“We remain concerned over their ability to withstand stress in an uncertain economic environment. We strongly encourage [that the Fed’ delay any dividends or compensation increases until they can show that their earnings are strong and their assets sound. Given the continued uncertainty in the markets, we do not believe it is the right time to allow transactions that will weaken their capital and liquidity positions.”

-Sheila Bair, Federal Deposit Insurance Corp Chair

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This weekend’s must read article is a long analysis by Jesse Eisinger of the process by which the Fed allowed bailed out banks to restart the process of returning cash to shareholders by dividends: Why the Fed Let Banks Pay Billions to Shareholders.

At the time, the FDIC was very much against it, concerned as they were about the banks weak balance sheets.

Some of the data is pretty devastating:

“From 2006 through 2008, the top 19 banks paid $131 billion in dividends to shareholders, according to SNL Financial. When the financial crisis hit, the banks were weak in large part because they didn’t have those billions. Indeed, in the fall of 2008, the government invested about $160 billion in the top banks.”

Taxpayer funded bank bailouts would not have been necessary if banks had merely retained more of their dividends.

This is quite significant to future reserve requirements. Instead of being prepared and having strong balance sheets, banks have learned the wrong lessons about Captialism and Socialism: They can be as aggressive as they want, and pocket the profits during the good times — and the taxpayers will cover the losses during the bad times. Privatized profits, socialized losses.

This situation arose due to three failures on the part of banks:

1. Bad Economics: It reveals Banks’ collective lack of understanding of economic conditions: Heading into the worst economic storm, bankers had no idea what was in front of them. Given the deterioration of their own mortgage portfolios, this is an inexcusable breach.

2. Poor Preparation: It shows the poor preparation for events dislocations or challenging events; Reserves reduce capital for other uses. It lowers ROI. Thomas Hoenig has suggested banks are more like Utilities, and should be regulated as such.

3. Terrible Risk Management: It reveals banks have terrible risk management approaches. Beyond this blog, numerous credible people has been warning about the oncoming storm. Why did the banks not prep better? My best guess is that profits were so great the risk was willfully ignored.

Since March 2011, the Federal Reserve has allowed the 19 biggest banks to pay out $33 billion in dividends. That is now money unavailabe to cushion banks balance sheets during downturns; in the event of a major crisis (Europe?) that is money that the taxpayer will have to foot.

If banks are healthy enough to be paying out big divvies, why hasn’t the Fed normalized its policies? Why allow loans against garbage paper? Why keep rates so low?

Eisinger notes that “a wide range of current and former Federal Reserve officials, other banking regulators and experts either criticized the decision to allow dividend payments and stock buy-backs then, or consider it a mistake now.” Remember that the next time bankers come hat in hand to DC to beg for taxpayer funding. The better choice remains providing debtor in possession financing during a prepackaged bankruptcy — and not a bailout.

The entire article is a must read . . .

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Source:
Why the Fed Let Banks Pay Billions to Shareholders
Jesse Eisinger
ProPublica, March 4, 2012
http://www.propublica.org/article/fed-shrugged-off-warning-let-banks-pay-shareholders-billions

Category: Bailouts, Dividends, Federal Reserve, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Why the Fed Overruled FDIC on Dividends Post-Crisis”

  1. rktbrkr says:

    The Fed is the handmaiden of the big money center banks- more specifically they are the handmaiden of these banks management teams. the management teams, come first, bank investors come second and everybody else gets scraps with the taxpayers refilling the trough. The Fed is there to facilitate the process. Allowing a half dozen banks to grow to Too Big To Fail stature guarantees preferential treatment in times of crisis. The banks act in concert to guarantee “systemic risk” public assistance when the inevitable downturn arrives.

    These management teams manage by crisis. The accounting rules are devised to exaggerate profitability during good times (mark to market) and conceal losses (mark to myth) during bad times with pliable loss reserves aiding the process so that when the losses are finally recognized it is a crisis of epic proportions requiring unstinting public assistance to the banks.

    The get out of jail card recently issued absolving bank managements and their lackeys of systemic fraud is the final “thank you” to the pols for this TLC

  2. ilsm says:

    Government of, by and for the banksters. Welfare for the banksters.

  3. amboycharlie says:

    Barry,

    I think you have it all wrong, it was more like “milksop managements’ claim that models and hedges and friends in high places would guarantee they’d come up aces” no matter what they did wrong.

    http://bonalibro.us

  4. Jim67545 says:

    The 3 explanations the author offers are on target. I would add to them in this way. 1. The banks failed to understand the scope of the issue. So, for example, they seemed to miss what would happen to the value of their collateral (residential real estate) if essentially everyone had to dump properties onto the market. If one thinks that one can recover the amount lent by selling the collateral, then risk is negligible and full steam ahead. 2. The banks failed to understand any secondary and tertiary impacts. For example, did they understand that selling sub-prime loans as AAA would poop in the mortgage securitizing punchbowl for years to come and make the GSEs the only conduits standing? Did they understand the impact on the economy and demographics to have millions of families in financial distress, with ruined credit, having to delay family formation, etc.?

    One can argue that they probably would not have cared anyway. Yes, they probably were only concerned about making that next nickle but had they understood the societal and economic changes this would bring and the way it would alter their business plan, they may have altered there behaviour in ways to lessen their risk. I believe that would have lessened (not prevented) the size of the eventual problem.

  5. Jim67545 says:

    Another tertiary impact I failed to include is the entire mortgage buy-back (reps and warrantees), foreclosure servicing, reputational and legal (penalties) expense that has followed the mortgage debacle.

  6. rd says:

    The executives making the decisions on dividends and stock buybacks get huge amounts of stock options. If any of these are reasonably near-dated, then boosting dividends and buying back stock will goose their stock which will put money in their pocket when they exercise their options.

