Fed Urges Banks to Put Bailout Funds Into Loans, Not Dividends

Feb. 24 (Bloomberg) -- The Federal Reserve is urging Wells Fargo & Co. and dozens of banks getting bailout funds to put the money into new loans or bolster loss reserves, not to pay dividends for shareholders, two people familiar with the matter said.

That message is in the draft of a letter the Fed is preparing to send to regional bank supervisors, according to the people who saw it, speaking anonymously because it isn’t public yet. The letter represents a stepped-up effort by the Fed to more closely monitor dividends after the agency told banks in November that it was concerned they might not be using the rescue funds for new loans.

“The government’s put up some money to strengthen the banks and enable them to continue lending,” said Sherrill Shaffer, who served as the New York Fed’s chief economist in the 1980s and is now a banking professor at the University of Wyoming in Laramie. “So they expect the banks to do a little on their end to be more conservative on dividend payouts.”

JPMorgan, the second-largest U.S. bank, yesterday slashed its dividend by 87 percent to 5 cents from 38 cents. Chief Executive Officer Jamie Dimon said the decision wasn’t “directly related” to the $25 billion it received under the government’s Troubled Asset Relief Program.

“We were not asked by anyone to do this,” Dimon said on a conference call. The reduction will allow the bank to repay the government funds “as soon as is prudent,” Dimon, 52, said in a statement.

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