October 30, 2008

A Clear Non-Dividend

Justin Katz

The Providence Journal editorial writers have this one right:

Should the taxpayers now bailing out some big banks let the troubled companies pay dividends to their stockholders? We think not.

A dividend is a distribution of earnings to shareholders. The nine banks don't have earnings; they have losses. If they had earnings, the banks at issue that have sought federal aid wouldn't need a $125 billion bailout. The funds that taxpayers are funneling into their vaults should not be confused with earnings.

Keeping companies alive and the credit market on its feet does not require that shareholders not feel the pain of business executives poor decisions. Indeed, the only way the bailout has a hope of not making the investment culture worse is if those involved throughout have reason to avoid similar behavior in the future.

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I'll admit that I don't understand every in and out of this situation, but if every bank in trouble were allowed to go out of business, and we ended up with maybe 1-2 banks remaining that were capable of lending money, but instead chose not to, how is that a better solution? I agree that executives and shareholders should be punished, even if that means that all public banks that take the bailout are no longer public and every stock certificate isn't worth the paper it's written on. That's fine by me. But we do need a banking industry. Would we fee the same way if every airline went bankrupt? Railroad? Would that be fine then? How about every grocery store? I'm all for free enterprise and Darwinism, but the mistakes have been made. We can't cut off our nose to spite our face at this point.

Posted by: James L. at October 30, 2008 4:25 PM
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