Banks Weighing Other Uses for Bailout Money
Wednesday, October 22, 2008
Several major U.S. banks are leaning toward spending a portion of their federal rescue money on acquiring other financial firms rather than for issuing new loans, the primary purpose of the government's $250 billion initiative to invest in banks.
About 10 financial institutions belonging to the Financial Services Roundtable, which represents 100 of the nation's largest financial services firms, are also considering making acquisitions with the money, said Scott Talbott, the group's senior vice president.
There is a growing consensus among Treasury and other federal officials that allowing healthy banks to use the money to acquire banks in jeopardy of failing could stabilize the economy and bolster confidence in banks. This could also save money for the Federal Deposit Insurance Corp.
Treasury Secretary Henry M. Paulson Jr. confirmed yesterday that some banks may use the capital they receive through the Treasury program to buy weaker banks and that this could benefit the financial system.
In an appearance on "Charlie Rose," Paulson said acquisitions were "not the driver behind this program. The driver is to have our . . . healthy banks be well-capitalized so they can play the role they need to play for our country right now." He added, "There will be some situations where it's best for the economy and for the banking system for there to be a consolidation."
Under the $250 billion program, the federal government will give banks cash in exchange for preferred shares.
The interest among banks in tapping the funds to finance acquisitions raises the possibility that the financial services industry could undergo a wave of mergers even more intense than what many analysts had predicted.
According to some analysts, an excess of mergers and acquisitions in the financial sector over the past decade created too many institutions deemed "too big too fail," meaning that the government would be obliged to rescue them if they faltered. Now, some worry the government's program will continue to drive that trend.
"I think it's a very serious problem, and I think it's part of a general failure to enforce antitrust laws in the last few years," Nobel Prize-winning economist Joseph Stiglitz said at a hearing of the House Financial Services Committee yesterday. "So one of the things I think is part of your exit strategy is that we have to think about breaking up some of the big banks," added Stiglitz, a Columbia University professor.
But supporters of consolidation say that bigger banks have bigger financial cushions and that healthier banks are able to buy -- and save -- weaker ones.
The Treasury program, which is designed to aid only healthy banks, could widen the disparity between the strong and the weak, analysts said. Some of the weakened banks could then be forced to look for a merger to survive.