Jan. 22 (Bloomberg) -- Memo to JPMorgan Chase & Co.: Your dividend needs to go.

For all the complaints that U.S. banks aren’t lending enough money, the bigger problem may be they’re giving too much away. Here we are amid the greatest banking crisis in 80 years, and some of the biggest, purportedly shrewdest banks keep acting as though they can spend their way into solvency by plying shareholders with outsized quarterly checks.

The latest numbers from JPMorgan say it all. Last week, the nation’s largest bank by market value reported $702 million of net income for the fourth quarter. That was about half as much as the $1.4 billion it paid in dividends to common shareholders. The company barely earned its dividend for the year, too, when net income and common dividends each were about $5.6 billion.

JPMorgan’s chief executive officer, Jamie Dimon, says the dividend is sustainable. “This company has enormous earnings power,” he said on the company’s Jan. 15 earnings conference call. “We feel an obligation to pay the dividend. So we feel pretty good about it, and so we’re not that concerned about it.”

That’s hardly convincing. JPMorgan would have reported net losses the last two quarters were it not for $1.9 billion of nonrecurring gains from accounting adjustments, related to the company’s purchase last September of the banking units of the failed thrift Washington Mutual Inc.

JPMorgan’s shares are down 28 percent this month to $22.63. They now trade for 63 percent of the company’s common shareholder equity, which suggests investors don’t believe the company’s balance sheet. And at 6.7 percent, JPMorgan’s dividend yield looks immense.

New Pays Old

JPMorgan already has received $25 billion of government bailout cash. It would pay almost a fourth that much in common dividends this year. That doesn’t include the interest the bank separately must pay to the U.S. Treasury on its preferred stock.

After Bernard Madoff’s Ponzi scheme, it should be out of fashion for financial companies to pay returns to old investors with money raised from new investors. Put aside the unseemliness of paying dividends with taxpayer bailout cash, though. The best reason for JPMorgan to slash its dividend is self-preservation.

Perhaps the world has just forgotten the purpose of dividends: to distribute excess capital to a business’s owners. The only time corporate directors should be authorizing such payments is when they conclude they don’t have any better ideas for how to deploy a company’s surplus cash.

It would be a nonstarter to argue that any major U.S. bank has excess capital today. There isn’t a bank out there that couldn’t use more.

Sign of Weakness

The 24 companies in the KBW Bank Index paid $38.5 billion of dividends to common shareholders during the past 12 months, according to data compiled by Bloomberg. By comparison, the companies’ combined net income in the latest four quarters was $5.4 billion. Meanwhile, their stock-market value yesterday was $363 billion, slightly more than the $350 billion remaining in the government’s Troubled Asset Relief Program.

While it once was a sign of weakness for a bank to slash its dividend, maintaining it no longer denotes strength. Just the opposite, it’s a sign of rank foolishness in the face of an economic meltdown if a bank isn’t earning what it’s paying out. Citigroup Inc. and Bank of America Corp. waited until they got second helpings from the Treasury’s bailout trough before cutting their quarterly dividends to a penny a share.

Stop Dawdling

JPMorgan should stop lingering. There’s a decent chance investors would view a penny dividend as a sign of common sense and even leadership, giving cover for other financial companies to follow suit. (Many institutional investors are barred from investing in companies that pay no dividends.)

The bank’s board could tell shareholders it hopes to reward them later. Instead of continuing to pay hefty dividends, it could save the money and designate it for emergency use only. Years from now, after today’s crisis passes, the company then could distribute the cash as a special dividend, assuming it survives and has the excess capital to turn loose.

Only last fall, Dimon was being hailed for exercising prudence by avoiding structured-investment vehicles and other sorts of financial exotica that got Citigroup and Merrill Lynch in trouble. What’s clear now is there’s no safe place for any large bank to hide.

Dimon, who also is JPMorgan’s chairman, already may have waited too long to hack the bank’s dividend. That’s no excuse for further delay. JPMorgan’s bosses should start showing they’re prepared for the worst. The longer they dither, the greater the risk for us all.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: January 22, 2009 00:01 EST