This from Treasury Secretary Paulson yesterday morning:

I have and will continue to encourage financial institutions to strengthen their balance sheets by raising capital, de-leveraging and reviewing dividend policies so that they continue to play their vital role in supporting economic growth.

Apparently, this is a new concept that he didn’t encourage Wachovia to do last spring. Here is what former CEO Ken Thompson said in April.

We had no regulator at any time approach us and ask us to raise capital (or) to cut our dividend; zero, not one conversation.

Maybe it was not necessary to hear from Paulson in April, but I am guessing that the message eventually found its way to Wachovia. Nevertheless, when former Treasury Undersecretary Robert Steel and now CEO of Wachovia reported their $8.86 billion loss a few hours later, the market cheered when it was explained that the company would not need to raise additional capital through an equity offering. Nope, it isn’t needed Mr. Paulson. According to CEO Steel…”lots of other options of what we can do.” They are going with the de-leveraging, cost cutting and dividend policy part of Paulson’s encouragement. They are cutting the dividend from 37.5 cents per share to 5 cents per share and they are going to cut about 10,700 jobs and they are looking at operations to sell to reduce leverage. Here’s the problem….they cut the dividend in April from 64 cents. They’ve also already cut a few thousand jobs already this year. This time it better work. You cannot cut dividends past zero. As for cutting employees and selling assets…good luck with that as a long term strategy. Oh and that part about raising capital through equity, there is a difference between we don’t need to and we can’t.

Washington Mutual apparently got the message too. Report humongous losses of $3.3 billion and have CEO Killinger tell the market….”The capital that we have in place is sufficient to manage through this period. We have no plans at this point to raise additional capital.” You might think it is time to cut the dividend. Well, the WaMu dividend is now 1 penny per share - they cut it from 15 cents last quarter along with about 3,000 job cuts and previously, in December they announced they would cut it from 56 cents to 15 cents along with about 3,000 job cuts. The market seemed to love the idea that Washington Mutual didn’t need to listen to Paulson’s plan to raise capital. After all, they have already raised $7 billion in capital just a few months ago. How did that work out? As Mish points out, there might be a difference between we don’t need to and we can’t.

Wells Fargo apparently didn’t need the message from Paulson….they decided to raise their dividend. The market loved it.

Pick any bank and evaluate whether they are really getting the message that Paulson says he keeps telling them to do.