The Federal Reserve is finally -- albeit only implicitly -- admitting that not all the big banks are healthy: The Fed isn't letting Bank of America pay increased dividends.

When the Fed allowed other large banks to issue increased dividends last Friday, I asked why. The big banks are insolvent, because -- at a minimum -- their loan portfolios are wildly overvalued. The reason the banks aren't bankrupt despite their insolvency is because the government stands behind them. Since the banks are in such shaky financial straits, they shouldn't be paying out money they don't have as dividends. Period.

Yet the Fed let many of these the banks reward shareholders -- who, under reality-based accounting, would have been wiped out -- with money that could otherwise be used to help the banks become solvent. Investors aren't entitled to returns on their capital. Even Treasury bills theoretically involve some risk that investors won't get their money back.

The official rationale for the increased dividends is that they may allow the banks to attract new investors, which should allow the banks to make more loans. The logic of this escapes me. First, if the banks have sufficient capital to greatly increase their dividends and buy back shares, they have enough capital to make a meaningful amount of loans. I don't see why another step is required before the socially important increased lending might happen.

Either Banks Need Money, or They Don't

To those who might say that the current dearth of loans reflects a lack of demand, well, how about deploying that "excess" capital to make meaningful home loan modifications? Such modifications would also be economically useful, as keeping people in their homes instead of putting them through foreclosure could help the real estate market limp a bit more quickly toward recovery. There's no shortage of demand for meaningful loan modifications.

And, if it were necessary to attract new investors to make loans, why didn't the Fed make the increased dividends conditional on increasing lending or meaningful modifications? The Fed has the leverage to do either, or even both. (Remember, the reason the Fed has control over the dividends in the first place is that such control was one price of the financial bailout that kept the banking system from failing.)

But the fact that really puts the lie to the idea that higher dividends are necessary to spur lending is the fact that share buybacks are being allowed. As the blog Baseline Scenario explains, buybacks are the equivalent of saying "we have more capital than we know what to do with." A bank can't simultaneously have more capital than it knows what to do with, and also need to attract more money before it can make loans.

Dividend Winners? The Executives, Of Course

Of course, the banks do know what they're doing with buybacks -- enriching their executives, who not coincidentally, make the decision to do the buybacks in the first place. Unlike dividends, share buybacks increase shareholder wealth by increasing the stock price, and thus are not directly taxed. For investors like executives, who have huge amounts of shares, that difference is meaningful. In addition, increased share prices can make executives' stock options more valuable, or earn them bonuses and other types of compensation.

Nonetheless, the executives would have to cash in while the increased share prices last: It's no mystery that future events could wipe out any gain from a buyback -- an impact that paying the cash out as dividends would avoid. And that risk again underscores how much worse allowing buybacks is than allowing dividends.

Drawing the line at Bank of America (BAC) is a positive step, but it's not enough. Bank of America's troubles, a large portion of which can be traced to its acquisition of Countrywide, are so well known that not even the most bullish, want-to-believe investor could swallow stress test results that gave it a clean bill of health. But Countrywide wasn't the only out-of-control lender. Consider what the FDIC says about Washington Mutual, which JPMorgan Chase (JPM) acquired.

So thanks, Fed, for forcing Bank of America to hang onto its capital so that it can perhaps cover its liabilities. But one reality-based decision does not a good policy make.

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Major Fraud Alert

The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

Bank of America violated the 21st Century Act: Final Amendments to Regulation CC Section:

seeking reimbursement of Credit, Loan, and Finance Balances as a "Bank Entity" and not a "Nonbank Consumer" as specified on Pages 85 and 86.

The person they sued through a LLC. Debt Collection Company and Law Firm was the "World Fortune Owner" who "Counterclaimed" and won.

Now all Contracts of any Corporations (Including Employment) under the "Controlling Interest" of any Investment Bank Worldwide are "Null and Void", and are also under the stipulated Rules and Regulations of an "Closely-held S Corporation rendering all Employed under Legal Actions against “Domination”, and also means that "No Corporation can hold Shares" officially making every Stock Exchange on the Planet a "Ponzi Scheme" by default.

