The dividends of crime
Wednesday, July 23rd, 2008
It seems criminal that Wachovia, which yesterday took a monstrous $8.7 billion loss and already is preparing for another $5.6 billion in losses, is still paying a dividend. The bank has a toxic portfolio of $122 billion of the riskiest mortgages, called pick-a-pay, which allow borrowers to make no payments on principle for an initial period.
Wachovia currently projects that 12% of these mortgages are going to default. Why should any of these mortgages, most of which are in housing quagmires California and Florida, not end up in default?
Losses on anything like that scale would force Wachovia to borrow money from taxpayers, you, me, our children and grandchildren. So continuing to pay dividends to shareholders while in such dire straights is akin to seeking to shelter assets from potential creditors.
Congress, busy trying to stop intelligent investors seeking to profit from the stupidity of others by selling short-selling the shares of still-overvalued companies (like Wachovia), should instead be prosecuting money-losing banks that insist on paying dividends with “extra” cash that’s just an accounting fiction.
A dividend is by definition a distribution of profits to shareholders, so how is it legal, or morally conscionable, for unprofitable companies to pay dividends?
Hey, let’s say it one last time: Wachovia’s mighty vaults sit on a $122 billion pit of quicksand.