    If you believe yourself to be infallible, then why would you not set up your stock to make you more money in the short run?

  7. Rick Caird says:

    When did large bank bankers stop being bankers and become speculators? The 3rd failure listed seems to be the most telling.

  8. Petey Wheatstraw says:

    The transfer of wealth to the top continues unabated, and under the color of law. We didn’t stop them when they ripped us off, previously, even though the crime was blatant. Why would they not keep doing so?

  9. mbrmd says:

    Too bad we don’t have a legislative body that could utilize, say, a regularly scheduled hearing or two with the current head of the federal reserve and perhaps the former head of the NY fed to conduct some oversight and probe into a matter such as this. Oh, wait, never mind…

  10. carleric says:

    Lets just start by replacing Bennie with Sheila Bair, arresting any CEO who needs or even accepts taxpayer dollars for their own stupidty and move on from there.

  11. peter says:

    Equity Capital Registers a Small Decline

    Lower unrealized gains on available-for-sale securities and other financial instruments contributed to a $7.7
    billion (0.5 percent) decline in the industry’s total equity capital during the fourth quarter. Unrealized gains are
    not included in regulatory capital, and tier 1 leverage capital increased by $2.4 billion (0.2 percent). This is the
    smallest quarterly increase in leverage capital in the past 13 quarters. Retained earnings contributed $3.7 billion
    to capital growth in the quarter, as banks paid $22.6 billion of their $26.3 billion in quarterly earnings in
    dividends.

  12. Fred C Dobbs says:

    I was once a consultant to banks, and I can tell you the management of the big banks know very well what they are doing and the consequences, far more than we and those who would regulate them.

    It may be assumed that much of what they know makes its way to Wall Street directly and through intermediaries, such as consultants, but not much finds it way to government regulators. The money the banks pay buys, as a rule, people who are a lot smarter, ambitious, creative, etc. etc. than those who, accept a boring, low-paying government job from which they can’t be fired, and get a sadistic thrill regulating.

    Part of the regulatory process are Congress (who makes the regulatory laws), and the agencies of government Congress has created, where ordinary people interpret Congressional rules, make up their own rules, and enforce the rules, using a double-standard, and the FED.

    The agencies do not enforce the rules the same way against all regulated. For example, they compete among themselves for Congressional and Industry favor, for it is before Congress they must prostrate themselves to get their budgets, and wage increases approved, and it is before the Industry Congress must prostrate itself for re-election contributions.

    For the most part, people who work at the Federal Reserve Banks prostrate themselves before their respective board of directors who are elected by the local regulated banks whose annual contributions pay the wages of the people who work at the district Federal Reserve Banks. Since these contributions are proportional, the big banks pay more and are correspondingly less regulated than smaller banks. This is why so many small banks, and no big ones have been closed.

    The FED is a headless animal in the sense all of its functions outside Washington, DC are performed by the people employed by the local district Federal Reserve Bank. As a reminder, their wages are paid from the funds contributed to the local district Federal Reserve Bank by the biggest banks headquartered in the local district. This means the local district banks can act independently, and they do not always carryout mandates from the FED in DC.

    Take the Federal Reserved Bank of NY. The administrative discretion and forbearance exercised by the NY Fed dwarfs other district fed banks as the big banks consolidated there the past decade or so and every dollar entering or leaving the US passes through under its watchful eyes. In these circumstances can anyone blame Geithner, for example, of being human, and thinking that, because he holds the office he actually knows what he is doing and should do?

    The body-less FED in DC, thanks to Congressman Paul and others, we all now know, exists in some world all by itself. The academics who sit on the board are isolated from society. They have never run any enterprise worthy of the name, let alone a bank, have no practical experience with attracting, retaining, hiring and firing people. They have not socialized with anyone with an IQ less than 130 since middle school. They, like Geithner, think that, because they are on the Board, they must know what now to do. They didn’t see the last two busts coming, and did nothing to prevent them, so what good is government regulation of the economy and banks?

    Insuring deposits and poor regulation gave the banks and Wall Street a free pass to bankrupt the nation. Banks contribute to both parties, so that no matter who is in charge, it is their friend. In a sense, they are self-governed. Is the US a free and open society or what? Why not make public the government bank examiner reports? Why not make it a crime for a bank or anyone working at a bank from contributing to any candidate in any election? If bank deposits are backed by the full, faith and credit of US taxpayers, should they be turned in utilities! What does the Big Picture advocate?

  13. AHodge says:

    Beyond dividends
    i think the FDIC and the splendid Sheila Baer are the only competent govt core to deal with any of these issues…
    you should read her farewell speech–its in link below somewhere. maybe too optimistic in parts, i dont think dodd frank resolution authority would work
    unless she or the like were there running it?
    http://www2.fdic.gov/qbp/
    the fdic site and the QFR are the #1 go to site for “real” banking news-which is nearly coincident with FDIC insured
    including the excellent quarterly videos, often with Rich Brown and Russ Waldrup, two of the most outstanding govt officials its been my privelege to know.

  14. AHodge says:

    Sorry make that QBP
    Quarterly Banking Profile for FDIC
    the QFR is another less illustrious Census profits report, still not bad

  15. AHodge says:

    to be clear here
    the FDIC data is, i think
    only for the real banking parts of the big behemoths
    so you can be part in and part out, esp the holding co level being out
    but i am not completely clear yet. for example at one point
    for example
    only say 15 % of goldman was under the FDIC tent.
    but there may have been some rescue elements in late 08 where a lot more got in?

  16. Sechel says:

    If we had double liability of share-holders and required banks to rely on more subordinated debt the right decisions would get made, but instead we get banks lobbying for dividend increases knowing full well at the next problem there will be another tax payer bail-out