; I would be content with the capital gains only (on which taxes can be deferred indefinitely).
October 24th, 2008 at 12:21 pm
Interesting article!
http://www.creditblogs.info/
October 24th, 2008 at 12:21 pm
Because everyone now is almost convinced of a L bottom over many years now I’ll take the other side and call for early 09 recovery.
The low prices of energy and other commodities will create a new boom
—————————-
Just like everyone was sure housing was the best investment in 2003.
Too early to go against the crowd.
October 24th, 2008 at 12:23 pm
On an unrelated note – when is that glib d-bag Dennis Kneale going to get canned by CNBC? How can they keep these assclowns on the air with their glib tone in this environment? Can’t believe that’s going to play well with viewers as we slide into ’09.
That would prove to me once and for all there is a God. Until then, the verdict’s still out.
October 24th, 2008 at 12:39 pm
The Clintons and WalMart* thought the world would prosper bringing Asia into the mix enslaving them. No-one likes to be enslaved we will discover. Capitalists have miscalculated BIG time. Bill and Hillary are in that camp. AR to NY to China.
October 24th, 2008 at 12:40 pm
Ahh…The four horsemen of the Apocolypse…I agree with those who have clarified what Whalen said re dividends.
Maybe he was extending his theory that the major banks would need more cash or be taken over a few quarters down the line…therefore his dividend call is predicated on economic events/impending portfolio losses and not something internal to current TARP regulation.
Barry, are you selling into the strength?
October 24th, 2008 at 1:38 pm
Here’s something that’s really unknown by most people…
Did you know that Goldman Sachs has already accrued over $13 BILLION for compensation for its employees through the first 3 quarters? And Morgan Stanley has accrued $10.7 BILLION? For Goldman, that comes out to over $420K per employee for only 3 quarters…including secretaries, maintenance people and the cafeteria workers.
After creating the biggest financial mess we have seen since 1929 (and possibly ever), these guys are still going to receive multi-million dollar PERFORMANCE bonuses, paid for by the taxpayers via bailout money, the Fed’s purchase of toxic securities, and loan guarantees. Now THIS is criminal. Given the outsized response to Sarah Palin’s $150,000 clothes purchase, don’t you think that, upon hearing this, the public will finally have just had enough?
If you do nothing else, Barry, please pick up this little tidbit (I introduced it to CNN and they ran a story on it last night on The Situation Room at 6:30pm) and continue to push it until the banks relent and put a hold on bonuses until the taxpayer is made whole, and the companies are in NO danger of imploding!
October 24th, 2008 at 3:06 pm
The video you posted
http://bigpicture.typepad.com/comments/2008/10/volcker-rebuild.html
or
http://tinyurl.com/6xpu79
“Volcker: Rebuild U.S. Banks From ‘Ground Up’”
The third guy speaking, says that dividends are being paid by bailed out banks in the U.S. (but not in England).
October 24th, 2008 at 7:01 pm
Must have been too much wine at that dinner
As long as the QFI has outstanding preferred stock it can not pay dividends. Once they have sold off all preferred stock issued, dividends may be paid at current levels (5% for preferred stock). If agreed by the TS, then dividends may be increased on common stock.
So the only way dividends can not be paid is if the QFI is unable to sell all of the preferred stock that was issued. Unless there is a conspiracy to make sure there is outstanding preferred stock, then dividends get paid.
October 25th, 2008 at 2:15 pm
Both you and Chris are dead wrong. There is nothing in what you quoted that says that banks may not pay dividends “until the money is paid back”. Dividends on preferred stock will continue.
October 25th, 2008 at 4:59 pm
I believe your reading of the term sheet is correct. But I doubt the term sheet refects the deal.
As you know, deal terms often change during the negotiating process and during the time the transctions documents are being drafted, proofed, redrafted, etc. The final executed transaction document terms will often differ from those of the term sheet.
I find it hard to believe the Treasury would charcterize the treatment of common dividends one way with reporters when in fact a totally different deal was structured.
October 29th, 2008 at 3:44 am
Not only are preferred dividends allowed, but the Treasury preferred is pari passu with most existing classes. Maybe the next round of recapitalization will change this, maybe not. Until then, it looks like if they get paid, you get paid.
http://www.ustreas.gov/press/releases/reports/document5hp1207.pdf