According to a report from Bloomberg, the Federal Reserve is urging Wells Fargo and dozens of banks getting bailout funds to put the money into new loans or bolster loss reserves, not to pay dividends for shareholders. The financial news site said their sources for the information were anonymous because the information hasn't been made public yet.


That message is in the draft of a letter the Fed is preparing to send to regional bank supervisors. 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. “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% 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.


According to a report from CNBC, American Insurance Group, the insurance giant that is 80% owned by the U.S. after its $150 billion investment, is in discussions with the government to secure additional funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history.


Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.


That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have. In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.


Downgrades by Moody’s Investors Service and Standard & Poor’s may force AIG to post more than $7 billion in collateral to counterparties, the insurer said in a November filing. AIG’s units could also lose access to the federal commercial paper program if they are downgraded, the company said.


The firm is looking to restructure its $150 billion rescue package by converting the government’s preferred shares into common stock to reduce pressure on the company’s cash flow. An exchange to common shares may improve AIG’s standing with lenders and other counterparties.


Bank of America Chief Executive Officer Kenneth Lewis, decrying “rumor, innuendo and falsehoods,” told employees that the bank’s prospects are “far superior to those of most of our competitors.”


Lewis, in his second internal memo in five days, reiterated today that Bank of America doesn’t need further assistance now and doesn’t anticipate seeking more aid. The Wall Street Journal said yesterday that the U.S. government may boost its stake in Citigroup to 40%.


“Bank of America’s overwhelmingly large deposit base, our consumer and commercial customer base, and earnings power give us a great advantage over banks that have been more badly damaged in the current crisis,” Lewis, 61, wrote in the memo. Bank spokesman Scott Silvestri confirmed its authenticity.