Fed denies Bank of America dividend increase

The Federal Reserve is forbidding Bank of America from increasing shareholder dividends, which are currently once cent per share. After a round of stress tests, the Fed told the biggest banks they were fit enough to increase payouts to shareholders. But Bank of America was the exception. Some financial experts are concerned the Fed’s blessing for banks to release capital to shareholders will put the banks in an untenable position in the event of an economic relapse into recession. Article resource – Why allowing banks to boost shareholder dividends is a bad idea by MoneyBlogNewz.

No Fed approval for Bank of America

The Federal Reserve heard from Bank of America that it wanted to, in the second half of 2011, to boost shareholder dividends in January. The bank was anticipated to raise its quarterly dividend by up to 8 cents, about 20 percent of its envisioned earnings this year. Because of the decision Bank of America made to lose $2.24 billion past year getting Countrywide in 2008 during the housing sector drop, the Fed told the bank not to do it. There has also been pressure from investors to get Bank of America to buy back bad mortgage securities. These were sold before the meltdown started. The Fed gave permission to other banks though. This involved U.S. Bancorp, Wells Fargo and JPMorgan Chase. Now Bank of America has a plan to give a new proposal to the Fed. This will occur before June is over.

Why would banks increase dividends for shareholders?

The economy will not be able to grow without increasing dividends helping banks raise more equity in the future, Wall Street banks argue. banks are able to lose equity but get more investors by paying shareholder dividends. Leverage is all bankers want. banks fund over 95 percent of investments in debt taking other people's money although companies like Google use equity to get funded. Equity is something banks don't need because leverage makes executives and shareholders lots of money. This is assuming there is health in the financial sector. banks also stay away from equity because the more equity they hold, the more liable they’re for the risks they take. They will default at their own expense with their risk. The working class individuals are not needed to help.

Possibility of another bailout

There were several highly leveraged banks noticed during the financial crisis. The Fed was worried about this. Many feel like shareholder dividend increases shouldn't be allowed unless the economy is strong first. The New York Times Simon Johnson compared the leveraged bank to getting a mortgage for 98 percent of the purchase price with a tiny down payment. Sometimes the home price will go up. That means it was worth the risk. Creditors end up missing out while the borrower loses if they drop. There’s a difference between the two though. The banks have learned they’re too large to fail when working for the people. When a highly leveraged bank fails, a government bailout rescues its executives, shareholders and creditors, and U.S. taxpayers get the shaft.

Citations

New York Times

economix.blogs.nytimes.com/2011/03/24/dividends-lost/?emc=eta1

Business Insider

businessinsider.com/how-bank-dividends-help-wall-street–and-hurt-almost-everyone-else-2011-3

CNN Money

money.cnn.com/2011/03/23/news/companies/bank_of_america_dividend/index.htm