Fed Shrugged Off Warnings, Let Banks Pay Shareholders Billions

In early November 2010, as the Federal Reserve began to weigh whether the nation’s biggest financial firms were healthy enough to return money to their shareholders, a top regulator bluntly warned: Don’t let them.

“We remain concerned over their ability to withstand stress in an uncertain economic environment,” wrote Sheila Bair, the head of the Federal Deposit Insurance Corp., in a previously unreported letter obtained by ProPublica.

The letter came as the Fed was launching a “stress test” to decide whether the biggest U.S. financial firms could pay out dividends and buy back their shares instead of putting aside that money as capital. It was one of the central bank’s most critical oversight decisions in the wake of the financial crisis.

“We strongly encourage” that the Fed “delay any dividends or compensation increases until they can show” that their earnings are strong and their assets sound, she wrote. Given the continued uncertainty in the markets, “we do not believe it is the right time to allow transactions that will weaken their capital and liquidity positions.”

Four months later, the Federal Reserve rejected Bair’s appeal.

In March 2011, the Federal Reserve green-lighted most of the top 19 financial institutions to deliver tens of billions of dollars to shareholders, including many of their own top executives. The 19 paid out $33 billion in the first nine months of 2011 in dividends and stock buy-backs.

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