Thursday, 16 October 2008

Should Darling pay bank shareholders dividends?

It is a tough question.

On the one hand, it seems ridiculous for the government to be pumping in new capital, only to see shareholders receiving dividends, which could have also gone to improve capital adequacy.

On the other hand, it won't be easy to persuade new shareholders to invest money in banks if the government forbids dividend payments.

However, this problem was always going to arise once the government decided on a partial nationalisation. If Brown and Darling had gone the whole way and completely nationalised the banks, there would be no private shareholders to worry about. Once the government had stabilised bank balance sheets, it could privatise the banks, and the taxpayer would get the full value of the capital injections.

A partial nationalization was always going to end up as a dog's breakfast.


Mark Wadsworth said...

AC, I know that you are quite keen to nationalise banks, but what evidence is there that the government can 'stabilise their balance sheets' and punt them out at a profit?

If it were possible to stick £37 bn into UK banks and increase the value of their shares by more than £37 bn, it would have happened all of its own. (there are SWFs out there to whom £37 bn is just about do-able).

The point is, the money that the government is sticking in is, as a matter of fact, boosting the value of banks' bonds far more than the value of the equity, because of course the default risk on the bonds is now vanishingly small.

It is the bonds, the liablities, with a gross nominal value of £1 trillion plus double counting, that are too big for even China to swallow up whole.

And, returning to my current hobby horse, it is the bondholders who should have been invited (or bullied into) doing a partial debt-for-equity swap, let's say 3% of bonds get swapped for £37 bn in new equity. So they are the real winners from all this. Whether this was intended is a moot point.

Conspiracy or cock-up, you decide!

Nick von Mises said...

The capital window has been shut for quite some time, so there never was a realistic chance of the troubled banks raising equity privately. Therefore to me, banning dividend payments is correct.

MW is correct on the bond holders being the main beneficiaries, and on how if the equity infusion truly was profitable it would've been done already.

This is really about Darling spending someone elses money (ours) to save his job.

Given what a mess this bunch of clowns have made of their own balance sheet, why would we expect them to clean up a bank's BS?

That said, seeing as this was buying non-voting preference shares, I don't think it amounts to even a part-nationalisation

aSteve said...

I take a hard-line on the whole "no dividends" "no bonuses" question.

In paying no dividends or bonuses, banks can privatise themselves most quickly. Not paying dividends or bonuses would necessarily be the choice of any board of directors acting honestly in the long term interests of their shareholders.

Furthermore, 12% is stupidly cheap... the banks think nothing of 35% rates on credit cards for those they consider "sub prime" - what is good for the goose, is good for the gander... and all that.

I don't think the shareholders have room to complain... they controlled the directorship and the directorship acted recklessly. No sympathy, I'm afraid.

vado said...

There seems to be a consensus here. Besides many "growing" companies defer dividend payments and plough all profits back into the company.

In the long run, shareholders will gain from a few years of zero dividends. As the health of the banks improve, the share price will increase.

Anonymous said...

Banks using part of the £37 Billion of tax payers money to pay dividends is a slap in the face to everyone who hasn't got shares in these banks.

If the government had tried to sell this difficult to swallow spending spree, on the basis that it would go straight into shareholders pockets, everyone from parliament to the tabloids would have ripped them apart.

I doubt the rest of Europe would have signed up to similar arrangements if they had to explain this to their electorates, but the most galling aspect of this latest bank whimpering is that they've played along with the whole non payment plan right up until they had the cash in their pockets, and now they announce that the rules change.

I would have thought that with reality catching up with highly paid liars, they might have bought a clue and cut the crap, but they can't be grateful for a rescue that no other companies on earth would get, oh no, they have to have their cake and then dish it out to shareholders too.

Given how long this change of heart took it seems very likely they had no intentions of stopping shareholder payments, but just paid lip service to the idiots in Downing street long enough to get their hands on our tax pounds.

This is quite frankly outrageous, how dare they slap tax payers in the face like this so soon after we kept them afloat. We should have let them all go to the wall and see how the shareholders feel about that lack of a dividend.

Dividends Anonymous said...

If as an investor you're not receiving a dividend in the face of further dilution, where is the incentive to hold or invest capital in such an investment?

I think its a serious mistake, but I also have a strong preference for dividends so my opinion is slightly biased.

Anonymous said...

"On the other hand, it won't be easy to persuade new shareholders to invest money in banks if the government forbids dividend payments."

If the shares are cheap enough for the risk involved, then shareholders will step up and buy more.

Capital appreciation and not dividends was the mantra for most of this decade. Why not now?

Neil said...


There was a very valid point made above about shareholders not exercising their control over the directors of companies. This is Led by the apathetic attitude of large institutional investors to short-termism or ridiculous renumeration strategies. Shareholders need to start behaving a owners (which they are) and not just investors.

It could also be said that shareholders have made profits in the short-term from the policies of the banks and it is therefore right that they should not receive dividends now.

There is still an incentive to hold investments in these banks, the prospect of large capital appreciation once the current crisis is over.


Anonymous said...

mw, yes, it seems completely absurd to believe that the txpayer can make a profit by paying a third party to take their money and then lend it back to them.