Federal Bailout Money & Bank Dividend Payments

In late summer/early fall 2008, the United States faced a severe economic crisis. The major cause of this crisis was that a number of large financial institutions issued mortgages to customers who were less than credit worthy. Then, when these customers defaulted on their loans because of a high variable interest rate, these banks were forced to foreclose on the properties, which resulted in an extremely high number of foreclosed homes throughout the country, as well as a large amount of loan write-offs. These foreclosed homes subsequently flooded the market, driving down home prices in what were thriving real estate markets. This event left these banks on the verge of failure, and in response, the federal government authorized a multi-billion dollar program to pump cash into firms who were deemed "too big to fail."

This bailout program did not come without risk. Firstly, inflation was, and still is a valid concern. Since the government did not have the cash on hand to fund such an undertaking, a large amount of money needed to be printed. Even before the funds were distributed, the prices of gold and oil rose dramatically, and the dollar value fell in value in the world market. Currently, we are seeing oil prices rise once again to over $100 a barrel and it is projected that during the summer months motorists will be paying between $4 and $5 a gallon for gasoline.1

However, perhaps the biggest consequence of this program was that the firms who took on these risks were, in a sense, rewarded. Successful financial institutions who did not make these bad loans were not rewarded for their prudent decisions. Instead, they were able to see their competitors be rescued from the brink of collapse. The firms who received bailout money were able to get a sort of "forgiveness" for their foolish decisions and, essentially, did not incur any consequences. They did have the stigma of taking federal money, as well as the press of what they did, but that can be easily forgotten, as shown by the fact that this event is still occurring, but it is seldom talked about now.1

Shortly after this program began and the funds were distributed, a number of banks began to issue dividends to their shareholders, using this government money. This caused a public uproar because the purpose of this program was to provide cash for these banks to increase their capital accounts and to provide money for loans to be issued, however much more carefully. In early 2009, the Federal Reserve issued a letter to the banks stating to cut dividends as conditions continued to deteriorate and that the use of federal rescue money to fund such payments was discouraged, but not prohibited.2

Furthermore, the Federal Reserve stated, "While many organizations place great importance on maintaining their dividends, a board of directors should reduce or eliminate dividends when the quantity and quality of the bank holding company's earnings have declined or the firm is