More Bailout Concerns

By Bizbox

And the implementation of the $700 billion bailout plan just keeps getting more bizarre. First the money was to buy up toxic mortgage-backed securities, the better to establish a legitimate market price for them and thereby enable banks to offload them for good without having to take bankruptcy-inducing losses while doing so. Then it was to be injected into big banks who could in turn lend it out, the better to unfreeze the credit markets (the subzero credit markets being, by general consensus, the main problem here).

But then we learned that the big banks, with tacit government support, aren't planning on increasing their lending, but rather, again with tacit government support, are planning on using the money to buy up smaller banks. And this has people pissed off. In echo of the equally angry community bankers, the New York Times reports that American Bankers Association President Edward L. Yingling angrily informed Treasury Secretary Henry Paulson in a letter that the plan has made bankers "believe they are being asked—in some cases pressured—to participate in a program they did not want and do not need." Yingling also said he has “deep concerns with the lack of clarity about the program.” That makes two of us (at least).

Regarding the initial $250 billion of government investment, fully half has been set aside for nine of the country's biggest banks--JPMorgan Chase, Bank of America, et al--in set amounts, while the remaining $125 billion is there for the taking for those who ask (and are approved).

A turning point appears to have been what transpired last week with PNC Financial Services, one of the country's largests banks, and National City Bank, a much smaller institution based in Cleveland. Last week, the government approved PNC's request for an injection of $7.7 billion in exchange for preferred share, which is the procedure under which bailout money is invested, while rejecting National City's request for a capital investment. Guess what happened next? PNC bought National City for a bit over $5 billion. These events are being seized upon as an example of how the bailout's implementation has encouraged consolidation, and even as proof positive that this is what the government wants.

The big worry, expressed last week by the community banks and this week by Yingling and others, is the extremely difficult and unfair position into which the injection plan places relatively healthy banks, which are disproportionately the smaller banks who never got in over their heads with leverage and exotic securities in the first place. They can take the money, but then they may seem like they needed it in the first place and are therefore unwise and otherwise struggling; they would also be subject to numerous conditions governing such things as executive pay (which affects the very people who are making this decision!). As Yingling put it to Paulson, “It would make no sense for a well-capitalized bank with solid earnings to agree to a program which would greatly lower the value of its stock."

Or a smaller bank can reject the money but then be put at a capital disadvantage to those banks who do take the money, which can hurt their business or even lead to their being bought--just ask National City.

Something needs to be done so that the National Citys--the smart, prudent, small banks who are weathering the storm just fine--aren't all of a sudden subject to acquisition and consolidation just because a bunch of the bigger banks are flush with government money to do whatever they want with.

Comments (1)

November 3, 2008 1:32 PM