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"Isaac: Please Let Under-Capitalized Banks Pay Dividends!<p>

By Barry Ritholtz - February 10th, 2011, 8:00AM<p>

Relentlessly shameless bank shill William Isaac gets up off his knees just long enough to pen an absurd FT piece: Banks should be allowed to pay out dividends.<p>

It is such a bizarre statement that we are left truly wondering what color the sky is on his planet.<p>

Isaac seems to be just making it up as he goes along:<p>

“Preventing profitable banks from paying reasonable dividends impedes bank lending and economic growth. It tilts the balance away from the issuance of new capital towards a slow-growth approach.<p>

We made a major mistake in allowing large banks to reduce their equity capital ratios to inappropriately low levels during the boom years. It encouraged lending beyond the ability of capital to cover the risks. At best, we were short-sighted and living on borrowed time (or money).”<p>

Wow, there is so much wrong in just two paragraphs, I don't know where to begin.<p>

Let's start with this: There is absolutely no credible evidence that not allowing banks to pay a dividend somehow impedes lending. Nor is there a scintilla of evidence that a lack of dividend payment somehow “tilts” towards reduced economic growth.<p>

What Isaac calls bank profitability is largely a mirage: Thanks to FASB 157, Banks are not required to report their actual financial conditions. How hard is it to appear profitable when you get show only gains, but never have to disclose losses? Who amongst us is so foolish as to really believe this?<p>

Then there is the issue of the 0% interest rates and artificially steepened yield curve. Does anyone actually believe these banks would be flush if they weren't receiving free money from the Fed?<p>

That is before we get to the issue of the GSEs: Fannie and Freddie have become the banks dumping grounds for every crappy mortgage loan made. This backdoor bailout is little more than emergency funding from the taxpayer to the Banks.<p>

And Isaacs has the unmitigated gall to claim these propped up, subsidized, phony balance-sheet banks are healthy enough to issue dividends? PUH-leeze.<p>

As to how the banks fell into this unfortunate condition, Isaac gets busy rewriting history to support the bankers his cause : It wasn't WE who made the “mistake allowing large banks to reduce their equity capital ratios” — that was done at the BANKS OWN REQUEST. They ASKED FOR AND RECEIVED the capital reserve waivers via their lackeys in Congress and the SEC. It was their demand — not ours — made to their bought and paid for rent-a-Congress. It was the banks who have made the concept of American Democracy a global joke, replaced with a far more accommodating Corpratocracy.<p>

And, the inappropriately low levels weren't a coincidence of the banking boom years — they were the cause. Increased leverage means more profits during good times, but more bloodshed during the inevitable correction. Every rookie trader understands the double-edged sword of leverage.<p>

Isaac, apparently, does not . . .<p>

>

Source:
Banks should be allowed to pay out dividends
William Isaac
FT.com, February 9 2011
http://www.ft.com/cms/s/0/130d27a0-348e-…

http://www.ritholtz.com/blog/2011/02/isa…