Mea culpa on Wells Fargo (NYSE: WFC ) . I did not think it was another Bank of America (NYSE: BAC ) -type situation -- I still don't think it is -- yet it had to cut its dividend early last month. And so did the other stellar performers among the financial-sector malaise: US Bancorp (NYSE: USB ) and JPMorgan Chase (NYSE: JPM ) .
It is politically unacceptable to be a major bank and have large dividend payouts these days. The government says so. The notion that companies receiving TARP money cannot pay large dividends is akin to shareholder blackmail, on top of the monetary blackmail the central bank is practicing.
In some cases, TARP money was force-fed to healthy institutions (like the three above), and as TARP receivers, those healthy institutions had to cut their dividends. This does not sound like the American way of doing business.
I completely agree that the competence-challenged staff at AIG (NYSE: AIG ) who blew up the company should not be getting retention bonuses. They deserve to be fired. I also agree that weak banks like Citigroup (NYSE: C ) should cut their dividends in order to preserve capital.
But that same strategy should not be imposed on healthy banks that were made to accept TARP money.
Right to be steamed
Wells Fargo Chairman Richard Kovacevich has been foaming at the mouth of late for the retroactive restrictions on dividend payments. He is justified. A dividend cut, after all, puts further pressure on a strong bank's stock -- because of the perception that the company is in a weakened condition. However, dividend cuts are good news for weak banks, because they preserve their razor-thin capital ratios.
Kovacevich's point is simple: Wells could have raised private capital, and it could have kept the dividend. That would have been a lot better for shareholders; the shares certainly would not be trading in the mid-teens. I still think Wells will be a major beneficiary of the cleansing process now under way, as it's in a lot better position than many rivals and will likely take away market share. Nonetheless, it's a shame that Wells Fargo shareholders had to pay for the mistakes of weaker banks.
Can't cut coupon payments
Here's an idea for investors who want good payouts but fear a dividend cut: Find out which banks can't fail -- the U.S. government pretty much has prepared the list for you -- and look into some short-term bonds. The banks don't pay big dividends because they got TARP money, but they do pay their debts. Otherwise, they'd go bankrupt, something that appears unlikely for Citi, Bank of America, and the like.
More on bonds
I owe a clarification on my take on the bond market. Yes, I am worried about inflation, at some point. But not in the next 12 months. Trying to short the bond market here is like trying to short the Federal Reserve, as it is on the other side of the trade. The Fed has more cash to keep the trade going than any bond short-seller. This is a short-term situation, so the Barclays 20+ Year Treasury Bond Fund (NYSE: TLT ) and Barclays TIPS Bond Fund are still worth investigating. Of course some might disagree with me.
In a year or two, if the Fed abuses its money-printing power -- and I have a sneaking suspicion that it will -- we'll be facing unpleasantly high inflation and a very weak dollar. Neither of those are very desirable outcomes.
Former Morgan Stanley economist Andy Xie once said that if the U.S. chooses to inflate its debts, it will cease to be a superpower. I always thought that sounded like a very extreme statement, but it's sounding less and less extreme to me these days.
There has never been a better time to hope for the best, but prepare for the worst.
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