Jan. 15 (Bloomberg) -- There’s no end to the sufferings of bank shareholders.

Banks have traditionally paid hefty dividends. In the years before the onset of the subprime mortgage crisis, payouts by Bank of America Corp., for instance, yielded about 3 percent to 4 percent of the company’s stock price and grew steadily.

Now President-elect Barack Obama plans to take away even that attraction, Lawrence Summers, who will head the new administration’s National Economic Council, informed Congress this week.

Obama -- not unreasonably -- will order the Treasury Department to limit dividends paid by commercial banks and investment banks that receive “exceptional assistance” from the government to “de minimis amounts.”

While investors have known that current yields were ballooned by falling share prices and that massive bank losses made some payouts unsustainable, many may have bet that relatively stronger banks would still maintain nice returns.

Yields now reach 13 percent at Bank of America and 14 percent at Citigroup Inc. -- even after both reduced payouts. JPMorgan Chase & Co. shares yield 5.9 percent, Morgan Stanley’s 6.3 percent. Both companies have kept payments steady.

Now, what dividends, if any, banks can pay may depend on how extraordinary “exceptional” may be interpreted and how trifling “de minimis” may turn out to be.

Numbers Game

Is the $45 billion in U.S. bailout funds dropped on Citigroup more exceptional than the $25 billion put into Wells Fargo & Co., allowing the latter bank to keep its dividend yield at 5.9 percent? Will Morgan Stanley, recipient of a mere $10 billion, be reined in? It seems likely that dividends of all the major bank recipients of Washington rescue money will be restricted.

Goldman Sachs Group Inc. might think its yield of 2.5 percent qualifies as minimal. It’s less than the 8.3 percent average yield on the 29 stocks in Standard & Poor’s 500 Diversified Financials Index and 3.4 percent on stocks in the broader Standard & Poor’s 500 Index. Still, Obama’s Treasury might say the company, now a commercial bank, should use more of the $830 million or so it pays in annual dividends to shore up its capital.

The government might want other banks to conserve more, too, considering the industry’s poor earnings outlook. JPMorgan Chase’s annual dividends now cost $5.7 billion, Wells Fargo’s the same.

Obama’s Treasury may want to assure the banks have enough money to pay the dividends they owe U.S. taxpayers. The preferred shares in financial institutions that the government bought in the rescue effort pay 5 percent dividends for the first five years, 9 percent after that.

Not to Worry

Though dividend losses will hurt, the new government may be doing the banks a favor. Dividends are the last thing they should worry about given the state of their finances.

At last count, commercial and investment banks worldwide had written off $736 billion in mortgage losses. Federal Reserve Chairman Ben Bernanke and Fed Vice Chairman Donald Kohn this week said illiquid debts still held by banks cloud the true value of the companies’ shares. They recommended further government aid, perhaps the purchasing or guaranteeing of bad loans.

Even with the aid it already has received, Citigroup is desperately raising capital. It’s merging its Smith Barney brokerage business with that of Morgan Stanley this week, getting $2.7 billion and recording a $5.8 billion net gain in the bargain. The bank is shopping other assets such as the CitiFinancial consumer loan business, according to people familiar with bank strategy.

Summers also told Congress that Obama would place restrictions on banks’ executive pay, stock buybacks and acquisitions of financially strong companies. Amen. Government dictates were sure to follow the welfare checks. They may be what’s needed if banks are to live to pay decent dividends again.

(David Pauly is a columnist for Bloomberg. Opinions expressed are his.)

To contact the writer of this column: David Pauly in Fort Myers, Florida / or dpauly@bloomberg.net

Last Updated: January 15, 2009 00:01 EST