Businesses owned by the States (Public Corporations) are being sold Stock Shares by Corporations also under the Federal Banking System in this Worldwide "Ponzi Scheme". The World Fortune Company Merrick Inc. Sweden is dissolving Millions and Billions of Dollars from "All Levels of Government"in the U.S. of Financing based upon Years of "negligent inaction" involving this case.

The Federal Government has already been forced to discontinue supplying the Financing States use to pay their debts, Persons in Government Offices may want to begin to take their jobs more seriously, these are different times from 10 Years ago and you will not be accepted civil servants here just because you say you are here to do the right thing.

May 29 2011 at 12:28 AM Report abuse rate up rate down Reply

Excuse me but Abigail you failed to mention that banks were forced to make loans to customers who knew they could not pay their mortgages by government decree, as if you didn't know. We fully realize that you are a Socialist that wants to redistribute wealth but you forget one very important fact; as with all Socialist countries only the people in power have anything of value; look at Cuba, Venezuela and the former Russia where the masses lived in communal quarters and line up to get foods we take for granted. And since when did giving investors something back for investing in a company a crime. My God, woman, burn your Communist party card.

March 27 2011 at 11:18 AM Report abuse -1 rate up rate down Reply

Abigail, please do your homework before you make broad statements about large banks. JP Morgan accepted Tarp funds only because it was encouraged to do so by the government and paid it back as soon as they were allowed. Stress tests were performed to ensure that the bank was adequately capitalized and the bank has exceeded analysts' estimates for earnings.

Also, the government encourages solvent banks to acquire insolvent banks to reduce FDIC insurance payouts. JP Morgan actually did all of us a favor when it purchased Washington Mutual.

March 25 2011 at 2:49 PM Report abuse -1 rate up rate down Reply

I think the Fed is scared to regulate and in my mind that's part of what they are there for. Another factor that shows them they are on the right track is that not one banker has gone to jail. I believe the banks owe a fiduciary responsibility to their shareholders not to make bad loans which they did with impugnity.

March 24 2011 at 1:19 PM Report abuse +1 rate up rate down Reply
Shomara Cruz

he did not care about loans being made to unqualified buyers, exotic mortgages that made no sense

March 24 2011 at 12:03 PM Report abuse +1 rate up rate down Reply

The entire finacial system is nothing more than a fraud. Starting at the top with the Federal Reserve. The underlings of the corrupt (damn near criminal) organization prints money for themselves to pay bonus's to bankster thieves at the expense of the rest of the world via higher food and energy cost's. The only thing good about the crisis of 2008 is the fact the fraud has been widely exposed. There are still many people that don't get this but the time of the Federal Reserve and the entire Central bank system has almost run it's course. Sooner or later these stupid politicians will realize the only way out of this
(ficticious) debt is to abolish this system and begin anew. If not, riots in the streets will not be far off.

March 23 2011 at 10:33 PM Report abuse -1 rate up rate down Reply

In this instance the FEDS are wrong! BOA can handle dividend payouts ---- they knew that when they applied.

March 23 2011 at 7:31 PM Report abuse rate up rate down Reply
1 reply to Hi RON's comment

Sorry, maybe you own BOA stock and would like to receive a dividend but until the banks can show they have straightened out the mortgage mess, they don't have money to pay in larger dividends. They may have the cash but what happens when they are forced to revalue the mortgages they hold unless they expect the taxpayers to do that for them, and I think that is what they are counting on.

March 24 2011 at 1:13 PM Report abuse rate up rate down Reply

I worked in the mortgage business and I saw first hand the bullying by the feds using the Community Reinvestment Act, pressure from Fannie Mae and Freddie Mac, Janet Reno, local goverments, Cuomo saying he did not care about loans being made to unqualified buyers, exotic mortgages that made no sense, the federal reserve lowering interest rates.
I frequently asked what delusion were we operating under. Shrugs and that is the way it is.

March 23 2011 at 2:49 PM Report abuse rate up rate down Reply